red flagAsk yourself these questions:
  1. To build your business, are you required to recruit people into any kind of downline?
  2. Would you as a new recruit, by permitted and even encouraged to recruit other participants, who would in turn be encouraged to recruit still others, and they still more, etc. – from whom you could collect commissions and /or bonuses on what they buy or sell?
  3. Visualize yourself recruiting a chain of recruiters recruiting recruiters, including friends and loved ones, just to enrich yourself. Wouldn’t you rather preserve and protect, rather than exploit, those relationships?

 

 Important Background for Red Flag #1
With the chaining feature in an MLM compensation and marketing plan, each person recruited is empowered and given incentives to recruit other participants, who are empowered and motivated to recruit still other participants, etc. – in a network of endless chains of recruiters recruiting recruiters – without regard to (de facto) market saturation.
All multi-level marketing programs (MLMs), no-product pyramid schemes, and chain letters have this unlimited recruitment characteristic in common.

You would be wise to avoid any program in which you are recruited without limit into chains of participants (distributors, agents, representatives, etc.), which are organized into multiple levels, especially where the position in the chain or hierarchy of participants is determined by timing of entrance into the program and/or by success at recruiting a downline of participants. While a few earn substantial profits, the vast majority (at least 99%) of participants in such programs lose both time and money.

In at least four studies, chain selling schemes that feature unlimited recruitment in endless chains of participants have been found to be profitable only for a tiny percent (less than 1%) of participants at or near the top of their respective pyramids. Yet MLM promoters typically present their programs as outstanding business or income opportunities This fallacy is at the heart of a maze of misrepresentations used in MLM recruitment. Whether or not law enforcement interprets the endless chains of recruitment as an illegal pyramid scheme, it can be considered an unfair and deceptive trade practice – or unjust enrichment of a few at the top of a pyramid of participants at the expense a downline of misled participants, the vast majority of whom are mathematically pre-determined to lose money.

It should also be noted that quality and/or prices of products or services often becomes questionable when incentives are tied to recruitment.

This would apply to such products and services as health products, investments, or internet services. But even if the products are of exceptional quality, it is the inherently fraudulent design of the chain-selling program that misleads people into participating against their own best interests. The vast majority of recruits are destined to lose both time and money.

For most chain selling programs (multi-level or network marketing, etc.), income is dependent primarily on downline recruitment of participants who will buy (or subscribe to) products to “play the game.” As a general guideline in evaluating MLM programs, if you must recruit to be successful, or if the primary emphasis in the compensation plan is on building a downline, it is not a viable income opportunity except for those at or near the top of the pyramid – who are usually those who joined at the beginning of the chain of recruitment. And you must decide if your success at the expense of so many victims will leave you with a clear conscience.

In summary, MLM is dependent on unlimited recruitment of endless chains of participants as primary customers. It assumes infinite expansion in a finite market. It also assumes relatively virgin markets. As a business model, MLM is therefore inherently flawed, fraudulent, and unprofitable except for a few at or near the top of a pyramid of participants. It is also extremely viral and predatory, preying on the most vulnerable among us.
To better understand market saturation in MLM, read the following:
It is not the recruiting per se that creates the problems, as recruiting is essential in many businesses (e.g., sales and executive recruitment). But unlimited recruiting of participating recruiters, each of whom is empowered and given incentives to recruit other recruiters, who are empowered to recruit still other recruiters, etc., in a network of endless chains of recruitment, inevitably dooms the majority of participants to failure and loss. This is not true of insurance agencies, direct sales, and other legitimate businesses – even recruiting businesses.
Any endless chain marketing scheme incentivizes recruitment of a downline. MLM depends on infinite recruitment in a finite population and is therefore inherently flawed, uneconomic, and fraudulent. Participants are mathematically predetermined to lose money, with the exception of a few at the top (or those who got in at the beginning) of the pyramid of participants. Therefore, making promises of rewards comparable to earlier entrants is misleading and becomes a primary device for defrauding recruits.

Like territorial franchises, MLM companies could conceivably limit recruiting in a given area. But limiting the number of participants is uncharacteristic of MLM because it would dampen the illusion of the potential for huge incomes for new recruits. Such limitations would render any pyramid scheme impotent.

In 1979,Amway successfully argued to the federal judge that total market saturation, theoretically associated with a pyramid scheme, had never happened and was not possible. However, to a person experienced in market realities, this argument is absurd. Why, for example, would a town of 1,000 people need 1,000 distributors? Ten people (1%) may be more than enough to serve the market. With unlimited recruiting, new recruits find it increasingly difficult to recruit more participants into the program. This could be termed market saturation, which is reached very quickly in MLM recruiting.

So while total saturation is never reached, when enough people are brought into the scheme that prospects perceive little remaining opportunity to sell or recruit, perceived or de facto market saturation has taken place. Market saturation would lead to collapse of the scheme, except that promoters typically expand to other geographical areas or set up new product divisions to survive and grow.

When MLM promoters expand into other areas to make it possible for earlier investing participants to be paid off from newer investors, the MLM can be said to have evolved from a pyramid scheme into a Ponzi scheme – which is illegal in almost all jurisdictions. Ponzi schemes are programs in which new investors are repaid, not from the sales of products or fulfillment of services, but from the investments of new investors. Ultimate collapse is inevitable as new markets become less accessible, or when perceived saturation makes future prospects resistant to participation.

Some MLM proponents argue that continual dropouts justify replacement through ongoing recruitment, much as in other direct sales businesses. But this is a fallacy. Later recruits never have the same opportunity as earlier entrants due to facto saturation.

In 1979 the FTC ruled that Amway was not a pyramid scheme, subject to “retail rules” – which are generally ignored (in actual practice) by MLM companies. Consumers recruited into MLM’s will continue to pay heavy prices for this decision – until federal and state enforcement agencies more rigorously apply existing laws as suggested in this paper. In spite of the confusion over definitions of what constitutes a pyramid scheme, much can still be accomplished within the present legal framework. This paper focuses on clarifying those definitions and on identifying the combination of features in the compensation plan that cause the greatest harm.

All MLMs allow for unlimited recruitment of participants. The fact that an MLM compensation plan limits the number of levels upon which any distributor can be paid overrides from the company does not negate the “endless chain” feature of the scheme. The mathematical impossibility of later recruits enjoying the same financial benefit as earlier participants is apparent.

NOTE: For the most thorough treatment on the topic of saturation in MLM, read Chapter 3 of the ebook Multi-level Marketing Unmnasked, which can be downloaded in whole or in part from our website.
  • What is the difference between total saturation and market saturation, and why is it crucial to differentiate between the two?
  • Is market saturation inevitable for MLMs, and how quickly does it happen?
  • Does unlimited recruiting doom MLM participants to failure?

 

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