|
Home MLM Evaluations MLM Consumer Guides Non-MLM Income MLM Products Actions You Can Take MLM Research MLM Statistics MLM Regulation Direct Selling/DSA Worldwide Warnings Utah LDS Foreign LanguageTranslations MLM History Short Articles MLM Humor/Satire Sponsor Credentials Recommended Links Contact |
|
|
CAI Consumer Awareness Institute Non-profit Corporation |
FREQUENTLY
ASKED QUESTIONS |
|
A
reader express thanks: CONTENTS on this page:
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
?MLM?
|
1.
Are your conclusions about MLM based on research or mere opinions?
A: Twelve years of solid research place these conclusions above the category of mere opinions. This research includes court records in MLM cases; financial reports from MLM companies; interviews and world wide feedback from thousands of MLM participants; analyses of compensation plans and marketing materials of over 250 MLMs; interviews with top experts and law enforcement officials; direct experience in MLM recruitment chains; and surveys of tax professionals, MLM company officials, consumers approached by MLM recruiters, and MLM customers. Information and guides drawn from this research are accessed from the home page of the web site - www.mlm-thetruth.com. THE BUSINESS MODEL 2. What does MLM include? A: "MLM" is an acronym for “multi-level marketing” (a.k.a. “network marketing,” “product-based pyramid schemes,” “pyramid selling schemes,” etc.). More accurately, it is a form of chain selling, which also includes chain letters, naked or no-product pyramid schemes, 2-ups, and other schemes featuring an endless chain of participants as primary (or only) customers. For brevity, we will refer to all types of product-based pyramid schemes, MLMs, or chain selling companies that offer products and services, as "MLMs". (For more information, see Consumers Guides.) 3. Are not all large organizations, including corporations and government entities, organized as pyramids, with those at the top getting paid the most? What’s the difference between them and pyramid schemes? A: This question shows a lack of understanding of why a pyramid scheme constitutes an unfair trade practice. It isn’t the shape of the organization that is important, but the endless chain of recruitment of participants as primary customers. MLM compensation plans require the climbing of a pyramid of participants in order to make enough money to profit to any significant degree. But unlike a corporate pyramid, in MLM and other types of pyramid schemes, virtually all of those at the bottom (the "downline") lose money (some a lot of money), where in a corporation, those at the bottom at least get a minimum wage. Of course, there are inequalities of rewards in most business arrangements. However, in MLM, the leveraging of a downline of thousands of participants who invest and lose money - only to enrich the TOPPs (top of the pyramid of participants), creates extreme inequality. For example, a downline may average $50 a month (actually losing money after subtracting necessary purchases from the company and operating expenses), while those at the top reap thousands or even millions of dollars a month. Such extreme inequality far exceeds what could be considered a normal or equitable business arrangement. MLM’s easy money and winners-take-all appeal is more akin to a lottery than a legitimate business. 4. How can I clearly
distinguish between a pyramid scheme and a legitimate sales
opportunity? A: Many years of broad experience in the direct sales field and extensive research led to the identification of five causal and defining characteristics of a compensation plan that clearly separate exploitive MLM/pyramid/chain selling schemes from legitimate sales opportunities. These five characteristics – referred to as the "5 Red Flags" – both cause the horrendous loss rates and clearly define or distinguish between a pyramid or chain selling scheme and a legitimate income opportunity. A detailed report on these characteristics is posted on the research page of our web site. The compensation plans of over 250 MLM programs have been tested against these 5 Red Flags of "recruiting MLMs" (those with pay plans that primarily reward the recruiting of a downline, making sales to non-network customers a comparative waste of time – which applies to nearly all MLMs). In the compensation plans of recruiting
MLMs, we find these
“Five Red Flags” (causative and defining factors):
In 100% of the MLMs where data is available, MLMs with all five of these characteristics (which is nearly all MLMs) result in losses suffered by approximately 99% of participants. The odds of profiting are far greater at gaming tables in Las Vegas. (For more complete discussions of the "5 Red Flags," read the reports linked from the MLM Consumer Guides page.) It is true that most new MLM recruits buy a few products and services and soon drop out. The ones who lose big are those who believe the promises of MLM promoters and then work hard to make them happen – and find their participation to be a money trap. Whereas in a legitimate business those who invest the most in time, effort, and money can be expected to profit the most; in MLM those who invest the most, lose the most – with the notable exception of those at the top of the pyramid or who got in at the beginning of the recruitment chain, some of whom make obscene amounts of money. One astute former MLMer stated it well: "The massive loss rates in MLM would be the same even if every participant had the talents and ambitions of Donald Trump or Warren Buffet! The loss rates are pre-determined by the scheme design and its operation." Some MLM promoters and executives vigorously deny that they are pyramid schemes, or even MLM. They may set up rules of behavior for participants to follow (such as requirements for sales to non-participants) in order to make them appear more legitimate. Such rules have little effect if the underlying structure features a compensation plan that rewards recruitment of an endless chain of participants as primary customers. “If it looks like a duck, walks like a duck and quacks like a duck, it’s a duck. “ Likewise with MLM. 5. Aren't no-product pyramid schemes more harmful than MLMs, or product based pyramid schemes? A. Many assume that since MLM chain sellers offer legitimate products they cause less losses than naked, no-product pyramid schemes. The facts show otherwise. Extensive research correlating the compensation plans with financial reports of leading MLMs and analyses of other classes of chain selling schemes leads to the conclusion that of all classes of pyramid/chain selling schemes, those that do the most harm are MLMs (product-based pyramid schemes) by any measure - leverage, loss rates, aggregate losses, or number of victims. In fact, statistical reports show that joining an MLM makes a bet on snake eyes in a game of craps at Caesar's Palace in Las Vegas look like a safe bet in comparison. One of the reasons that MLM is less profitable for participants than no-product pyramid schemes is that a sizable percentage of moneys paid into an MLM program goes to the company for products and infrastructure - facilities (often expensive), wages of workers, and salaries (often huge) of executives. Conversely, in no-product schemes, all the money goes to the top of those in the pyramid of participants. As a result, the loss rate for no-product pyramid schemes is approximately 90%, whereas for product-based schemes it is about 99%. In fact, in many MLMs, as many as 99.9% of participants lose money.
(See MLM
Research, especially “5 Red Flags” report. See also MLM Statistics.
Read also Robert Fitzpatrick's excellent report "The
Myth of MLM Income Opportunity in Multi-level lMarketing," which
essentially confirms my findings.) 6. Do not some MLM programs qualify as legitimate income opportunities? A: After studying
over 250 MLM programs, my short answer would have to be "no." To
be legitimate and fair, an MLM would have to depart from the typical MLM
model of an endless chain of recruitment of participants as primary
customers - which is virtually all of them. To those familiar with qualified independent research, MLM (or any
chain selling program) should be considered an unfair trade practice. It
enriches a few at the expense of a revolving door of hapless victims who
lose money – after subtracting necessary purchases and minimal operating
expenses. (See MLM
Research, MLM
Evaluations, and MLM Statistics.) 7. MLM critics charge that MLM leads to saturation. But how can that be when MLMs are constantly growing and replacing dropouts without ever reaching saturation? A: MLM compensation plans reward the recruitment of an endless chain of participants into an infinitely expanding network – but in a finite marketplace. They are therefore destined to market saturation and collapse, and MLM promoters must be continually recruiting to replace a revolving door of participants who drop out at a rapid rate. MLM promoters who claim that saturation never occurs are referring to total saturation, which never would or could occur. It is absurd to assume that in a city of 100,000 people, 100,000 MLM distributors would be needed. The city may accommodate 10 or 20 distributors before the market is saturated, in that each new recruit would find it tougher and tougher to recruit more participants. (To illustrate an extreme example of saturation, in a randomized survey of households in Utah County, which leads the nation in sponsorship of MLMs, there were four MLM distributors for every one customer who was not a part of the network of distributors. Is it any wonder MLMs from Utah County recruit aggressively in other areas? Of necessity, their sales are to recruits, and only rarely (if at all) to non-network customers. So with MLM or any endless chain scheme, market saturation occurs very quickly, after which recruiters must move to other states to recruit successfully, then to other countries to find new prospects to add to the chain of buyers. In effect, the MLM then becomes a de facto Ponzi scheme, in that income from the churning of new recruits in new markets is needed to repay earlier recruits who invested in saturated markets. This is why MLM promoters scramble to be the first ones in to a new country when it is opened up as a new market for recruitment. 8. If MLMs are merely endless chain schemes that are dependent on constant churning of new recruits in rapidly saturating markets, how do some MLMs survive for decades without collapsing? A: The more resourceful MLMs survive for years
and even decades 9. If ordinary participants are not profiting from the large revenues received by the MLM company, who is? A: Based on feedback from
those who prepare tax returns of MLM participants - and on reports by the
MLM companies themselves, four groups of people
get the vast majority of the commissions and profits paid by MLM
companies: 10. MLM spokespersons claim that most MLM participants sign as distributors to buy MLM products at a discount – or just sell part-time for a little supplementary income. What's wrong with that? A: These deceptive
arguments ignore the basic reality of MLM pricing and
compensation plans. MLM products are not priced competitively (often at
least triple the price of similar products from standard retail outlets),
so that promised income from re-selling them, except sparingly to
sympathetic friends and family members, is rarely worth the time. Actual sales to customers who are not part of the
network of distributors are symbolic, but seldom significant. Products
are
sold through an endless chain of distributors, who subscribe to a monthly
quota of products in order to qualify for commissions and advancement in
the scheme – the "pay-to-play" requirement. But it is extremely rare
for participants to recruit enough people to buy enough products to cover
minimum pay-to play-purchases and operating expenses. That is why 99%
of participants lose money and qualify as victims of these deceptive
endless chain schemes. 11. Are you saying MLM promoters are crooks? A: To those who
understand the business model and its effects on participants, MLM/chain
selling companies are bogus businesses that can definitely be classified as white-collar
crime; i.e., money obtained by deception but without violence – by
otherwise respectable people. However, it would be harsh to refer to most
MLM participants as criminals. Nearly all recruits are lured by these
deceptions into buying expensive products in order to “play the game.”
Self-deception is common in MLM, as is group deception and even cultish
behavior in typical
recruitment campaigns. (See MLM Research
and MLM Regulation and Law Enforcement. If one looks for a villain in MLM/chain selling schemes that defraud the vast majority of participants, it is usually not to be found in the founders or promoters, most of whom (based on my communications with them) have convinced themselves that their schemes are legitimate. In my opinion, the villain in all chain selling is an inherently flawed system that depends on deception and self-deception to survive and spread in an endless chain of unwitting participants. I prefer to call MLM "system fraud," implying that it is the underlying system that is the villain. 12. What about the
esteemed scientists and famous people who endorse the MLM products and who
speak at MLM conventions? A: It should come as no surprise to you that if you pay a scientist or famous person enough money and tell a convincing story, he/she will often allow his/her name to be associated with your product, no matter how questionable. 13. Some MLMs donate to worthy humanitarian causes. Would scam operators be so generous? A: This question deserves a rhetorical question in response. If a person robs a bank and donates 5-10% of his take to charity, does that excuse him from the crime of robbery? 14. If MLM products really work, what is the harm in buying them? A: Most MLM companies sell “potions and lotions” with little scientific evidence supporting their claims that they will cure or prevent nearly every disease under the sun. It is virtually impossible to convince “true believers” that MLM promoters are often the modern version of what a former vice-president of a major MLM called "snake oil peddlers". Frequently, product claims by MLM promoters have been found to be misleading, resulting in legal actions against them. Actually, some MLM products are very good, but the emphasis on the “great products” offered by MLMs is often merely a diversion from a flawed business model and a ruse for getting people involved in the chain of recruitment. And if you are gullible enough to be a "customer" and pay the premium prices charged by these MLMs, you are more likely to be fattening the wallets of those at the top of the MLM recruitment chain than you are to be benefiting yourself. (See MLM Products, Consumer Guides, and MLM Research See also http://www.mlmwatch.org/) 15. Isn’t MLM legal in most jurisdictions? A: To those who understand the compensation plans, MLM has been technically illegal in most jurisdictions where statutes against pyramid schemes are in place. However, MLM spokesmen and the Direct Selling Association (DSA) have used deceptive tactics and information to weaken statutes against pyramid schemes in several states and has even attempted to get protection from Congress. Unfortunately, even in jurisdictions where MLM clearly satisfies the definition of an illegal pyramid scheme or endless chain, such laws are seldom enforced. As explained below, this is due primarily to the silence of victims, who rarely file complaints. (See MLM Regulation and Law Enforcement) And I might add – the politicians to whom MLMs give generous political contributions cooperate with the DSA to protect MLMs from laws that would otherwise provide protection for consumers. For news and information on legal cases and legislation related to MLM and other types of pyramid schemes, go to the Pyramid Scheme Alert web site. 16. If in fact MLM/chain selling is an unfair trade practice and MLM companies depend on deceptive marketing practices for their growth and survival, why has the FTC and other law enforcement agencies allowed MLM to go forward at all? A: In 1979, the FTC was outfoxed and outgunned by Amway attorneys when an FTC judge ruled that Amway was not a pyramid scheme, provided certain “retail rules” were met. These rules have not been enforced to any significant degree, and indeed, may be unenforceable. The result has been the proliferation of MLM programs to the point that thousands of MLMs have come and gone since 1979. and several hundred remain. World wide, tens of millions of MLM victims have lost tens of billions of dollars as a result of "the great FTC blunder" – the 1979 Amway decision. However, in fairness to the FTC, if FTC prosecutors would have had the research available in 1979 that is available today, the ruling might have been entirely different. Had Amway been ruled an illegal pyramid scheme, you would not be reading this today, and millions of victims might have been spared financial loss. (See MLM Regulation and Law Enforcement.) Incidentally, the FTC has proposed a Business Opportunity Rule that would require disclosure of key information to help prospects making decisions about participation – much like franchise disclosure requirements. The DSA and MLM promoters were able to get over 15,000 MLM participants to comment, protesting that such strict disclosure requirements would make compliance difficult and would hurt their business. They vigorously protested against disclosing average income of participants, legal actions against the company or its officers, a “cooling off” waiting period before signing on, etc. MLM companies have even hired former top officials of the FTC (including a former FTC Chairman) to act as spokespersons to write comments opposing the Business Opportunity Rule. It would be interesting to know how much these officials were paid to move from consumer protection to what some would consider fraud protection. It should be obvious from the above that meaningful disclosure would hurt an MLM business. If intelligent prospects were told that their chances of making a profit were virtually nil, or that 99% actually lose money, who would join? The FTC is faced with a choice between cowering to the DSA/MLM lobby or carrying out its own mission to protect consumers and promote fair trade by requiring meaningful disclosure. The latter course would do much to mitigate the harmful worldwide fallout from the original 1979 Amway decision. (Read sample comments, including my own (Go to “C” and Consumer Awareness Institute) and my rebuttals to comments by the DSA and MLM spokesmen.) Another reason for the lack of enforcement actions against MLM companies is the lack of prosecutorial will and resources (funds, personnel, and expertise) to confront the MLM companies with their massive legal and lobbying resources. One state regulator estimated that it would take 20 times the resources to prosecute an MLM as it would the typical case brought before it. 17. Why are laws against pyramid schemes or endless chains seldom enforced in the case of MLM programs? And what explains the silence of victims? A: Typically, in law enforcement, the squeaky wheel gets the grease. Officials respond to complaints in a reactive – not proactive – fashion. Victims in endless recruitment chains almost never file complaints. Since MLM recruits must recruit a large number of people to have any hope of earning enough in commissions to recoup their ongoing investments (including required purchases), every major victim becomes a perpetrator. Fearing self-incrimination and/or consequences from or to those they recruited (often close friends and family members) and blaming themselves for their “failure,” they simply drop out and accept their losses. Also, when law enforcement does not act, recruitment prospects assume the MLM is legitimate. No law enforcement, no complaints. No complaints, no law enforcement. MLM may be the most successful con game of all time. Many of the very people who are out recruiting to extend the endless chain of participants (their "downline") are themselves victims until they run out of money and drop out of the chain. And since victims in endless chains almost never file complaints, law enforcement seldom acts. So the game goes on, extending the chain of recruitment from state to state and from country to country – then starting the cycle of recruitment all over again with new products, aliases, or divisions – as Amway (Alticore) has done with Quixtar and Nu Skin has done with IDN, Big Planet, Pharmanex, and PhotoMax. (See MLM Regulation and Law Enforcement) For a unique perspective on why MLMs manage to escape prosecution even while defrauding thousands of victims, read "The Parable of the Missing Children." MLM/DSA – AND CREDIBILITY WITH THE MEDIA, THE FINANCIAL MARKETS, THE BBB, AND ACADEMIA 18. Has not the Direct Selling Association produced statistics to prove the efficacy and acceptance of MLM companies as legitimate businesses? A: The Direct Selling Association (which has been virtually taken over by MLM member companies) deceives law enforcement, the media, and the public by citing misleading statistics from surveys lumping MLM/chain selling in with legitimate direct selling. If their surveys on participant satisfaction, profitability, etc. were to include only MLM/chain sellers – and all MLM participants who were recruited within a given year, including dropouts – the statistics would be vastly different – certainly not so rosy. (See DSA) 19. The stocks of some MLM companies are publicly traded and/or are given favorable reviews in business publications. Doesn’t that prove they are legitimate? A: Unfortunately, this is an indictment of the shallow research and analyses of financial writers and the media who fall for the phony claims of the MLM industry. MLM is a pseudo-business without a significant base of legitimate customers (most buyers are recruits) And it is totally dependent on a network of thousands of distributors, 99% of whom are losing money. But MLM promoters have duped analysts and the media into believing they are legitimate – and even that the stocks of publicly traded MLMs are good investments. MLM is the Enron of the little guy. It has been reported to us that the SBA (Small Business Administration) refuses to finance any enterprise characterized as MLM (SBA 2006). And the SBDC (Small Business Development Corporation) refuses to counsel anyone involved with MLM, since many small business consultants do not consider MLMs legitimate entrepreneurial ventures. 20. Can consumers get good advice regarding MLM from their local Better Business Bureau? Unfortunately, the usual recommendation to "check it out with your local Better Business Bureau" seldom works with inquiries about MLMs. Most BBBs merely report unsatisfied complaints against companies. And since so few victims ever register complaints, BBB's often give a "clean" report for even the most egregious MLM/chain selling schemes. 21. So are MLM promoters lying to the public, the media, and to law enforcement? A: MLM is dependent on a complex web of deceptions. In fact, the success of typically every MLM recruitment campaign depends on at least 30 misrepresentations of products and or the business itself. (See "30 Typical MLM Misrepresentations.") MLM spokespersons have duped many in the public, the media, and law enforcement into believing MLM is a legitimate business. Based on careful analysis of MLM company financial reports, it is no more appropriate to refer to MLM as a legitimate business opportunity than it is to post “Business Opportunity” above the slot machines in Las Vegas. The DSA and MLM company spokespersons constantly beat the drumbeat of legitimacy. However, many savvy consumers sense something terribly amiss about MLM – or have known many MLM victims, which accounts for the unsavory reputation MLM has in the minds of many. (See MLM Products, MLM Research and MLM Regulation and Law Enforcement.)22. Where is academia in the debate over the legitimacy of MLM? A: Academia has not weighed in on this issue to the extent that one would expect. University officials and instructors are typically not activists and do not see themselves as having the responsibility to determine the legitimacy or legality of alleged scams. Unfortunately, some colleges who receive large donations from MLM companies have actually taught MLM as a legitimate business model and have allowed industry representatives to serve on academic boards. In isolated instances, some professors speak out and write about the abuses inherent in the MLM field. However, since MLM has become such a major phenomenon among many countries in the world, more serious study of the effects of MLM participation could well be undertaken. But to be objective, such research should be financed from independent sources and not from MLM companies or the DSA. 23.
If accurate information about the legitimacy of MLM is seldom available
from law enforcement, from the press, from the Better Business Bureau,
from financial analysts, or from academia, where can a consumer go to get
reliable information about MLM? A.
The answer demonstrates the democratic power of the Internet. Currently,
the only source of rigorous, well-researched, and independent information
on MLM is the Internet. A small group of dedicated consumer advocates and
researchers donate their time and resources to post news, research data,
and analytical reports on independent web sites – financed by them and
not by MLM companies or public funds. These consumer-oriented sites stand
in sharp contrast to the DSA’s web site and to a plethora of web sites
sponsored by MLM companies, which of course promote MLM as a legitimate
business model – though for those who are informed, it clearly is not. The
FTC and state AG offices and consumer protection agencies typically give
warnings but are careful not to go so far as to condemn MLM programs with
legitimate products. Some even go so far as to state that multi-level
marketing is a legitimate form of business enterprise and that there is a
real difference between an illegal pyramid scheme and multi-level or
network marketing. Assuming officials were working with correct
information (including recent independent research) and were not beholden
in any way to the DSA or MLM industry, they would likely take a more
negative position. Even in states with pyramid scheme laws weakened by the
DSA, MLM is an unfair trade practice and does not deserve the imprimatur
of legitimacy. It may be legal in those states, but it is neither honest
nor equitable. 24. What can consumers do to protect themselves from MLM scams? A: Avoid any scheme where recruitment occurs in an endless chain of participants, regardless of product or income claims – whether the scheme is called MLM (multi-level marketing), network marketing, consumer direct marketing, 2-up, etc. Buy from reputable and established retail or legitimate (non-MLM) direct selling channels. And be suspicious of any opportunity that comes knocking (by a recruiter). Normally, you must search out the good opportunities for yourself. (See Consumer Guides and “1,357 Ways to Earn a LOT More Mony than in MLM/Network Marketing.”) 25. But if MLM/chain selling programs are not legitimate “home business” opportunities, what can I do for income without leaving home (or entrepreneurship) and entering the standard job market? A: There are literally thousands of legitimate income opportunities outside of the standard job market. Read the report and check out the links in “1,357 Ways to Earn a LOT More Money than in MLM/Network Marketing.” MLM (multi-level marketing, network marketing, chain selling, product-based pyramid schemes, etc.) is a system that depends upon recruitment of an endless chain of new distributors to replace a continuously collapsing base of new participants in a pyramid of recruits. As such, it constitutes an endless chain scheme of marketing by recruitment of distributors as primary customers. It is a pseudo-business with no significant customer base and is dependent on a large network of distributors, approximately 99% of whom lose money from investing in products and services (including “success tools”) offered by the sponsoring MLM company - as well as normal operating expenses. The extremely high loss rate and aggregate losses make recruiting MLM’s, or product-based pyramid schemes, the worst of all types of pyramid schemes. Thus, recruiting MLM’s are inherently flawed systems that promise ongoing residual income, but deliver very little except financial loss at the least, and loss of treasured relationships and values of honesty and integrity at the worst. They maintain themselves by continuous recruitment of new recruits, as investing participants give up or run out of funds and leave the system, seldom understanding what happened to them – even blaming themselves for their “failure.” Victims of MLM programs are seldom aware enough to file complaints with authorities and often fear consequences from or to those they recruited, so law enforcement rarely takes action. To be successful in a recruiting MLM, one must first be deceived, then maintain a high level of self-deception, and finally go about deceiving others. They must also be in a state of denial about the losses suffered by the "downline" they recruited. Some would label this "theft by deception," except that few of those doing the deceiving are aware that they are deceiving and defrauding those they are recruiting. They may even put on a display of being "successful" by buying expensive cars and homes and inviting others to be like them. The SYSTEM is the culprit. Read about MLM as a flawed business model and the need to protect consumers with meaningful disclosure such as the FTC outlined in their proposal for a new Business Opportunity Rule. Of course, the DSA is doing everything it can to gain an exemption for MLMs as "direct sellers." Please refer five people to this report and web site, and ask each of them to tell five more, suggesting that each of them tell still five more, etc., etc.– ad infinitum. You just might start an endless chain of truth-telling. ________________________________________________________ RETURN TO HOME PAGE for a starting index to reports explaining the truth about all aspects of MLM – based on 12 years of solid independent research. Check out recommended links to other sites with excellent reports to be further informed on the topic. |