This report summarizes the entire mlm-thetruth web site,
which is based on 15 years of worldwide feedback and research on over 350 MLM programs.
A definition of MLM is now articulated that clearly separates MLM from all other business models – and also explains MLM’s high loss rates.
After several years of comparative analysis, I was a able to identify five causative and defining characteristics (5 CDCs - or "5 red flags") which both cause the high loss rates and define MLMs as separate and distinct from all other business models. The first four of the five CDCs were found in the compensation plans in all of 350 MLMs I analyzed.
Further, in every MLM where average income data was available and where all recruits were counted, the percentage of participants who lost money was 99.0-99.9%, after subtracting purchases necessary to qualify for commissions and minimal operating expenses. The effects of the fourth CDC can be amplified by the fifth (more levels than needed) - totalling five characteristics. For simplicity, I refer to these as the "5 Red Flags" of a recruiting MLM (focusing on recruitment over retail sales). The 5 Red Flags are:
1. MLM programs depend on an endless chain of recruitment – without limits.
Each person recruited is empowered and motivated to recruit more participants, and each of them to recruit still more participants, ad infinitum. Because of such infinite expansion in finite markets, one would expect MLMs to ultimately collapse due to market saturation. And in fact, markets do become saturated or flooded with MLMs rather quickly. However, many MLMs escape collapse by “re-pyramiding” into other markets, by misrepresenting the "opportunity" and the products, by introducing new products or divisions in order to continue the endless chain of recruitment, and by incentivizing participants to keep purchasing and recruiting. Conversely, in a legitimate direct selling operation, it is unlikely any sales person would recruit others to compete with him/her in the same locale.
2. Advancement in the MLM hierarchy of distributors is achieved by recruitment of participants under him/her, often called a “downline” or pyramid of distributors.
In MLM, sales managers are not appointed as in a normal company, but must instead recruit their way up to those positions.
3. The MLM is financed by "pay to play" purchases by a revolving door of new recruits who must purchase prdoucts and services on an ongoing basis in order to qualify for commissions and/or advancement in the scheme.
Research and company records demonstrate that most MLM company revenues are from participants’ personal consumption, rather than from sales to non-participants.
Technically, according to FTC guidelines, if most of an MLM’s revenues come from participants’ personal consumption, it is an illegal pyramid scheme. However, the DSA (Direct Selling Association)has lobbied successfully in several states to protect MLMs (that sell products or offer buyback provisions) from prosecution as pyramid schemes. All of the 350 MLM compensation plans I analyzed are top-weighted, rewarding primarily "kingpins" or "TOPPs" (top-of-the-pyramid promoters) through one or both of the next two characteristics:
4. For each sale, company payout for the total of all upline participants equals or exceeds that for the person actually selling the product.
Typically, the effect of MLM compensation plans is to reward most of the commissions to those at or near the top of the hierarchy of distributors, who had little to do with the sale, and not to the front-line salespersons. Some refer to those at the top of an MLM hierarchy as "kingpins." I coined the term TOPPS (short for top-of-the-pyramid promoters) to more accurately describe their position and function.
Conversely, in normal sales situations the salesperson making the sale is usually rewarded the highest commissions for selling products to retail customers, with smaller override commissions paid to sales managers above them. But for MLMs, their top-weighted pay systems create inadequate incentives for selling products to the public and excessive rewards for recruiting a large pyramid of new distributors. This top-weighted pay system – together with overpriced products – explains why in MLMs little actual selling to the public occurs.
It is the extreme concentration of commissions and bonuses paid primarily to TOPPs that motivates them to work tirelessly to expand and maintain their downline, thereby assuring the MLM’s survival and growth. Such a top-weighted compensation plan makes an MLM a money transfer scheme in which money to TOPPs is transferred or derived from commissions on sales to their downline, nearly all of whom lose money. In fact, research demonstrates that a loss rate of 99.0-99.0% is standard for MLMs.
5. MLMs typically have more levels of sales managers than are needed.
MLMs typically have more levels of sales managers than are needed. Some have dozens or even no limit on the number of levels. Conversely, any legitimate company can manage its sales function within a country with four or five levels of sales managers – for example: branch, division, regional and national sales managers. More than that in an MLM just enriches those at the top at the expense of those at the bottom, who do most of the buying.
For those rare MLMs with only four or five levels in their pay plan, I have found the top-weighting demonstrated by substantially greater commissions paid to the upline than to those who make the sale. So Red Flag #5 is not as crucial a determinant as is #4, and in fact merely amplifies the top-weighting of the compensation plan. In general, the higher the number of levels, the greater the degree of leverage enjoyed by TOPPs.
The first four red flags, taken together, were found in the compensation plans in all of over 350 MLMs I analyzed. Taken together, these four characteristics were unique to MLM and clearly separate MLM from all other sales-oriented business. No “retail MLMs,” in which distributors derive most of their income from retail sales, were found. Based on this research, it would be difficult to justify the oft-repeated assumption that MLM is a legitimate business model. However, as I was unable to obtain the compensation plans for programs using in-home demonstrations, they have been excluded from the analysis and may or may not be profitable for participants.
With its endless chain of recruitment, MLMs assume both infinite markets and virgin markets, neither of which exist. MLM is therefore inherently flawed, fraudulent, and unprofitable for nearly all but TOPPs, which are often the first participants – which is like being sold a ticket on an airplane that has already left the ground.
Many MLMs use complex compensation plans (such as breakaway, binary, or matrix plans) to mask and enhance this transfer. Also, MLMs may be very profitable for the founders and for those managing the company, who often skim large salaries from sales revenues. For more information about MLM and their pay plans, read the full “5 Red Flags” report.
Based on extensive research, MLM could be accurately defined as follows:
“MLM is a business model featuring an endless chain of recruitment of participants as primary customers, organized into a hierarchy of levels in a compensation plan that rewards primarily those at the top of the hierarchy, with advancement determined by success at recruiting a downline of participants, who are incentivized to purchase products and to recruit more participants, each of whom are incentivized to recruit still more, ad infinitum.”
MLM products and services are priced high to reward a bloated hierarchy of distributors.
MLM companies require high prices for their products and services to reward their many levels of distributors. So MLM products - often "potions and lotions" - are usually very unique and difficult to compare with similar products at standard retail outlets. Exaggerated claims are made to justify the high prices for their products.
To guarantee repeat orders, MLMs sell products and services that promoters claim must be used regularly. Though the signup fee for MLM recruits is often under $50, they must meet a quota of minimum purchases in order to qualify for sales commissions or advancement. For most MLM companies, these "pay to play" purchases by participants and their immediate families are a primary source of revenue for the company. MLM participants often purchase and stockpile far more products than they need – or would have otherwise purchased – because of these minimum monthly quotas, which can amount to thousands of dollars over time.
MLM participants suffer high loss rates and other harm.
Even though MLM companies sell legitimate products, they are still structured and incentivized as pyramid schemes. Of all types of pyramid schemes I have studied, MLM programs are the most harmful by any measure – loss rate, total losses, number of victims, etc.
When you subtract money paid by participants to the MLM company from money received from the company, nearly all participants lose money, especially if you subtract all purchases required to qualify for commissions and advancement in the scheme. And if you subtract minimal operating expenses to conduct a successful recruitment campaign, losses can be substantial. In my analysis of over 300 MLM programs, wherever financial data is available, I find that approximately 99.0-99.9% of participants lose money.
This loss rate is far higher than for classic no-product pyramid schemes, which are approximately 90%. This fact, together with far greater aggregate losses and numbers of victims, make product-based pyramid schemes (MLMs) more harmful than classic, no-product schemes – contrary to the claims of the DSA. Since MLMs are misrepresented as an “income opportunity” to all prospects (not just TOPPs), nearly all MLM participants become victims of a fraudulent system.
In fact, a person is far more likely to profit from gambling at a game of craps or roulette – than from joining and working an MLM program. To review some of the research showing the high loss rates for MLM participation, go to the “MLM – Network Marketing Statistics” page of my web site and read the reports referred to on that page, including a “Survey of Tax Preparers” and “Which Does the Greater Harm?” comparing MLM with gambling and with classic pyramid schemes.
Based on extensive independent comparisons,almost any income opportunity is superior to making money in MLM. For hundreds of examples, read “1,357 Ways to Make More Money than in MLM!”
Some MLM participants lose far more than money from their participation. We often hear of marriages and families broken up, credit cards charged to the maximum, bankruptcies, long-term friendships ruined, religious and other groups stressed or broken up, even suicides – all from compulsive participation in an MLM. In fact, the more committed a person is to an MLM, the greater the likelihood that he/she will suffer at least some of these consequences.
MLM programs can be evaluated objectively.
As mentioned earlier, after several years of analysis and feedback, I was able to identify elements of the pay plan that cause the extremely high loss rates and clearly distinguish between a harmful product-based pyramid scheme (MLM) and a legitimate income opportunity. Based on the characteristics (CDCs) of the compensation plan explained above, a person can test the pay plan of any MLM program with a “5-step Do-it-yourself MLM Evaluation” to determine if 99% of participants will likely lose money. As discussed above, after studying the compensation plans of over 300 MLM companies, I found these characteristics in all of them.
My 15 years of research and worldwide feedback convince me that a “good MLM” would be extremely rare – if any exist. (I have not found one yet!) Based on this research, the only MLM companies that might be legitimate are companies that rely on selling to the public through in-home demonstrations (called “party plans”) – because their demonstrations and many of their actual sales are to persons who are not participants in the pay plan. But even for in-home demonstration programs, one must carefully study the compensation plan to see how well the sale of products to the general public is rewarded by the company, as opposed to commissions to TOPPs from a large downline of recruits.
MLM is dependent on an array of misrepresentations and on self-deception.
MLM promises what it cannot deliver. To be successful, MLM companies depend on a complex web of deceptions, including much self-deception. Following are just a few examples of misleading promises and claims by MLM promoters:
• MLM offers freedom from having to work at a job, or more time to spend with family and in leisure activities
• Everyone has the same opportunity as the founders and first ones to join the program who are making boatloads of money
• MLM participants can work from home part-time or even seasonally and establish an ongoing “residual income.”
• MLM products are superior and worth their high prices - and these products can easily be sold to the public at a handsome profit
• Most MLM participants sign up just to get products at a discount - so are not counted as "failures."
• The MLM program can grow indefinitely, assuring “permanent income” for participants - almost like an annuity.
• Endorsements by big name athletes or politicians, articles in the business press, listing on the stock exchanges, or donations to worthy causes make an MLM legitimate.
• Lack of legal enforcement actions against an MLM guarantees that it will not have legal action taken against it in the future.
If you removed the many misrepresentations on which an MLM depends and the truth about it were disclosed, the company would quickly collapse. This is why MLMs avoid disclosing average income, cost of participation, attrition rates, etc. This also explains the DSA’s and MLM promoters' vigorous objections to requiring even a one-page disclosure of relevant information in the FTC's proposed Business Opportunity Rule. For a comparison between the MLM deceptions and the truth, read “30 Typical MLM Misrepresentations.”
The silence of MLM victims helps explain the inaction of law enforcement.
Nearly all MLM recruits lose money, becoming victims of fraudulent misrepresentations. However, they are taught by their MLM recruiters that if they fail it is their fault. Also, if they consider complaining to authorities, they fear consequences from those they recruited or those who recruited them – which are often close friends or relatives. For these reasons, MLM victims rarely file complaints with law enforcement. And because in law enforcement, those who complain the loudest get the most attention, and silent victims are usually ignored, very little is done to stop this unfair and deceptive practice.
The inadequacy of MLM regulation is amplified by the lobbying efforts of the DSA.
The FTC is charged with protecting consumers against unfair and deceptive practices. Knowing what we now know about MLM, it would be difficult to conceive of any business practice that is more unfair and deceptive than MLM. Informed persons may wonder why an FTC judge ruled in the 1979 FTC vs. Amway case that Amway was not a pyramid scheme. I offer two explanations:
First, it must be remembered that the ruling hinged on the understanding that Amway was complying with “retail rules” – 70% of products would be resold at retail, ten retail customers were required, and a buyback rule was in place. However, these rules were neither fully implemented by Amway nor enforced by the FTC, which should have been grounds for reversing the ruling that Amway was not a pyramid scheme. But during the original case, the FTC attorneys had been outgunned by a powerful team of Amway attorneys, and FTC officials have shown no appetite for entering that arena again.
Second, though logic should have dictated that entrepreneurial chains or pyramid sellers (MLMs) operated on the same principle as illegal chain letters and pyramid schemes, Amway argued that its business model was somehow different. Amway had been around for some twenty years and had not even begun to approach saturation and collapse, which was the expected destiny of pyramid schemes. What FTC attorneys failed to recognize was the difference between total saturation and market saturation. A city of 100,000 people would not need 100,000 distributors; only ten or twenty may be enough to constitute market saturation – beyond which it would be more and more difficult for distributors to find customers. In any given area, market saturation is actually reached very quickly, especially with hundreds of MLMs recruiting, as is now the case. And as explained above, MLMs lke Amway have found ways to endure and avoid total collapse.
Also, FTC officials in 1979 did not have the benefit of the extensive research that is available to them today. I’m not referring to research from the DSA (Direct Selling Association) or MLM companies, which of course skew their research to produce results supporting their programs. I’m referring to research by independent consumer groups, such as reported on this website, which clearly demonstrates that MLM is an unfair and deceptive marketing practice leading to losses for nearly all participants.
The DSA has recently been taken over by the MLM industry. The DSA could be considered a cartel which seeks to weaken anti-pyramid statutes, to influence the deceptive dialogue by MLM promoters and in the media, and to lobby for the advancement and protection of MLM, or product-based pyramid schemes. By introducing deceptive bills in U.S. state legislatures, the DSA/MLM cartel has been successful in protecting MLM companies from prosecution as pyramid schemes in several U.S. states. In Utah, for example, the Attorney General testified in 2006 on behalf of a DSA-initiated bill weakening its Pyramid Scheme Act; however, he did not disclose that the top contributors to his campaign were MLMs. The DSA/MLM cartel has also attempted to introduce legislation in the U.S. Congress to protect MLM companies from prosecution.
The harm from unfair and deceptive practices of MLMs could be partially overcome through meaningful disclosure; including average payout (mean, median, and mode) from the company to participants by levels, average payments to the MLM (and TOPPs) for products and services (including sales “tools”), attrition rates, and percentage of sales to non-participants.
In 2006, the FTC (Federal Trade Commission) proposed a Business Opportunity Rule that would require sellers of business opportunities to disclose helpful information (average income, references, etc.) to protect consumers from the worst scams. However, in 2008, by getting about 17,000 MLM participants and 80 Congressmen (with implied votes and political contributions) to object, the DSA/MLM cartel managed to get MLM companies exempted from the proposed Rule. If finalized in this form, it is likely that all sellers of business opportunities will change their pay plans to become MLM companies. This would leave consumers with almost no protection against perhaps the worst kind of unfair and deceptive practices, from which the FTC is pledged to protect consumers.
The FTC's response to criticism of its decision to exempt MLMs from having to provide transparency for consumers is that it can go after fraudulent MLMs on a case-by-case basis, using Section 5 of the US Code. At the same time, it admits to having prosecuted only 14 MLM cases in ten years. Based on my research, at least 350 MLMs are currently violating Section 5, including MLM members of the DSA. With dozens of new MLMs forming every year, and without increasing its staff twentyfold, the FTC would only continue falling further behind in its mission to protect consumers against unfair and deceptive practices. A rule requiring effective disclosure would be far more cost effective and consumer protective.
MLM as a business model should not be considered legitimate direct selling – or an "income opportunity."
MLMs reward the recruitment of an endless chain of participating “distributors” (agents, associates, representatives, etc.) as their main customers. The sellers are the primary buyers, and the buyers are the sellers – to themselves and their families. In contrast, in legitimate direct selling, the customers are not other distributors, but the general public.
TOPPs receive huge checks to lead the recruitment of a multitude of recruits who buy products to qualify for commissions and advancement in the program. As explained above, based on analysis of available data from MLM companys' own reports, approximately 99% of MLM distributors (other than TOPPs) lose money, buying more than they receive in commissions from the MLM company. So the vast majority of recruits eventually give up and quit – only to be replaced by other recruits.
In a legitimate income opportunity, the more one invests in time, effort, and money, the more likely one is to succeed. But in MLM, the more one invests, the more he/she loses – with the notable exception of the TOPPs.
This extremely uneven distribution of income, coupled with numerous misrepresentations, would place MLM under the category of an unfair and deceptive practice. The FTC is pledged to protect consumers against such practices, but with MLMs, it has been unable or unwilling to do so.
Government officials worldwide should carefully weigh the consequences before allowing MLMs entrance into their countries.
MLMs quickly reach market saturation in the U.S., so in order to continue their endless chain of recruitment, U.S.-based MLMs recruit vulnerable populations overseas. MLM is one of the most damaging of all classes of U.S. exports, and officials in other countries may wish to protect their citizens with an outright ban.
There are rare examples of countries that wisely refuse MLMs to operate in their countries. One example is China where MLM has been illegal for some time. Unfortunately, some U.S. trade officials, spurred by the powerful DSA/MLM cartel, have endeavored to get the ban lifted. While such a move would be a bonanza for U.S.-based MLMs, one can only imagine the millions of struggling Chinese that would fall for their deceptive recruitment practices. Whole multitudes of individuals and families would be ravaged, and the amount of aggregate losses could be staggering.
Summary
In summary, MLM (multi-level marketing) features an endless chain of recruitment to benefit a tiny few at the top of its pyramids of participants. It is built on the assumption of infinite expansion in finite and virgin markets, and as such MLM as a business model is inherently flawed, deceptive, and unprofitable for nearly all participants. MLM is also extremely viral and predatory - reaching out to and defrauding vulnerable populations elsewhere. MLM as a business model is the epitome of an unfair and deceptive practice and therefore should be per se illegal. At the very least, the FTC should require all MLMs to disclose meaningful information that would give consumers some protection.
