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CAI

Consumer Awareness Institute

Non-profit Corporation

MLM - Network Marketing, DIRECT SELLING, and the DSA 

Dr. Taylor has coined the term 'product-based pyramid schemes' to describe [MLM] plans, and I believe his term to be dead-on accurate." —Douglas M. Brooks, Gilman & Pastor, LLP

Most MLM's are no more direct selling programs than a pig is a horse. – Jon Taylor

"Theoretically, MLM companies pay commissions and bonuses only upon the sale of  products and services by distributors to consumers; i.e., persons who are not part of the distributor scheme. Serious problems arise, however, when the ultimate consumers are in fact comprised mainly of distributors, and retail selling is secondary to recruitment. Such plans are profitable only for a tiny percentage of distributors at the top of the marketing chain. Most distributors in such plans will inevitably lose all or most of their investments. Dr. Taylor has coined the term 'product-based pyramid schemes' to describe [MLM] plans, and I believe his term to be dead-on accurate." —Douglas M. Brooks, Gilman & Pastor, LLP –specializing in franchising and distribution law and certified class actions against MLM firms

MLM – the truth!

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.

For a good laugh at how ludicrous is the claim that MLM is merely another form of direct selling, see the box below with the pigs and horses.

1. Through the DSA (Direct Selling Association), MLM promoters are working hard to define MLM/network marketing as a form of legitimate direct selling. The MLM industry has virtually taken over the Direct Selling Association (DSA) and used it for intensive lobbying for anti-pyramid scheme laws which would exempt MLM's from prosecution as pyramid schemes, at the local, national, and international level. However, research conducted by Dr. Jon Taylor demonstrates that the highest loss rates of all pyramid schemes are product-based pyramid schemes, or recruiting MLM's. So the effect of the legislation is to make the worst pyramid schemes legal. What MLM promoters and the DSA fail to acknowledge is what legitimate direct selling is NOT – for example, an endless chain of recruiters recruiting recruiters (which they call distributors, but are in fact their primary customers – See quote by Douglas M. Brooks at the bottom of the section on LAW ENFORCEMENT. 

The Direct Selling Association (DSA), which is now dominated by the MLM industry and therefore promotes MLM’s agenda, defines direct selling as “the sale of a consumer product or service, person-to-person, away from a fixed retail location.”  On the bases of this definition, MLM’s claim to be direct sales programs. But the definition fails to specify what legitimate direct sales programs are NOT.  

2. What legitimate direct sales programs do NOT do:

• Recruit participants in an endless chain of participants recruiting more participants (as primary customers), 

• Specify advancement by recruitment, rather than by appointment,

• Require or use powerful incentives for ongoing purchases in order to qualify for commissions and to advance in the scheme,

• Pay overrides on more levels of managers than are functionally justified (most corporations have found the entire country can be covered in four levels of sales managers), and–

• Offer excessive incentive to recruit, combined with inadequate incentive to sell products to bona fide customers. In nearly all MLM’s, there are few legitimate customers outside the network of “distributors.”  

For a chart comparing recruiting MLM's and legitimate direct selling, see  "Does Multi-level Marketing Qualify as a Form of Direct Selling?" [PDF format] (This chart uses a 7-point checklist, but the same essential concepts as the "5 Red Flags.) If you have read other reports on this site,  you may recognize the "5 Red Flags.". Read the full report to the National White Collar Crime Center, entitled "The 5 RED FLAGS for Identifying Exploitive Product-based Pyramid Schemes, or Recruiting MLM’s"  For more information on DSA-influenced bills put before state legislatures and the Congress, go to the web site for Pyramid Scheme Alert (PSA) at – http://www.pyramidschemealert.org/PSAMain/news/DSABill/DSAbill.html

The Typical MLM is No More a Legitimate Direct Sales Opportunity than a Pig is a Horse. Turn to the last page of "THE 5 RED FLAGS" report [PDF]. Note Appendix C: Does MLM Qualify as a Form of Legitimate Direct Selling? – a Six Point Checklist. Anyone who has read the above reports with an open mind will agree that the typical MLM is no more legitimate direct selling than a pig is a horse - no matter how much money is spent positioning it as a horse (below). And just because an MLM is a member of the DSA does not make it a direct sales company any more than marching a pig into a horse corral makes it a horse.

The 5 Red Flags were selected on the basis of over six years of experiential and comparative research, along with input from the top experts in the field. They were then validated with actual data from MLM company financials, court records, etc.. Serious researchers will want to carefully review the grid that was used for the final selection of the 5 Red Flags. Click here to download "Comparative Analysis of Direct Sales and other Legitimate Distribution Models with No-Product Pyramid Schemes  and Recruiting MLMs, or Product-based Pyramid Schemes." 

3. Unfortunately, the DSA has succeeded in weakening statutes against pyramid schemes in several states. They have done this to shield MLM's from prosecution as pyramid schemes, even though recent evidence proves that the most virulent and harmful chain selling schemes are product-based pyramid schemes. Read how the DSA duped nearly everyone in the 2006 Utah legislature  SB182 passed in Utah, which is a hotbed of MLM activity.

4. The DSA engages in the web version of identity theft. As further evidence that the DSA, like the MLM industry that supports it, engages in misrepresentations to carry off its programs, go to the PSA web site at www.pyramidschemealert.org. When PSA was developed and financed as a non-profit organization, the web site developer was given the option of registering its domain name with the suffix ".org." But as soon as these guidelines were lifted, the DSA registered other domain name suffixes for pyramidschemealert. Try adding ".com" or ".net" and see what happens. This identity diversion is the web version of identity theft, but was no surprise to those who knew of the pattern of deceptive marketing practices routinely used by the MLM industry.

Now the DSA is at it again, apparently planning to use such deception to mislead web surfers seeking out this site. Go to http://www.mlm-thetruth.org/, and you will find a site deceptively similar to this one (with ".org" instead of ".com" suffix) reserved by - you guessed it - the DSA! (I checked the WHOIS listings.)

5. Analysis of sales figures supplied by the World Federation of Direct Selling Associations (WFDSA) shows increasing losses by participants as MLM grows world wide. Karl-Heinz Kreiter has done an incredible job of showing how unprofitable direct selling is when the number of MLM participants is factored in - using statistics supplied by the WFDSA. They are condemned by their own numbers! Read the full report – "Outstanding unlimited growth potential for MLM?" at – http://www.mlm-beobachter.de/mlm/mlmwachstum_e.htm

6. Legitimate direct selling, naked pyramid schemes, and gambling all beat MLM! You may not make much money, but you will lose little or no money in legitimate direct selling. Conversely, the rate of success for recruiting MLM's is abysmal. In fact, MLM makes gambling in Las Vegas look like a safe bet in comparison. Even clearly illegal no-product pyramid schemes do far better.  See "WHICH DOES THE GREATER HARM?" [PDF]  For a comparison of loss rates of 10 specific MLM's with direct selling, no-product pyramid  schemes, and gambling, click here. [PDF] 

7. Are there nore fair network marketing or "Retail MLM" programs that emphasize sales over recruiting? Fair and equitable distribution of income in compensation plans is extremely rare in MLM/network marketing. Where such MLM programs exist, I call them "retail MLM's". In a retail MLM, every participant can earn a decent income selling products without recruiting a large downline. Based on review of compensation plans of over 250 MLM programs and their resultant effects, it can be assumed that a harmless MLM could exist if certain rules were adhered to. Read "Rules for Compensation Plans in MLM Programs to Prevent the Worst Abuses." 

Out of hundreds of MLM's I have reviewed, we occasionally find an MLM/network marketing programs that can be classified as "Retail MLM's" – which avoid the worst abuses of the "5 Red Flags" discussed above. However, most eventually change their compensation plans to reward recruitment over retailing - probably because direct selling is no longer as attractive or competitive in a society with big box chain stores and internet shopping options. So they turn to chain selling of participants as primary customers.

8. The DSA resists honest and meaningful disclosure or other "business opportunity rules" proposed by the FTC that could limit their ability to deceive the public. The FTC recently invited public comments on a proposed business opportunity rule that would hopefully protect people from some of the worst business opportunity scams  people complain about - mostly "pyramid marketing schemes." Since any honest and meaningful disclosure or other reasonable requirements would clip the wings of MLM recruiters, over 15,000 comment letters were sent to the FTC protesting such rules. Most of these were form letters supplied by the DSA or its member forms. Read the comments submitted to the FTC by Dr. Jon Taylor of CAI, and then read his rebuttal of the comments by the DSA representative.

Our position is that meaningful disclosure is essential to protect consumers from MLM. Read about MLM as a flawed business model that can only thrive on a complex web of deceptions. 

Take time for a good laugh from these great cartoons –