The DSA (Direct Selling Association) was once an organization dedicated to advancing the interests of what were then legitimate direct selling companies like Fuller Brush, World Book Encyclopedia, Tupperware, Cutco Cutlery, etc. But what has happened in recent decades could be illustrated by a farmer who has pigs and horses for sale. He gets more money for horses, so he attaches horse hairs on the buttocks of the pigs and marches them into the horse corral. Then he proclaims, “There, you see, they are no longer pigs, but horses because they are in the horse corral.”
Similarly, since multi-level sounded too much like a pyramid scheme, they coined the term “network marketing.” Then, since it sounded even less pyramid-like, they sought to be called “direct selling” companies. So one-by-one they joined the Direct Selling Association and now boldly declare they are direct selling companies.
1. Through the DSA, MLM promoters are working hard to rebrand itself, defining MLM 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 may call sellers, but are in fact their primary customers
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.”
The Typical MLM is No More a Legitimate Direct Sales Opportunity than a Pig is a Horse.Read “Does MLM Qualify as a Form of Legitimate Direct Selling?” in Chapter 2 of the ebook The Case against Multi-level Marketing as an Unfair and Deceptive Practice, which can be downloaded from our web site. 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.
Let’s put it another way. A pig is not a horse, no matter how much money is spent positioning a pig as a horse. And MLMs are not legitimate direct sellers – any more than a pig is a horse!
Let us suppose MLMs were selling primarily to non-participants. With the 15 million or so MLM “sales persons”, you would have someone calling on you every hour or so – and to sell products, not to recruit you!
The “5 Red Flags of a product-based pyramid scheme” which characterize all MLMs were selected on the basis of many 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. 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. 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 bill passed in Utah, which is a hotbed of MLM activity. See Chapter 11 of the aforementioned ebook.
4. Sales figures supplied by the World Federation of Direct Selling Associations (WFDSA) show 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
5. 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 MLMs 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 our report “Which Does the Greater Harm?” for a comparison of loss rates of typical MLM’s with direct selling, no-product pyramid schemes, and gambling.
6. Are there no fair network marketing or “Retail MLM” programs?
Fair and equitable distribution of income in compensation plans is virtually non-existent in MLM/network marketing. If such an MLM programs did exist, I would call it a “retail MLM”. In a retail MLM, every participant can earn a decent income selling products without recruiting a large downline, and in fact the incentives would favor retailing over recruiting with no commissions paid on downline purchases. Based on review of compensation plans of approximately 500 MLM programs and their resultant effects, I can say that an MLM would be hamless only to the degree it is not at all like a typical MLM – but more like a standard retail sales model.
The most likely candidates for a legitimate MLM, if such existed, are party plans, which allow a host to actually earn money for a party he/she sponsors. 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.
7. The DSA/MLM lobby fought meaningful disclosure in a “business opportunity rule” proposed by the FTC that would have limited any MLM’sability 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 17,000 comment letters (including duplicates) were sent to the FTC protesting such rules. Most of these were form letters supplied by the DSA or its member forms.
Through aggressive lobbying (and likely political contributions and implied large groups of voters), the DSA/MLM lobby got over 80 congressman to sign on to a letter objecting to including MLM in the Rule. The FTC complied and proposed a Revised Rule exempting MLM from having to make such disclosures. So the business opportunities that most typify the reason for the rule was exempted in the Revised Proposed Rule!
Our position is that transparency, including meaningful disclosure of critical information, is essential to protect consumers from MLM. Read Regulatory Capture: MLM as a Flawed Business Model, which can be downloaded free of charge from our web site.
Let me quote from a top legal expert in the field:
“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, Boston attorney specializing in franchising and distribution law and certified class actions against MLM firms