By Jon M. Taylor, MBA, Ph.D., Consumer Awareness Institute
My qualifications for this research includes (but is not limited to) the following:
• MBA with 2 years study in statistics, economics, accounting, and finance
• PhD in applied psychology, including behavioral incentives
• Review of thousands of pages of research on MLM and home business opportunities
• Involvement in over 40 home business startups, including several sales oriented businesses
• 20 years of worldwide feedback
• Review of applicable federal and state laws
• One-year test of Nu Skin program, followed by publication of the book The Network Marketing Game
• Over 20 research studies on MLM, including analysis of the compensation plans of over 600 MLMs (MLM programs) and average income (loss) figures for 50 MLMs.
With all this background, I come to the conclusions below in answer to key questions about MLM. For more details, see my e-book entitled: Multi-level Marketing Unmasked: The Case against Multi-level Marketing as an Unfair and Deceptive Practice. (Download for free from this web site.)
You also might find it helpful to read “A Brief History of Pyramid Schemes and MLM“.
Click on the headings below to read the details for each section:
• MLMs are often sold as a viable alternative to an unfavorable job market and as a better route to retirement than traditional plans.
• MLM programs typically sell “pills, potions, and lotions” or other products that are consumable, that have unique appeal, and that can be claimed to deliver benefits not available elsewhere.
• One sees a strong sense of belonging, or an “us versus them” cultish mentality.
For a description of the types of people who are involved in MLM, click here.
• MLMs depend on unlimited recruitment of a network of endless chains of participants.
• Participants advance to ranks or positions in a pyramid (“downline”) of participants based on timing and recruitment, rather than on merit or appointment.
• As endless entrepreneurial chains, or “opportunity” recruitment schemes, MLMs assume an infinite market, which does not exist in the real world. They also assume virgin markets, which don’t exist for long. They would be doomed to eventual market saturation and collapse, except that some avoid this by expanding (“re-pyramiding”) to other markets and/or through the same markets with new product offerings.
• Therefore, as endless chains, MLMs are inherently flawed, unfair, and deceptive – profitable primarily for those positioned at or near the top of the hierarchy of participants, which I call “TOPPs” (top-of-the-pyramid promoters) – who are often the first ones in the endless chains of recruitment. New recruits are being sold a ticket on a flight that has already left the ground.
• Worldwide feedback suggests that MLMs can be extremely viral and predatory. As endless chains, MLMs quickly spread from state to state and often to vulnerable foreign markets. As a result, they are far more prevalent than legitimate business opportunities.
• I have challenged state and federal law enforcement officials to identify any packaged “business opportunity” that is systemically more unfair and deceptive, and more viral and predatory than MLM. No one has met the challenge.
• MLMs typically finance their operations from purchases by participants who are incentivized to buy overpriced products to qualify for commissions and for “rank advancement” (to advance to higher levels in the pyramid of participants). With the exception of some party plans, the majority of sales are typically to participants.
• Typically, MLM products are unique (making it difficult to compare with competing products), consumable (to encourage repeat purchases), and priced higher than products sold elsewhere (to pay commissions on many levels of participants).
• MLM compensation plans are cleverly rigged to reward the bulk of commissions to TOPPs (top-of-the-pyramid promoters), which is typical of all pyramid schemes. This is due to a commission structure that is upside-down from a legitimate direct selling program, in which the bulk of the commissions are paid to the person making the sale. It is this extreme concentration of commissions paid to TOPPs that motivates them to tirelessly promote recruitment to expand downlines, thereby assuring not only their outsized income, but the MLM’s survival and growth. Also, continual recruitment is needed to replace large numbers of dropouts, most of whom will have lost money.
• Another explanation for MLMs unfairness is that relative vertical equality in commission structure – which appears benign – results in extreme inequality in distribution of income to participants. (See Exhibits 7g and 7h in Chapter 7.) This extreme inequality is further proof that MLM is an unfair and deceptive practice, which the FTC and Attorneys General of the 50 states should be actively combatting.
• Most MLMs become even more top-weighted with five or more layers in their compensation plans – more than are justified to manage the sales function.
• Some ask: Is possible to design an MLM that is honest and fair to all participants. To accomplish this would require major adjustments, such as the following:
o Commissions would be paid only on sales to non-participants – and no overrides or commissions paid for purchases of downline participants.
o For each sale, over 50% of total commissions paid by the company would be paid to the front-line person who sells the products, with amount of commissions decreasing at each higher level rank.
o The number of levels on which commissions can be paid would be limited to four (the maximum needed to manage any standard sales function, including branch, division, regional, and national managers). Unfair features of breakage and highly leveraged breakaway programs would be banned.
o There would be no minimum ongoing purchase quota to qualify for commissions or rank advancement.
• Unfortunately, to my knowledge, none of the MLM founders have taken such steps to achieve honesty and fairness.
• The villain in MLM abuse is not so much the leaders as a flawed system of unlimited recruitment of participants as primary customers. MLMs enable the transfer of money from a rapidly churning supply of new recruits to TOPPs, founders, and the company itself.
• MLM promises what it cannot deliver. To be successful, MLM promoters depend on a litany of deceptions, including much self-deception. Misrepresentations regarding products, income potential, and legitimacy are commonplace in MLM. (See Chapter 8)
• Based on the foregoing and on the research discussed below, if asked if MLM is a moral or ethical business model, I would have to answer with an unqualified “no!”
• MLM is clearly an unfair and deceptive practice and should be illegal under Section 5 of the FTC Act, as well as state statutes that mandate against unfair and deceptive acts or practices (UDAP). Some states also have laws against endless chains, and MLMs clearly violate these. However, the Direct Selling Association (DSA) and the MLM industry, has lobbied successfully for weakening of laws and rules that could offer needed protection for consumers.
- Based on available company data, approximately 99.7% of all MLM participants lose money – spending more on company purchases and promotion and operating expenses than they receive in commissions from the company. Attrition rates are high. And if one removes TOPPs from the calculations of average income, the loss rate is closer to 99.99%, which means that the chance of new recruits profiting is virtually zero.
- As is true with any scam, those who invest the most, lose the most, having accepted deceptive claims that the MLM is a legitimate income opportunity, and having continued to invest in the vain hope of eventually profiting handsomely.
- Sales reported by MLM companies represent losses to participants. So based on DSA statistics, aggregate losses suffered by tens of millions of victims exceeds ten billion dollars a year in the U.S., with losses suffered increasingly by vulnerable populations overseas. This means that total aggregate losses from hundreds of millions of victims worldwide since the 1979 FTC v, Amway decision (allowing Amway to continue its endless chain recruitment scheme) would amount to hundreds of billions of dollars.
- Damages from participation in MLM are widespread among participants. In many cases, monetary losses from MLM participation lead to heavy indebtedness, bankruptcy, foreclosed mortgages, and failed education and career pursuits.
- Some MLM participants lose more than money. Divorces and rifts among extended families are commonplace. Even suicides and murders related to participation in MLM, have been reported.
- Addiction to MLM can result from excessive commitment to MLM – which can become a cutish lifestyle. “MLM junkies” – who have internalized its “easy money” appeal – may find it difficult to work again in a normal work setting.
- MLM is an unfair and deceptive practice (UDAP) that siphons money away from legitimate businesses. And with the FTC’s granting of an exemption to MLMs from having to comply with its Business Opportunity Rule, the market for legitimate non-MLM direct selling and business opportunities could be virtually eliminated, as packaged business opportunities and formerly legitimate direct sales opportunities are converted to an MLM format to escape regulation.
- The case can easily be made that virtually all MLMs are violating some federal and state laws, although law enforcement seldom acts against them – partly because victims of endless chains rarely file complaints. For the same reason (as well as financial support from MLMs and the DSA – see #3 below), the Better Business Bureau seldom issues a negative report on major MLMs. The media have been largely silent.
- The DSA, together with major MLMs, function as a cartel to choreograph deceptive arguments defending the industry – and to weaken laws and regulatory efforts against product-based pyramid schemes. Through promised votes and carefully placed political contributions to Attorneys General and other key politicians, they have been successful in getting laws passed in Utah and other states that exempt MLMs from prosecution as pyramid schemes. They have donated to the political campaigns of presidential candidates and to those with oversight responsibility for the Federal Trade Commission to assure that no significant action is taken on the federal level by the FTC or any other agency.
- Even the Better Business Bureau is corrupted by support from the DSA/MLM cartel, members of which are “corporate sponsors” of the BBB. Amway, for example, gets an A+ rating from the BBB – which says more about the BBB than it says about Amway.
- Regulators, the media, and MLM victims, have become conditioned to focus on the question of whether or not an MLM is a pyramid scheme. Since the DSA/MLM lobby has obfuscated this issue with the indeterminate question of what percentage of products are consumed, nothing gets done. The issue of whether or not an MLM is an unfair and deceptive practice is more easily determined, as this book proves.
- Most MLM participants spend no more than a few hundred dollars in products and services and then drop out. They are the lucky ones. Despite having spent more than they received, few blame the company for their losses – even losses of many thousands of dollars. They have been taught that they – not the company – are responsible for any failures.
- The silence of victims of MLMs is also explained by the fact that in every endless chain, major victims are also perpetrators, having recruited as many people as possible to recover costs of participation. So they fear self-incrimination if they file a formal complaint, and they fear consequences from or to those they recruited – which often include close friends or family members.
- They assume unlimited recruitment of endless chains of participants.
- Except for TOPPs, participants advance by recruitment, rather than by appointment like other businesses.
- In order to qualify for commissions or advancement, participant must make minimum incentivized or “pay to play” purchases of products or services.
- Most of the commissions paid by the company are paid to those at or near the top of a pyramid of participants – often the first to join. Founders may also skim a percentage of all revenues.
- For most MLMs, company payout is to five of more levels of participants, with commissions to those at the bottom levels seldom enough to cover the cost of “pay to play” purchases and other expenses.
- Consumers, law enforcement, and the media must get informed; and regulatory officials must be willing to expose and challenge the inherent flaws and unfair and deceptive practices in the MLM industry.
- Crucial information must be disclosed to prospects to make informed decisions about MLM participation, such as average commissions from – and payments to – the company for all participants.
- MLM promoters must not be allowed to make (or imply) promises of substantial or residual income potential.
- A 7-day waiting period should be required before any investment is made by prospects.
- Victims must be more active in complaining to authorities.
7. Conclusion – definition and effects of MLM
Persons honestly seeking a good under-standing of multi-level marketing (MLM) find that MLM does not yield itself to a short and simple definition. I conclude with what I believe to be the only accurate, research-based definition of the business model labeled “multi-level marketing.” This definition applies to all of over 600 MLMs I have analyzed:
Multi-level marketing (MLM) is promoted as “direct selling”; but in fact, rewards are stacked in favor of recruitment, rather than sales to the public. MLM is characterized by all of the following:
(1) Endless chains of participants are recruited into the bottom level of company-sponsored pyramids of participants,
(2) Advancement up the levels in the pyramid is achieved by recruitment and/or purchases, not by appointment,
(3) Minimum purchases are required to qualify for commissions and/or to attain or maintain ranks in the pyramid, and
(4) The bulk of rewards are paid primarily those at the top of the pyramid.
NOTE: This set of four distinct characteristics is not found in any other type of business – except pyramid schemes. In fact, the fundamental structure of MLMs (MLM programs) is virtually identical to that of classic, no-product pyramid schemes, except that in lieu of cash exchanged directly between participants, products are purchased and commissions processed through an MLM company sponsor. Such commissions are drawn chiefly from purchases of their “downline” (those recruited beneath them). It is appropriate to refer to MLMs as “product-based pyramid schemes.”
This definition requires some explanation of its assumptions and effects, which have been identified through 20 years of research and worldwide feedback. Both the above definition and the effects described below provide a true and complete picture of multi-level marketing as a business model and as an industry, which again has been confirmed in analyses of over 600 MLMs:
As a business model incentivizing unlimited recruitment, MLMs (MLM programs) assume an infinite market, which does not exist in the real world. MLMs also assume virgin markets, which cannot exist for long. Since MLM compensation plans are heavily weighted towards recruitment, rather than retail sales, stable retail markets never materialize. Consequently, MLMs must “re-pyramid” (expand) into new markets to compensate for saturation of existing markets. And with its high attrition rate, constant recruitment is necessary to replace dropouts. This re-pyramiding and constant churning of recruits is necessary to prevent total market saturation and collapse, as is true of any pyramid scheme.
In addition, some MLM recruiters sell books, lead generation systems, and other “sales tools” to assure success, but which wind up increasing costs and eventual losses.
MLMs depend on a myriad of misrepresentations* to survive and grow and to defend against regulatory action. Exaggerated product and income claims are common in recruitment and in company communications.
Prospects are typically lured into MLM with exaggerated product and income claims. Since approximately 99% of participants lose money, most eventually drop out, to be replaced by a continual stream of new recruits, who are likewise destined for loss and disappointment.
MLMs are therefore inherently flawed and have been proven to be the most unfair and deceptive of all purported business opportunities.** Technically, as extremely unfair and deceptive acts or practices UDAP), MLMs in the USA violate Section 5 of the FTC Act, as well as UDAP statutes in many states.
As recruitment-driven systems, MLMs can also be extremely viral and predatory. MLMs, or product-based pyramid schemes, do far more damage than classic, no-product pyramid schemes by any measure – loss rates, aggregate losses, and number of victims. Tens of millions of MLM victims suffer tens of billions of dollars in losses every year. MLM may be the most successful consumer fraud in history.
While financial losses can be significant, adverse effects can also sometimes be seen in bizarre or cultish behavior, divorces, loss of “social capital” or ruined relationships with family and friends, and even addiction to MLM’s empty promises. Some sacrifice careers or education to pursue MLM’s vaporous promises of easy wealth (“time freedom” or “residual income”) and a mystique of personal and spiritual fulfillment.
The above definition is strengthened by information in my eBook Multi-level Marketing Unmasked. MLM is dependent on aggressive recruitment of new recruits as primary customers. Products are overpriced to accommodate large downlines. The loss rate and attrition rates are extremely high, and a myriad of misrepresentations are necessary to lure new prospects. And because victims seldom file complaints with law enforcement, there is little incentive for law enforcement to act against them or for legislators to enact better laws to protect against MLM fraud.
Though MLM is a fundamentally flawed business model manifested in bogus “business opportunities,” it is now protected by the FTC with its exemption from having to comply with its Business Opportunity Rule (BOR) – which was originally intended to protect the public from such practices. As an unintended consequence, other packaged “business opportunities” will be incentivized to adopt the same flawed MLM model to avoid having to comply with the Rule – hurting rather than helping those they target.
As in the past, tens of millions of MLM victims will continue to suffer tens of billions of dollars in losses every year – perhaps the greatest consumer fraud in history.