CAI

Consumer Awareness Institute

Non-profit Corporation

  "It's the Compensation Plan, Stupid!"

Comparative analysis – and the “5 RED FLAGS” of a recruiting MLM, or product-based pyramid scheme  

"It’s the compensation plan, Stupid." 
      An MLM (multi-level or network marketing) enthusiast was trying in vain to recruit his friend into his program – touting its great nutritional supplements, the integrity of the company’s leaders, awards by business magazines, etc. When nothing seemed to convince him, he challenged, “What could be wrong with it? Look at the great products and the people behind it.”  
      His friend finally blurted out, “It’s the compensation plan, Stupid!”  He explained that the program rewarded top-of-the-pyramid promoters for recruiting an endless chain of “opportunity” buyers, each suckered into buying products in hopes of capitalizing on something that was in fact a mathematical trick to defraud them of their money.

Identifying the features that cause horrendous loss rates 
     Finding little in the way of clear definitions in FTC cases or state statutes that clearly distinguished pyramid schemes from legitimate direct sales programs, I compared key features of legitimate sales programs with features of pyramid-like schemes that caused financial losses to the vast majority of participants. After several months of comparative analysis and consultation with top experts in the field, I identified five “red flags” in a compensation plan that clearly distinguished between the two. These 5 Red Flags, taken together, cause horrendous loss rates. In fact, when all five red flags came up in a compensation plan, and data could be found on participants’ earnings, approximately 99.9% lost money!
     Also, these 5 Red Flags have legal significance, in that they demonstrate primary emphasis on income from recruitment, rather than from actual sales to end users who are not part of the network of participants. In many jurisdictions, this emphasis is central to an MLM being defined as an illegal pyramid scheme.  

 

The “5 Red Flags” of a product-based pyramid scheme
     Nearly all MLM programs can be considered “product-based pyramid schemes,” or “recruiting MLM’s” – referring to schemes that are characterized by endless chain recruitment of a multi-level hierarchy of participants as primary customers. Recruiting MLM’s incorporate these “Five Red Flags” in their compensation plans:  

  1. Recruiting of participants is unlimited in an endless chain of empowered and motivated recruiters recruiting recruiters.  

    2. Advancement in a hierarchy of multiple levels of participants is achieved by recruitment, rather than by appointment.

  3. Ongoing purchases (products, sales “tools,” etc.)  by participating “distributors” are encouraged in order for them to be eligible for commissions and to advance in the business ("pay to play").

  4. The company pays commissions and/or bonuses to more than five levels of “distributors”;’ i.e., more than is functionally justified. This creates great leverage to enrich those at the top of their respective pyramids at the expense of a multitude of victims recruits. Of course, the company also profits handsomely at their expense.

  5. For each sale, total company payout for upline participants equals or exceeds that for the person actually selling the product, creating an inadequate incentive to sell products directly and an excessive incentive to recruit new participants.    

For more complete information on these "5 Red Flags," read the report that was summarized at the 2004 Economic Crime Summit Conference, sponsored by the National White Collar Crime Center. Read the full “5 Red Flags” report.

For a summary of the comparative analysis that led to the “5 Red Flags,” go to – http://www.mlm-thetruth.com/comparisons.htm

 For evaluations of over 200 programs on the basis of these 5 Red Flags, go to – http://www.mlm-thetruth.com/mlm_evaluations.htm

 If you read the full report, the supporting research, and the ensuing evaluations with an open mind, you will never again see the typical MLM/network marketing program as an innocent home business.

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