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QUESTIONS ABOUT MLM AS A BUSINESS MODEL:
Of course, there are inequalities of rewards in most business arrangements. However, in MLM, the leveraging of a downline of thousands of participants who invest and lose money – only to enrich the TOPPs (top of the pyramid of participants), creates extreme inequality. For example, a downline may get average payments $500 a year (actually losing money after subtracting necessary purchases from the company and operating expenses), while those at the top may reap millions of dollars a year. Such extreme inequality far exceeds what could be considered a normal or equitable business arrangement. MLM’s easy money and winners-take-all appeal is more akin to a lottery than a legitimate business.
A: Many years of broad experience in the direct sales field and extensive research led to the identification of four causal and defining characteristics of a compensation plan that clearly separate exploitive MLM/pyramid/chain selling schemes from legitimate sales opportunities. These four characteristics – referred to as the “4 Red Flags” – both cause the horrendous loss rates and clearly define or distinguish between a pyramid or chain selling scheme and a legitimate income opportunity. The compensation plans of over 600 MLM programs have been tested against these 4 Red Flags of “recruitment-driven MLMs” (those with pay plans that primarily reward the recruiting of a downline, making sales to non-network customers a comparative waste of time – which applies to virtually all MLMs).
In the compensation plans of recruiting MLMs, we find these four causative and defining factors (“Four Red Flags”):
- Recruiting of participants is unlimited in an endless chain of empowered and motivated recruiters recruiting recruiters.
- Advancement in a hierarchy of multiple levels of participants (“distributors,” “associates,” etc.) is achieved by recruitment, rather than by appointment.
- Minimum quotas of purchases (company products and/or sales “tools,” “business support materials,” training, etc.) by participants and/or recruitment of other participants are required in order for participants to be eligible for commissions and to advance in the business (“pay to play”).
- For each sale, company payout for the total of all 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 Also, in most MLMs, the company pays commissions and/or bonuses to more than four levels of participants, which further enriches those at the top.
In 100% of the MLMs where data is available, MLMs with at least the first four of these characteristics (which is virtually all MLMs) result in losses suffered by approximately 99% of participants. The odds of profiting are far greater at gaming tables in Las Vegas.
It is true that most new MLM recruits buy a few products and services and soon drop out. The ones who lose big are those who believe the promises of MLM promoters and then work hard to make them happen – and find their participation to be a money trap. Whereas in a legitimate business those who invest the most in time, effort, and money can be expected to profit the most; in MLM those who invest the most, lose the most – with the notable exception of those at the top of the pyramid or who got in at the beginning of the recruitment chain, some of whom make huge amounts of money.
One astute former MLMer stated it well: “The massive loss rates in MLM would be the same even if every participant had the talents and ambitions of Donald Trump or Warren Buffet! The loss rates are pre-determined by the scheme design and its operation.”
Some MLM promoters and executives vigorously deny that they are pyramid schemes, or even MLM. They may set up rules of behavior for participants to follow (such as requirements for sales to non-participants) in order to make them appear more legitimate. Such rules have little effect if the underlying structure features a compensation plan that rewards recruitment of an endless chain of participants as primary customers. “If it looks like a duck, walks like a duck and quacks like a duck, it’s a duck. “ Likewise with MLM.
A. Many assume that since MLM chain sellers offer legitimate products they cause less losses than naked, no-product pyramid schemes. The facts show otherwise. Extensive research correlating the compensation plans with financial reports of leading MLMs and analyses of other classes of chain selling schemes leads to the conclusion that of all classes of pyramid/chain selling schemes, those that do the most harm are MLMs (product-based pyramid schemes) by any measure – leverage, loss rates, aggregate losses, or number of victims.In fact, statistical reports show that joining an MLM makes a bet on snake eyes in a game of craps at Caesar’s Palace in Las Vegas look like a safe bet in comparison.
One of the reasons that MLM is less profitable for participants than no-product pyramid schemes is that a sizable percentage of moneys paid into an MLM program goes to the company for products and infrastructure – facilities (often expensive), wages of workers, and salaries (often huge) of executives, and profits to founders (also often huge – called “skimming”). Conversely, in no-product schemes, all the money goes to the top of those in the pyramid of participants, with nothing shared with a company infrastructure. As a result, the loss rate for no-product pyramid schemes is approximately 90%, whereas for product-based schemes it is at least 99%. In fact, in most MLMs, approximately 99.7% of participants lose money, assuming you count all participants (not just “actives”) and subtract incentivized purchases and minimal operating expenses.
(See MLM Research, especially chapter 7 of my eBook Multi-level Marketing Unmasked. See also Shocking MLM Statistics. And you could check out Robert Fitzpatrick’s report “The Myth of MLM Income Opportunity in Multi-level Marketing,” (downloaded from pyramidschemealert.org) which essentially confirms my findings.)
To those familiar with qualified independent research, MLM as a business model (or any chain selling program) should be considered an unfair and deceptive trade practice. It enriches a few at the expense of a revolving door of hapless victims who lose money – after subtracting necessary purchases and minimal operating expenses. New recruits are being sold a ticket on a flight that has already left the ground. (See MLMs Evaluated, and Shocking MLM Statistics.)
So with MLM or any endless chain scheme, market saturation occurs very quickly, after which recruiters must move to other states to recruit successfully, then to other countries to find new prospects to add to the chain of buyers. In effect, the MLM then becomes a de facto Ponzi scheme, in that income from the constant churning of new recruits in new markets is needed to repay earlier recruits who invested in saturated markets. This is why MLM promoters scramble to be the first ones in to a new country when it is opened up as a new market for recruitment.
A. Some MLM proponents argue that if it were a pyramid scheme, the programs would be destined to collapse. While this may be true for classic, no-product schemes, MLM promoters have found ways to survive and even grow. They do so by constant recruitment of new recruits to replace those dropping out, a process called churning. They move to new areas to start the process all over again – a technique that I call “re-pyramiding.” So they don’t collapse, but are in a state of continuous collapse – or churning through a revolving door of new recruits.
The more resourceful MLMs survive for years and even decades by doing the following:
- “re-pyramiding” into new countries or with new product lines when one area is saturated.
- recycling through a continuous stream of new recruits to replace a multitude of dropouts
- hugely rewarding top recruiters for constant recruitment of purchasing participants to replace those who dropped out,
- duping law enforcement, media, and consumers about the MLM’s legitimacy,
- requiring ongoing (subscription) investments by participants to qualify for commissions and advancement in the pay plan,
- recycling through new markets or countries and then with new product offerings,
- feigning compliance with “retail rules” and by staying below the radar of law enforcement ,
- convincing victims that failure is their “fault,”
- and by a host of other deceptive and creative measures.
Thus, MLMs, or product-based pyramid schemes, are able to continue indefinitely where cash-based (no-product) pyramid schemes soon collapse.
- the founders
- top company administrators
- the earliest participants who initiated the networks of recruitment chains
- those who through diligent and deceptive recruitment manage to climb to a point near the top of a large pyramid of participants – sometimes replacing those who have left the company
Approximately 99% of all other participants lose money. (Again, see Shocking MLM Statistics.)
MLM participants who do actually earn enough in commissions and bonuses to exceed required purchases and minimal operating expenses must work long hours and recruit aggressively (while parroting typical misrepresentations they are taught) in order to realize any significant profits in excess of expenses. “Part-time income” from MLM is a myth, and to promise such is a misrepresentation of the facts. Except for those who were initially positioned at the top of the pyramid, any success in MLM requires years of round-the-clock recruiting and a generous dose of self-deception.
QUESTIONS ABOUT THE PEOPLE WHO PROMOTE MLM
Nearly all recruits are lured by these deceptions into buying overpriced products in order to “play the game.” Self-deception is common in MLM, as is group deception and even cultish behavior in typical recruitment campaigns. For discussion on cultish behavior, including MLM, go to freedomofmind.com/
Again, if one looks for a villain in MLM/chain selling schemes that defraud the vast majority of participants, it is not easily ascribed to the founders or promoters, most of whom (based on my communications with them) have convinced themselves that their schemes are legitimate. In my opinion, the primary villain in all chain selling is an inherently flawed system that depends on deception and self-deception to survive and spread in an endless chain of unwitting participants. I prefer to call MLM “system fraud,” implying that it is the underlying system that is the villain.
QUESTIONS ABOUT MLM PRODUCTS:
Actually, some MLM products are very good, but the emphasis on the “great products” offered by MLMs is often merely a diversion from a flawed business model and a ruse for getting people involved in recruiting. And if you are gullible enough to be a “customer” and pay the premium prices charged by these MLMs, you are more likely to be fattening the wallets of those at the top of the MLM recruitment chain than you are to be benefiting yourself. (See MLM Products. See also mlmwatch.org/)
QUESTIONS ABOUT MLM AND LAW ENFORCEMENT:
And I might add – the politicians to whom MLMs give generous political contributions cooperate with the DSA to protect MLMs from laws that would otherwise provide protection for consumers. For news and information on legal cases and legislation related to MLM and other types of pyramid schemes, go to the legal pages on this web site.
Incidentally, the FTC proposed a Business Opportunity Rule that would require disclosure of key information to help prospects making decisions about participation – much like franchise disclosure requirements. The DSA and MLM promoters were able to get over 17,000 MLM participants to comment, protesting that such strict disclosure requirements would make compliance difficult and would hurt their business. They vigorously protested against disclosing average income of participants, legal actions against the company or its officers, a “cooling off” waiting period before signing on, etc. MLM companies have even hired former top officials of the FTC (including a former FTC Chairman) to act as spokespersons to write comments opposing the Business Opportunity Rule. It would be interesting to know how much these officials were paid to move from consumer protection to what some would consider fraud protection.
In addition, the DSA managed to get over 80 Congressmen to sign on to a petition to the FTC to exempt MLM from the Rule. Yielding to this extraordinary pressure, the FTC granted an exemption to the Rule in its Revised Proposed Business Opportunity Rule – claiming it could prosecute offending MLMs under Section 5 (mandating against unfair and deceptive practices). However, Section 5 has been rarely used against MLMs, and prosecuting the hundreds of MLMs who are now violating Section 5 on a case-by-case basis would be impossible with the agency’s limited resources. We filed numerous comments with the FTC protesting to this abrogation if its responsibility to protect consumers and insisted the FTC abandon its plans for a Business Opportunity Rule altogether as an alternative far preferable to a Rule that would exempt the primary reason for the rule itself – the MLMs that are the primary perpetrators of business opportunity fraud resulting from misrepresentations regarding income of participants.
It should be obvious from the above that meaningful disclosure would hurt an MLM business. If intelligent prospects were told that their chances of making a profit were virtually nil, or that 99% actually lose money, who would join? The FTC is faced with a choice between cowering to the DSA/MLM lobby or carrying out its own mission to protect consumers and promote fair trade by requiring meaningful disclosure. The latter course would do much to mitigate the harmful worldwide fallout from the original 1979 Amway decision. (Download and read my eBook titled REGULATORY CAPTURE: the FTC’s Flawed Business Opportunity Rule.)
Another reason for the lack of enforcement actions against MLM companies is the lack of prosecutorial will and resources (funds, personnel, and expertise) to confront the MLM companies with their massive legal and lobbying resources. One state regulator estimated that it would take 20 times the resources to prosecute an MLM as it would the typical case brought before them.
MLM may be the most successful con game of all time. Many of the very people who are out recruiting to extend the endless chain of participants (their “downline”) are themselves victims until they run out of money and drop out of the chain. And since victims in endless chains almost never file complaints, law enforcement seldom acts. So the game goes on, extending the chain of recruitment from state to state and from country to country – then starting the cycle of recruitment all over again with new products, aliases, or divisions – as Amway (Alticore) has done with Quixtar and Nu Skin has done with IDN, Big Planet, Pharmanex, PhotoMax, Ageloc, etc.. (See Key Isses in Law Enforcement)
For a unique perspective on why MLMs manage to escape prosecution even while defrauding thousands of victims, read “The Parable of the Missing Children.”
QUESTIONS ABOUT MLMs AND THE DSA – AND CREDIBILITY WITH THE MEDIA, THE FINANCIAL MARKETS, THE BBB, AND ACADEMIA:
MLM promoters claim their MLM programs to be direct selling. But careful analysis of their compensation plans reveals striking differences between MLM and legitimate direct selling. (See Chapter 2 of Multi-level Marketing Unmasked.) MLM is no more direct selling than a pig is a horse.
It has been reported to us that the SBA (Small Business Administration) refuses to finance any enterprise characterized as MLM (SBA 2006). And the SBDC (Small Business Development Corporation) refuses to counsel anyone involved with MLM, since many small business consultants do not consider MLMs legitimate entrepreneurial ventures. A banker told me that bankers will not loan money to finance MLM participation – and will require a large down payment on a home loan if they know that the borrower is depending on MLM for income.
But something more insidious has happened recently with the BBB. It’s “corporate sponsors” have included the DSA and leading MLMs like Amway! The A+ rating which the BBB gives to Amway tells us more about the BBB than it does about Amway.
So – if you want to get an unbiased evaluation of an MLM, don’t call the BBB. You will get much better information by typing the name of the MLM followed by the words “fraud” or “complaints.”
The DSA and MLM company spokespersons constantly beat the drumbeat of legitimacy. However, many savvy consumers sense something terribly amiss about MLM – or have known some MLM victims, which accounts for the unsavory reputation MLM has in the minds of many.
In isolated instances, some professors speak out and write about the abuses inherent in the MLM field. However, since MLM has become such a major phenomenon among many countries in the world, more serious study of the effects of MLM participation could well be undertaken. But to be objective, such research should be financed from independent sources and not from MLM companies or the DSA.
QUESTIONS ABOUT CONSUMER WARNINGS AND GUIDES:
The FTC and state AG offices and consumer protection agencies typically give warnings but are careful not to go so far as to condemn MLM programs with legitimate products. Some even go so far as to state that multi-level marketing is a legitimate form of business enterprise and that there is a real difference between an illegal pyramid scheme and multi-level or network marketing. Assuming officials were working with correct information (including recent independent research) and were not beholden in any way to the DSA or MLM industry, they would likely take a more negative position. Even in states with pyramid scheme laws weakened by the DSA, MLM is an unfair and deceptive trade practice and does not deserve the imprimatur of legitimacy. It may be considered legal in those states, but it is neither honest nor equitable. But unfortunately, few officials have the skill, the will, or the resources to stand up to the MLM juggernaut.
We try to provide the best possible guidance to people seeking the truth about MLM as a business model and as manifested in an array of MLMs. For information from other reputable sites (not funded my MLMs or the DSA), go to my annotated list of recommended web sites.
MLM (multi-level marketing, network marketing, chain selling, product-based pyramid schemes, etc.) is a system that depends upon recruitment of endless chains of new recruits to replace a continuously collapsing base of new participants in a pyramid of recruits. As such, it consists of recruiting distributors as primary customers. It is a pseudo-business with no significant customer base and is dependent on a large network of distributors, approximately 99% of whom lose money from investing in products and services (including “success tools”) offered by the sponsoring MLM company – as well as normal operating expenses. The extremely high loss rate and aggregate losses make MLMs, or product-based pyramid schemes, the worst of all types of pyramid schemes.
Thus, MLMs are inherently flawed systems that promise ongoing residual income, but deliver very little except financial loss at the least, and loss of treasured relationships and values of honesty and integrity at the worst. They maintain themselves by continuous recruitment of new recruits, as investing participants give up or run out of funds and leave the system, seldom understanding what happened to them – even blaming themselves for their “failure.” Victims of MLMs are seldom aware enough to file complaints with authorities and often fear consequences from or to those they recruited. Consequently, law enforcement rarely takes action.
To be successful in MLM, one must first be deceived, then maintain a high level of self-deception, and finally go about deceiving others. They must also be in a state of denial about the losses suffered by the “downline” they recruited. Some would label this “theft by deception,” except that few of those doing the deceiving are aware that they are deceiving and defrauding those they are recruiting. They may even put on a display of being “successful” by buying expensive cars and homes and inviting others to be like them. The SYSTEM is the culprit.
Read reports on this web site about MLM as a flawed business model and the need to protect consumers with meaningful disclosures. Of course, the DSA is doing everything it can to have MLM labeled as legitimate “direct selling” that should not require disclosures. But nothing could be further from the truth.
The information on this web site is reported in a brief and simplified summary of key points that can be easily translated into a foreign language. Reports have been translated into several languages.
Please refer five people to this report and web site, and ask each of them to tell five more, suggesting that each of them tell still five more, etc., etc.– ad infinitum. You just might start an endless chain of truth-telling.