The only consumer-friendly and research-based definition of multi-level marketing, or MLM
By Jon M. Taylor, MBA, Ph.D., Consumer Awareness Institute
As a business model, multi-level marketing (MLM – sometimes called “network marketing”) defies short and simple definitions. The definitions offered by the FTC, the DSA, MLM spokespersons, and the legal community do not adequately distinguish between multi-level marketing and legitimate direct selling and other businesses (insurance salesmen, manufacturer’s reps, etc.) that have more than one level of participants receiving commissions. Nor do they explain the inherently fraudulent, unfair, and deceptive structural elements in the MLM business model that lead to losses for the vast majority of participants. The definition below is derived from comparative structural analysis of other business models to which MLM is often compared and from analysis of the compensation plans of over 600 MLMs, all of which display the structural characteristics described below.
We will begin with the easier issue of what MLM is not.
What MLM is not:
MLM is not legitimate direct selling, in which the bulk of commissions are paid to the person doing the selling and in which most sales are to the general public, not to other participants. In contrast, MLM compensation plans reward primarily those at the top of the pyramid of participants at the expense of new recruits who buy in at the bottom levels – which is a primary characteristic of any pyramid scheme. Although MLM communicators, including the DSA (Direct Sellilng Association), promote MLM as “direct selling;” in reality, incentives for building a large downline far exceed those for selling to non-participants, so little selling to the general public occurs by MLM participants.
Also, MLMs are not legitimate income or business opportunities which offer fair and honest returns for reasonable effort. In contrast, MLMs promise rich rewards with little effort, while in fact over 99% of new recruits lose money regardless of effort.
An accurate, research-based definition of what MLM is:
Multi-level marketing (MLM) is a purported income opportunity, in which persons recruited into company-sponsored pyramids of participants qualify for commissions and for rank advancement primarily by meeting “pay-to-play” purchase quotas and by recruiting others in endless chains of recruitment, and in which rewards are stacked in favor of recruiters at the top of the pyramid.
Taken together, the following distinguishing characteristics separate MLM from all other forms of business activity:
- Endless chains of participants are recruited without limit into the bottom level of company-sponsored pyramids of participants.
- Rank advancement up the levels in the pyramid is achieved by recruitment and/or purchases, not by appointment. It should also be noted that compared to the incentives for recruiting a large and active downline, rewards for selling to non-participants are insignificant.
- Minimum “pay-to-play” purchases, or quotas, are required to qualify for commissions and/or to attain or maintain ranks or levels in the pyramid.
- The bulk of rewards are paid to those at the top levels of the pyramid, whose positions are usually established early in the formation of the pyramid. Also, most MLMs have five or more levels in their compensation plan, with additional levels exponentially increasing rewards to those at the top of the pyramid at the expense of those at the bottom levels.
This set of four distinct structural 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 cash-based (no-product) pyramid schemes, except that in lieu of cash exchanged directly between participants, products are purchased and commissions processed through an MLM company that sponsors the pyramids of participants. Such commissions are drawn chiefly from purchases of their “downline” (those recruited beneath them). It is therefore appropriate to refer to MLMs as “product-based pyramid schemes.”
The above definition is further clarified by noting:
(1) the assumptions upon which MLM is based
and (2) MLM’s powerful effects on participants.
Assumptions and effects of MLM
The above 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 has been confirmed in analyses of the compensation plans and practices of over 600 MLMs evaluated:
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 sales to the general public (non-participants), 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 new recruits is necessary to prevent total market saturation and collapse, as is true of any pyramid scheme.
The distinction between buyer and seller evaporates, as participants are incentivized to subscribe to ongoing purchases of products or services offered by MLMs. These are typically “pills, potions, and lotions”; but a wide variety of other products or services are offered by some of the newer MLMs. In addition, fees are paid for training meetings and “opportunity” extravaganzas, some of which require expensive travel. And MLM recruiters have been selling motivational books, lead generation systems, web sites, and other “sales tools” to assure “success”, but which – combined with normal business expenses – wind up further increasing costs and eventual losses.
MLMs depend on a myriad of misrepresentations to survive and grow and to defend against regulatory action. (Over 100 are listed and debunked in Chapter 8 of my book Multi-level Marketing Unmasked.) Prospects are typically lured into MLM with exaggerated product and income claims. Since approximately 99% of participants lose money, the vast majority 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 likely to be the most unfair and deceptive of all purported “business opportunities.” Technically, as extremely unfair and deceptive acts or practices (UDAP), all MLMs in the U.S. violate Section 5 of the FTC Act, as well as statutes against UDAP in many states. Properly understood, MLMs are therefore technically illegal in most jurisdictions whether or not they are classified as illegal pyramid schemes.
As recruitment-driven systems, MLMs can also be extremely viral and predatory. MLMs, or product-based pyramid schemes, do far more damage than cash-based (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. However, the fraud is systemic, meaning that it is not so much a problem of perpetrators deliberately scamming people, but it is the underlying MLM system that is fraudulent. This is why it is safe to state that a “good MLM” is an oxymoron.
While financial losses can be significant, adverse effects are also often seen in bizarre or cultish behavior, high divorce rates, loss of “social capital” or ruined relationships with family and friends who feel exploited, and even addiction to MLM’s empty promises. Some sacrifice careers or education to pursue MLM’s vaporous promises of easy money (“time freedom” or “residual income”) and a mystique of personal and spiritual fulfillment.
We should also note that society suffers from the proliferation of MLM schemes because the money and effort could have instead been invested in legitimate enterprises. Such failed investments and wasted energy also spoil the initiative of would-be entrepreneurs who might have been successful in a legitimate business.
Finally, MLM expenses written off as losses result in a shortfall of tens of billions of dollars in IRS revenues, which should not be allowed for an illegitimate business. MLM losses should be treated the same as gambling losses, which can only be subtracted against winnings.
Are all MLMs pyramid schemes?
Read the page titled “Are all MLMs pyramid schemes?” See also “What MLM is like“, A brief history of pyramid schemes and MLM, and The Network Marketing & Direct Selling Name Game.
For a more thorough treatment of the subject, refer to the eBook Multi-level Marketing Unmasked, available for free download from this web site.