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Multilevel marketing (MLM) or network marketing is a type of unfair and deceptive financial woo, purportedly a business, promoted by a non-salaried workforce selling a company's product/s or service/s independently, who are paid according to a commission structure that heavily incentivizes endless recruitment.
MLM presents itself as a "business opportunity," with products that are ostensibly sold to the general public. However, it doesn't resemble any other retail business at all, and what it does strongly resemble is a pyramid scheme - the underlying mathematics of the two are identical. MLM has also been described by regulators as a form of gambling or lottery. Some MLMs resemble cults. The MLM industry denies that MLMs are anything other than normal, legitimate businesses, and unlike pyramid schemes, MLMs operate openly and (just this side of) legally in most countries.
According to numerous independent analyses and the MLM industry itself, the vast majority of MLM distributors make little to no money or lose money; according to one researcher, "you'd be hard-pressed to find anyone [in network marketing] making more than $1.50 an hour." Some MLM participants lose much more than just money, squandering social capital and damaging careers, reputations and relationships.
With all this, not to mention numerous high-profile failures and legal troubles, it's no wonder MLMs have a poor reputation with consumers. Nevertheless, in the USA alone, MLMs had a combined total of more than 20 million
suckers members and swindled generated more than $36 billion in revenue in 2015. The situation is worse in emerging economies in regions like Latin America, Africa and Asia.
- 1 The structure (more or less)
- 2 Direct selling
- 3 Two-for-one scam
- 4 Typical characteristics of an MLM
- 5 The C-word
- 6 Why MLM is fundamentally flawed
- 7 See also
- 8 External links
- 9 References
The structure (more or less)
In mainstream terms, it's most similar to franchising, where a business operator buys the rights to a specific brand and in turn receives support from the company that owns the brand. But there are two big differences:
- an endless chain of new distributors: a standard franchising model is protected and franchisees buy into a specific segment of the market with the understanding that they will not be directly competing with other franchisees within the same brand - MLM imposes no such limits and actually encourages exponential growth
- the upline/downline: a normal franchise model is flat, and all franchisees deal with corporate headquarters or a regional manager for supplies, point-of-sale materials, and the like - in MLM you deal directly with who recruited you (your "upline") and in turn manage those directly underneath you (your "downline") in a weirdly feudal hierarchy
Essentially, the idea is that any given upline collects a cut of the sales from every member of their downline. As a result, the only path to solvency for the upline is to make sure that the downline recruits as heavily as possible, with as deep a pyramid beneath them as possible - as opposed to conventional businesses, where the path to solvency is to sell sufficient product to consumers.
The problem is that in a recruiting-driven MLM, there is no upper bound save the market population itself, and the bottom rung of distributors makes no money at all except from sales. This ensures a fierce scramble among distributors to sign up their own downline (Amway in particular is notoriously aggressive about this) so they can move up the ladder, often to the exclusion of product sales, and also ensuring market saturation—most distributors wind up selling only to themselves and perhaps a few friends, with only the most driven (and often least principled) making any money at all.
Another common practice is "channel stuffing" - requiring distributors to buy large minimums of company product, ostensibly for retail sale or for "personal use," which serves to inflate sales numbers to give the appearance that an MLM is more sales-driven than it really is. However, the only support materials usually provided by their recruiter(s) are ones that promote the signing on of more new distributors. As a result, many a person out there has a closet full of Mary Kay cosmetics that they don't need, and can't sell. Type the name of any well-known MLM into eBay or Craigslist and you'll see evidence of what becomes of that "investment" of "just a few hundred dollars" made in order to achieve new wealth and prosperity in ten hours a week from home.
A few MLMs (Mary Kay, Avon) are significantly more sales-driven, with a larger customer base, and offer more added value to customers. They are still definitely not without controversy or criticism, however - no MLM is.
MLM has its origins in direct selling, which developed in the rural United States, where supply lines were limited and retail options were scarce. In the olden days this meant the Avon lady going door-to-door, or the woman down the street holding a Tupperware party, but in the modern era direct selling can more broadly refer to any retail business that is conducted person-to-person (including electronically) rather than at a retail store.
Direct selling does not necessarily incorporate the endless chain of recruiting that makes MLM so controversial, and is not necessarily unethical. However, the modern direct selling industry is utterly dominated by MLMs. According to the
Deceptive Direct Selling Association (DSA), the industry's trade association and lobbying arm, 97% of its members are MLMs as of 2017. The distinction between direct selling and network marketing, which many MLMs hide behind to maintain their legitimacy, is therefore essentially meaningless.
In a classic and severe case of crank magnetism, MLMs are notorious for specializing in products of dubious value (supplements, essential oils, laundry balls) and making pseudoscientific, questionable or outright false claims.
- Nu Skin, a cosmetics MLM, has accumulated more than $48 million in civil penalties since 1994 for exaggerating the effectiveness of its products, which include baldness treatments, wrinkle lotions, burn creams and others, and for making bogus claims regarding chromium picolinate and L-carnitine, key ingredients in several of their supplements.
- Dynamic Essentials was an MLM promoting "Royal Tongan Limu," a seaweed extract. The company was dissolved by its parent after it was ordered to pay $2 million in fines and destroy almost $3 million in unsold inventory for falsely claiming the product could cure cancer, arthritis, and attention deficit disorder (ADD), among other ailments.
- Metabolife was an MLM founded by convicted meth cooks that sold primarily supplements containing ephedra, which can cause serious adverse cardiac effects. Ephedra was banned in 2004 after several high-profile deaths, and the company folded; its founder was later found guilty of tax evasion and lying to the public and the FDA regarding ephedra's safety.
- BioPerformance was an MLM that sold "gas pills" claimed to improve fuel economy when added to an automobile's gas tank; the product was found to have no effect whatsoever on car fuel economy and in 2006 Texas' Attorney General shut down BioPerformance for being an illegal pyramid scheme.
- In 2012, an affiliate of Medifast, a nutrition/weight loss MLM, paid nearly $4 million in a civil penalty for false advertising.
- Herbalife distributors continue to make false and misleading claims about the health benefits of its products, despite investigations, a court battle and a $200 million fine.
- In 2014, two MLM companies selling essential oils, Young Living and doTerra, were issued warnings by the FDA for falsely claiming their products could protect against ebola, autism, Parkinson's Disease and other illnesses.
- Mannatech, a dietary supplement MLM notable for featuring future US Presidential Candidate Ben Carson as a spokesperson, later accumulated more than $15 million in fines and settlements for falsely claming their products could cure cancer, diabetes, autism, AIDS, and other diseases.
Typical characteristics of an MLM
MLMs and related schemes are remarkably uniform in their structure and business model, the appearance/writing style of their promotional materials, and the behavior of their members. They'll deny it, which sometimes makes them difficult to spot, but the similarities reveal themselves with even the smallest amount of due diligence and research, and are surprisingly consistent.
A business is likely to be an MLM or related scheme if it exhibits one or more of the following traits. Many of these traits are, of course, red flags in general - not just warning signs of an MLM.
- Participants who approach strangers in public places, or electronically, or who hand out literature
- Participants who distribute vague posters/flyers/classified ads that do not mention their origin, like the image to the right
- Participants who aggressively sell to family, friends, coworkers, and community members, often inappropriately, and often to the point that they damage relationships
- Participants who maintain a substantial social media presence, entirely devoted to praising the company and its products
- Holding motivational "seminars," often very large and elaborately produced
- A compensation structure in which a large portion (typically 60-99%) of participants make little to no money or lose money
- Extremely complex commission structures (i.e., each product has one or more "point values" that determine commission)
- An emphasis on recruiting over selling products
- "Pay-to-play" clauses which make receiving commissions/rewards contingent on recruitment or orders
- Promoting products or pseudo-products of dubious or very low intrinsic worth (supplements, cosmetics, financial products, Bitcoin, videos/seminars, software, subscriptions, coupons/discounts) at very large markups, with low profit margins (often less than 1%) for the "distributor"
- Unusual amount/density of fine print (especially the Quack Miranda Warning) anywhere on their website, product, or promotional materials
- "Channel stuffing:" requiring participants to place substantial bulk orders of products with their own money to join or remain in good standing
- Promotional materials that emphasize wealth and material possessions (photographs of cash, large houses, expensive cars, boats, vacations)
- Promotional materials that disparage conventional jobs and businesses
- Targeting vulnerable or disadvantaged groups (ethnic minorities, recent immigrants, non-English speakers, ex-cons, recovering addicts, poor communities, high school/college students, women), often accompanied by love bombing
- Use of invented jargon and euphemisms, which has led to a predictably hilarious euphemism treadmill (i.e., "network marketing," "referral marketing", "affiliate marketing", "home-based business franchising", "Independent Business Owner")
- Extensive use of deceit: denying that they are an MLM when asked, use of front groups, making dubious or false claims about their product, claims of great potential wealth and success from joining, claims of utter failure if you don't join or if you leave, going to great lengths to hide or de-emphasize their compensation structure (if they reveal it at all)
- An extensive legal history (fines from regulators, lawsuits from former members, use of the legal system to silence critics)
- A cult of personality surrounding the founder & high-level members
- Numerous founder/s and high-level member/s who were involved in previous pyramid schemes, legal or not (pyramid scheme perpetrators have a recidivism rate of nearly 100%)
- Being headquartered in Utah
The only word that makes MLM Kool-Aid drinkers bristle quicker than pyramid is cult. It's a bold accusation, one not to be trotted out lightly, but there's simply no other way to describe the techniques MLMs use to attract and retain recruits.
MLM culture feels unmistakeably totalitarian. The organization is tightly controlled by the top 0.1% of the pyramid, and absolute loyalty to one's upline is strictly enforced. Open criticism of the company or its leadership is discouraged. Members denigrate non-MLM employment and belittle non-MLM jobs. MLM gatherings, often referred to as "seminars" or "conventions" or "business retreats," look nothing like any of these things - instead they feature chanting, ecstatic speeches, testimonials, and highly produced audiovisuals, often for hours on end.
The most cult-like thing about MLM is that it manipulates members' existing beliefs and desires, and tricks them into believing they are exercising free will. MLMs are able to coerce people into willful and compliant self-destruction on a staggering scale: we're talking quitting or getting fired from a six-figure full-time job due to an MLM, alienating everyone you know due to your constant sales pitches, investing your own or someone else's life's savings into an MLM, ruining your credit or losing collateral by borrowing heavily to fund an MLM, and even theft to support an MLM habit. Suicides related to MLM have been reported.
- NXIVM, a self-described MLM specializing in LGAT, turned out to be an abusive sex cult in which members signed themselves into sexual slavery and were branded with the founder's initials.
Why MLM is fundamentally flawed
As a means of moving capital from the bottom of the pyramid to the top, MLMs are very effective; their chief promoters and high-level members aren't lying when they boast of the money they've made from the scheme. However, as a business model (i.e., a means of creating and capturing capital), MLMs are hilariously ineffective - like a toddler imagining what it's like to start a business. Here are just a few of the reasons why.
It creates its own competition
MLMs blur the line between 'contractor' and 'customer.' That's because participants aren't just required to sell products - they're required to recruit other people, presumably in the same general geographic area, who also sell the same products. When you recruit someone, you've just created a competitor, which will decrease your own sales. What you gain from recruiting that person (i.e. the cut from his sales) is never enough to offset the loss of your own sales, and thus, your income.
MLMs often teach their participants to recruit their best customers. What kind of normal business turns one of its best assets into a liability? Imagine if the local Starbucks started encouraging all its best customers to open up their own Starbucks, where all the customers would, in turn, be encouraged to open up their own Starbucks. How long before there are too many Starbucks and no paying customers left? Which brings us to point #2...
It depresses its own sales
The main pitch of most MLMs is passive income - the promise of being able to sit back and relax while someone else does all the work. But if everybody wants to "let someone else sell the products," who will actually do the selling?
Example: Let's say I sell $10,000 of widgets every month, and my profit margin, after accounting for all expenses, is 10% - $1,000 per month. Let's say I decide to start an MLM business and I recruit another distributor, who takes over all my leads. We'll make a REALLY generous assumption that my distributor's profit margin is 5% - many MLM products don't even scrape 1%.
So now, I'm making $500/month without doing anything. That's only half my previous income, so I still need to sell widgets to maintain the same income as before. But I no longer have my old leads, since I just created my own competitor. Let's make another EXTREMELY generous assumption that my new distributor has found some new customers and increased sales by 10%. Total sales are now $12,000, but the money is now split between two people, so each of us sells $6,000 in widgets and pockets $600, and the upline (me) pockets an additional $300 as commission (5%). So I now make $900 per month.
What if I recruit more distributors - then can I stop selling? Assume each new guy manages to expand the business by 10% - again, EXTREMELY generous. With two sellers, total sales are $12,000 so I make $600 doing nothing, and each distributor in my downline makes $600 in direct profit. Even if each distributor increases sales by 10%, I'd still have to recruit at least 10 people and DOUBLE my total sales in order to profit least as much as before while doing nothing. With ten distributors and me at the top, total sales are $20,000. I make my $1,000, and they each make $200 (10% profit).
The choice is pretty clear: why would I work my butt off every month selling widgets to make $1,000, when I can make the same money by recruiting ten other people to sell, and then do nothing? And when the distributors under me see me kicking back and relaxing, what motivation is there for them to do all the work and make a fifth of what I make?
In a normal business, the purpose of commissions is to encourage sales; in an MLM, the purpose of sales is to encourage commissions. Everyone wants to be at the top (earning commissions), and nobody wants to be on the bottom (selling). The fatal flaw of pyramid schemes (and MLM, by extension) is that there has to be a bottom somewhere. If everyone recruits, and nobody sells, that's a pyramid scheme - in all but name.
And again, this example scenario makes all kinds of assumptions (the profitability of the product, the availability of new recruits and new customers) that are absurd and completely unrealistic, which leads us to point #3...
It's divorced from economic reality
The MLM "business model" can only be successful in an environment where there is:
- infinite demand for the product - sales must always be increasing to accommodate recruits
- an endless chain of new customers/distributors - recruits must build their own downline in order to make money
- no competition/market saturation - customers must be willing to refuse all substitutes for the product
- no hidden costs and 100% customer satisfaction - the product sells itself and customers don't ask to return damaged/defective/unwanted products
None of these conditions exist anywhere in the real world. Markets change, trends come and go, customers are fickle and demanding, and competitors constantly enter/exit the market. There isn't an endless supply of people willing to serve as self-appointed salespeople in any market, anywhere - some of us have better things to do than sell overpriced supplements to our friends on Facebook. And there are almost always plenty of competitive alternatives to every consumer product. So what inevitably follows is point #4...
It's inefficient and redundant
Buying products from a network marketing company isn't cheaper, faster, or more pleasant than buying them on the open market, and it's often considerably worse in all three of these categories. That's because unlike normal retail business, where the supply chain is direct and logical (from manufacturer, to wholesaler, to retailer, to customer), in MLMs the supply chain follows the customer's upline, accumulating markups and compounding inefficiencies at each level of the pyramid. The result is higher prices, frequent unexplained delays, and products that are constantly "on back-order." MLMs will often try to artificially suppress competition by claiming their product is unique or superior to all others - even claiming that their competitors' products are poisonous or even Satanic - but equivalent products are always available from normal retail outlets, often at a fraction of the cost.
Even in the digital age, the brick-and-mortar retail experience is preferable to MLM: it's more convenient and does not open people up to accusations of conning their friends with substandard products or high prices. Internet and catalog shopping and reliable shipping services have long since obviated the need for a tightly-knit distributor network serving remote areas; in urban areas, where retail shopping has always been fairly available, MLMs were never important to begin with.
So-called "direct selling" and its bastard child, MLM, seem quaint and irrelevant - like print newspapers, typewriters or vinyl records. That's not to say there isn't a market for all these things; there is. But niche markets can never sustain the kind of infinite, boundless growth that's necessary for an MLM distributor to make the kind of money that's often advertised (unless they're at the top of the pyramid). Speaking of boundless growth, there's point #5...
It creates the opposite of a meritocracy
In a normal sales business, you are hired and promoted based on a holistic assessment of a variety of factors: one's character, temperament, and contribution to the company and its profitability. In an MLM, there are no qualifications to join and you advance based on one factor alone: recruitment. The problem is that as the market saturates at an exponential rate, the pool of potential new recruits rapidly dries up, and new distributors must sink lower and lower and engage in steadily shadier and more desperate practices to build their downline. Far from being the behavior of "just a few bad apples," as the MLM industry would have you believe, this practice is encouraged and rewarded by a system that prioritizes raw recruitment numbers above all else. This virtually guarantees that the ones who make the most money in MLM are the ones with the fewest scruples - which is unsurprising, given point #6...
The whole thing is predicated on a lie
The loss rates for those at the bottom 99% of an MLM more closely resemble a casino game than a business:
- The Times: "The Government investigation claims to have revealed that just 10% of Amway's agents in Britain make any profit, with less than one in ten selling a single item of the group's products."
- Scheibeler, a high level "Emerald" Amway member: "UK Justice Norris found in 2008 that out of an IBO [Independent Business Owners] population of 33,000, 'only about 90 made sufficient incomes to cover the costs of actively building their business.' That's a 99.7 percent loss rate for investors."
- Newsweek: based on Mona Vie's own 2007 income disclosure statement "fewer than 1 percent qualified for commissions and of those, only 10 percent made more than $100 a week."
- Business Students Focus on Ethics: "In the USA, the average annual income from MLM for 90% MLM members is no more than US $5,000, which is far from being a sufficient means of making a living (San Lian Life Weekly 1998)"
- USA Today has had several articles:
- "While earning potential varies by company and sales ability, the DSA says the median annual income for those in direct sales is $2,400."
- In an October 15, 2010 article, it was stated that documents of a MLM called Fortune reveal that 30 percent of its representatives make no money and that 54 percent of the remaining 70 percent only make $93 a month. The article also states Fortune is under investigation by the Attorneys General of Texas, Kentucky, North Dakota, and North Carolina with Missouri, South Carolina, Illinois, and Florida following up complaints against the company. In 2013, the FTC's court-appointed receiver determined that Fortune was nothing but an illegal recruitment MLM and that least 88 % of the members did not even recoup their enrollment fees and that more then 98% had lost more money then they ever made. Refund checks mailed out totaled over $3.7 million.
- A February 10, 2011 article stated "It can be very difficult, if not impossible, for most individuals to make a lot of money through the direct sale of products to consumers. And big money is what recruiters often allude to in their pitches."
To represent MLM distributorship as a "business opportunity" or "additional income stream" or "side hustle" - let alone claiming that it's a way to get rich - is manifestly deceptive and a complete misrepresentation. To succeed in an MLM, you must essentially con your downline into buying tickets for a plane that has already taken off.
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- FTC (Jan 28, 2013) "FTC Action Leads Court to Halt Alleged Pyramid Scheme"
- FTC (May 13, 2014) "FTC Settlement Bans Pyramid Scheme Operators From Multi-Level Marketing"
- FTC (Nov 8, 2016) "FTC Returns More Than $3.7 Million to People Harmed by Pyramid Scheme"