The multilevel marketing (MLM) field grows, and its member companies multiply. Solicitations to join seem to be everywhere. Its promoters would like you to believe that it is the wave of the future, a business model that is gaining momentum, growing in acceptance and legitimacy, and will eventually replace most other forms of marketing. Many people are led to believe that success will come to anyone who believes in the system and adheres to its methods.
Unfortunately, the MLM business model is a hoax that is hidden beneath misleading slogans. Calling it a “great business opportunity” makes no more sense than calling the purchase of a lottery ticket a “business venture” and winning the lottery a “viable income opportunity for everyone.” MLM industry claims of distributor income potential, its glorified descriptions of the “network'” business model, and its prophecies of dominating product distribution have as much validity in business as UFO sightings do in the realm of science.
The very legality of the MLM system rests tenuously upon a single 1979 court ruling on one company. The guidelines for legal operation set forth in that ruling are routinely ignored by the industry. Lack of governing legislation or oversight by any designated authority also enables the industry to endure despite occasional prosecutions by state attorneys general or the FTC.
MLM’s economic scorecard is characterized by massive failure rates and financial losses for millions of people. Its structure in which positions on an endless sales chain are purchased by selling or buying goods is mathematically unsustainable, and its system of allowing unlimited numbers of distributors in any market area is inherently unstable. MLM’s espoused core business — personal retailing — is contrary to trends in communication technology, cost-effective distribution, and consumer buying preferences. The retailing activity is, in reality, only a pretext for the actual core business, which is enrolling investors in pyramid organizations that promise exponential income growth.
As in all pyramid schemes, the incomes of those distributors at the top and the profits to the sponsoring corporations come from a continuous influx of new investors at the bottom. Viewed superficially in terms of company profits and the wealth of an elite group at the pinnacle of the MLM industry, the model can appear viable to the uninformed, just as all pyramid schemes do before they collapse or are prosecuted by authorities.
The growth of MLM is the result of deceptive marketing that plays upon treasured cultural beliefs, social and personal needs, and some economic trends, rather than its ability to meet any consumer needs. The deceptive marketing is nurtured by a general lack of professional evaluation or investigation by reputable business media. Consequently, there is widespread belief that MLM is a viable business investment or career choice for nearly everyone and that the odds of financial success in the venture are comparable or better than other employment or business ventures.
MLM’s true constituency is not the consuming public but hopeful investors. The market for these investors grows significantly in times of economic transition, globalization, and employee displacement. Promises of quick and easy financial deliverance and the linking of wealth to ultimate happiness also play well in this market setting. The marketing thrust of MLM is directed to prospective distributors, rather than product promotions to purchasers. Its true products are not long distance phone services, vitamins, or skin creams, but the investment propositions for distributorships which are deceptively portrayed with images of high income, low time requirements, small capital investments, and early success.
Here are ten lies I have identified during more than 20 years of observing the MLM marketplace:
Lie #1: MLM offers better opportunities than all other conventional
business and professional models for making large amounts of money.
Truth: For almost everyone who invests, MLM turns out to be a losing financial proposition. Fewer than 1% of all MLM distributors ever earn a profit and those earning a sustainable living at this business are a much smaller percentage still.
Extraordinary sales and marketing obstacles account for much of this failure, but even if the business were more feasible, sheer mathematics would severely limit the opportunity. The MLM business structure can support only a small number of financial winners. If a 1,000-person downline is needed to earn a sustainable income, those 1,000 will need one million more to duplicate the success. How many people can realistically be enrolled? Much of what appears as growth is in fact only the continuous churning of new enrollees. The money for the rare winners comes from the constant enrollment of armies of losers. With no limits on numbers of distributors in an area and no evaluation of market potential, the system is also inherently unstable.
Lie #2: Network marketing is the most popular and effective new way to bring products
to market. Consumers like to buy products on a one-to-one basis in the MLM model.
Truth: Personal retailing — including nearly all forms of door-to-door selling — is a thing of the past, not the wave of the future. Retailing directly to friends on a one-to-one basis requires people to drastically change their buying habits. They must restrict their choices, often pay more for goods, buy inconveniently, and engage in potentially awkward business relationships with close friends and relatives. In reality, MLM depends on reselling the opportunity to sign up more distributors.
Lie #3: Eventually all products will be sold by MLM. Retail stores, shopping malls,
catalogs and most forms of advertising will soon be rendered obsolete by MLM.
Truth: Fewer than 1% of all retail sales are made through MLM, and much of this is consists of purchases by hopeful new distributors who are actually paying the price of admission to a business they will soon abandon. MLM is not replacing existing forms of marketing. It does not legitimately compete with other marketing approaches at all. Rather, MLM represents a new investment scheme couched in the language of marketing. Its real products are distributorships that are sold through misrepresentation and exaggerated promises of income. People are buying products in order to secure positions on the sales pyramid. The possibility is always held out that you may become rich if not from your own efforts then from some unknown person (“the big fish”) who might join your “downline.”
MLM’s growth does not reflect its value to the economy, customers, or distributors, but the high levels of economic fear, insecurity, wishes for quick and easy wealth. The market dynamics are similar to those of legalized gambling, but the percentage of winners is much smaller.
Lie #4: MLM is a new way of life that offers happiness and fulfillment.
It provides a way to attain all the good things in life.
Truth: The most prominent motivational themes of the MLM industry, as shown in industry literature and presented at recruitment meetings, constitute the crassest form of materialism. Fortune 100 companies would blush at the excess of promises of wealth, luxury, and personal fulfillment put forth by MLM solicitors. These appeals actually conflicts with most people’s true desire for meaningful and fulfilling work at something in which they have special talent or interest.
Lie #5: MLM is a spiritual movement.
Truth: The use of spiritual concepts like prosperity consciousness and creative visualization to promote MLM enrollment, the use of words like “communion” to describe a sales organization, and claims that MLM fulfills Christian principles or Scriptural prophecies are great distortions of these spiritual practices. Those who focus their hopes and dreams upon wealth as the answer to their prayers lose sight of genuine spirituality as taught by religions. The misuse of these spiritual principles should be a signal that the investment opportunity is deceptive. When a product is wrapped in the flag or in religion, buyer beware! The “community” and “support” offered by MLM organizations to new recruits is based entirely upon their purchases. If the purchases and enrollment decline, so does the “communion.'”
Lie #6: Success in MLM is easy. Friends and relatives are the natural prospects.
Those who love and support you will become your life-time customers.
Truth: The commercialization of family and friendship and the use of”‘warm leads” advocated in MLM marketing programs are a destructive element in the community and very unhealthy for individuals involved. People do not appreciate being pressured by friends and relatives to buy products. Trying to capitalizing upon personal relationships to build a business can destroy one’s social foundation.
Lie #7: You can do MLM in your spare time. As a business, it offers the greatest flexibility
and personal freedom of time. A few hours a week can earn a significant supplemental income
and may grow to a very large income, making other work unnecessary.
Truth: Making money in MLM requires extraordinary time commitment as well as considerable personal skill and persistence. Beyond the sheer hard work and talent required, the business model inherently consumes more areas of one’s life and greater segments of time than most occupations. In MLM, everyone is a prospect. Every waking moment is a potential time for marketing. There are no off-limit places, people, or times for selling. Consequently, there is no free space or free time once a person enrolls in MLM system. While claiming to offer independence, the system comes to dominate people’s entire life and requires rigid conformity to the program. This is why so many people who become deeply involved end up needing and relying upon MLM desperately. They alienate or abandon other sustaining relationships.
Lie #8. MLM is a positive, supportive new business that
affirms the human spirit and personal freedom.
Truth: MLM is largely fear-driven. Solicitations inevitably include dire predictions about the impending collapse of other forms of distribution, the disintegration or insensitivity of corporate America, and the lack of opportunity in other occupations. Many occupations are routinely demeaned for not offering”unlimited income.” Working for others is cast as enslavement for “losers.” MLM is presented as the last best hope for many people. This approach, in addition to being deceptive, frequently discourages people who otherwise would pursue their own unique visions of success and happiness. A sound business opportunity does not have to base its worth on negative predictions and warnings.
Lie #9. MLM is the best option for owning your own
business and attaining real economic independence.
Truth: MLM is not true self-employment. “Owning” an MLM distributorship is an illusion. Some MLM companies forbid distributors to carry other companies’ products. Most MLM contracts make termination of the distributorship easy and immediate for the company. Short of termination, downlines can be taken away arbitrarily. Participation requires rigid adherence to a “duplication” model, not independence and individuality. MLM distributors are not entrepreneurs but joiners in a complex hierarchical system over which they have little control.
Lie #10: MLM is not a pyramid scheme because products are sold.
Truth: The sale of products does not protect against anti-pyramid-scheme laws or unfair trade practices set forth in federal and state law. MLM is a legal form of business only under rigid conditions set forth by the FTC and state attorneys general. Many MLMs are violate these guidelines and operate only because they have not been prosecuted. Recent court rulings are using a 70% rule to determine an MLM’s legality: At least 70% of all goods sold by the MLM company must be purchased by nondistributors. This standard would place most MLM companies outside the law. The largest MLM acknowledges that only 18% of its sales are made to nondistributors.
An FTC trade regulation rule that forces honest disclosure of potential MLM distributor income is desperately needed. Toward this end, Pyramid Scheme Alert has launched a petition drive urging the FTC to force multilevel companies to disclose the true income of their distributors. The requested data would include: (a) the total number of distributors involved in the company for at least three years (or since the company’s founding if less than three years); (b) the average incomes of all distributors who have signed up for a distributorship by percentiles, not just the ones deemed “active”; and (c) a “weighted” overall average income of all distributors so that the extraordinary high incomes of the small number at the top are not calculated in with vast majority so as to give a more statistically valid figure.
Mr. FitzPatrick consults and writes about trends in manufacturer/distributor relationships. He founded and is president of Pyramid Scheme Alert, a consumer advocacy group focused on exposing and preventing pyramid schemes. He has served as an expert witness in several cases involving pyramid schemes and MLM companies. He writings include False Profits (a book about MLM deception) and “Pyramid Nation” (a booklet that laments the growth and “legalization” of pyramid schemes.)
The article was posted on August 4, 2002.