Is Multi-Level Marketing a Legitimate Business Method?


pyramid-scheme-mlmDefenders of multi-level marketing (MLM) are often heard saying that it’s a legitimate business method! Even government regulators say MLM is legitimate. And it is true that state and federal governments in the United States generally allow multi-level marketing companies to operate with little oversight. This is despite the fact that structurally and operationally, MLMs are nothing more than pyramid schemes.

Oh sure, the MLMs are careful to use lots of window dressing that makes it appear they don’t violate anti-pyramiding laws. There are even lawyers who whore themselves out to tell owners of MLMs how to “stay legal.” And of course, the massive lobbying on behalf of “direct sellers” and multi-level marketing companies ensures that current laws against pyramid schemes will not be enforced, and that no new laws impeding MLMs will be enacted.

Yesterday the Chicago Tribune ran a piece on multi-level marketing, specifically referring to Herbalife and Fortune Hi Tech Marketing. Typical positive MLM talking points were cited:

  • Low start-up cost
  • Ability to be your own boss
  • Commissions made off recruits
  • Possibility of six-figure compensation

The article cites the Direct Selling Association’s claims that annual sales from MLM in the United States total $30 billion per year. However, this figure is completely fabricated. It is derived from the wholesale sales of multi-level marketing companies to their distributors, which is then increased to suggested retail pricing…. assuming every single product purchased by distributors during the year is sold to a customer, and sold at full suggested retail pricing.

The problems with this figure are many: Very little actual retailing of MLM products occurs. Much of the product that gets in distributor hands is never sold to a customer, because the distributor is purchasing to meet minimum requirements of the pyramid. When products are sold, there are often significant discounts involved.

Unlike many of the “news stories” done on multi-level marketing, this piece actually gave a decent amount of airtime to the critics of MLM. We’re often painted as “anti-MLM zealots” or other negative terms, when the reality is that many of us are simply extremely educated about the reality of multi-level marketing (often called direct sales, network marketing, or some other term that is meant to distract consumers from the business of recruiting and the bad rap the industry has generated for itself).

A key paragraph of the article:

The harshest critics maintain there is no difference [between a legitimate multilevel marketing company and an illegal pyramid scheme], that there’s no such thing as a legitimate MLM and that the industry’s secrets stay safe because of a cultlike mentality and a blind eye of regulators.

One of the most knowledgable experts on multi-level marketing, Jon Taylor said in his interview that all MLM companies have the same flaw: They depend on endless chains of recruiting new members.  “There is no more unfair and deceptive practice than multilevel marketing.”

I was quoted:

Multilevel marketing companies are pyramid schemes that the government allows to operate. The only difference is that Herbalife, or any multilevel marketing company, has a tangible product that they use to make their pyramid appear legitimate.

And here’s where it gets really fun. The Federal Trade Commission says the products differentiate MLM and pyramid schemes. They say in legitimate MLMs, the bulk of the money made by distributors comes from product sales. And in pyramid schemes, the pyramid toppers are compensated with “participation fees” paid by people at the bottom of the pyramid.

More precisely, a document at the FTC’s website says:

There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. Inventory loading occurs when a company’s incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company’s distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. The people at the bottom make excessive payments for inventory that simply accumulates in their basements. A lack of retail sales is also a red flag that a pyramid exists. Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.

The reality is that most MLMs in the United States have very, very little retail sales to third party customers. The bulk of the products are sold to distributors who are unable to re-sell them, and who purchase them primarly to move up or keep their position in the pyramid. MLMs have minimum purchase requirements, typically on a monthly or quarterly basis, which distributors must meet in order to be commission-eligible.

That, my friends is inventory loading. In some companies, such as Mary Kay, the inventory loading is heavy on the front end. In other companies, the inventory loading goes on continuously, little by little. You’d be amazed at how much unsold inventory a distributor can accumulate via monthly purchases that appear relatively small.

The Chicago Tribune article quoted an FTC official relative to the shut-down of Fortune Hi Tech Marketing:

These defendants were promising people that if they worked hard they could make lots of money. But it was a rigged game, and the vast majority of people lost money.

Welcome to multi-level marketing, people. MLM is a rigged game in which the vast majority of people lose money. It’s not just FHTM. It is nearly every MLM, yet the FTC refuses to act on a large scale.

But of course, the Direct Selling Association must push the idea that multi-level marketing is a great way to make an income.  The DSA says “median earnings” are $2,400 per year, and about 16 million people in the U.S. participated in MLM last year. There are huge problems with this number:

  • It’s completely fabricated. It again assumes that nearly all products are retailed at full suggested retail pricing.
  • It is a gross income figure. It does not account for business expenses which, for 99% of participants, exceed the income.
  • It is an average, which is a typical technique used in MLMs to deceive potential participants. It distorts the reality, in which the vast majority of participants earn little to nothing.

The average is also easily proven to be bogus by Robert FitzPatrick, who analyzes it as follows:

  • 8 million salespeople times $2,400 income (at an absolute minimum) is $19.2 billion in INCOME. (8 million X $2,400 = $19.2 billion)
  • If they received an average of 25% commission on company sales (which would be generous), then the minimum average SALES for the upper half to have earned $2,400, must be at least $9,600 each ($2,400/25% = $9,600)
  • Using just a minimum of $9,600 each for the average annual SALES of the upper half, then total SALES credited to the upper 8 million has to be about $77 billion! ($19.2 billion/25% = $76.8 billion). You reported that the DSA reports TOTAL SALES  are just $30 billion. There is a $47 billion discrepancy without even factoring the sales of the bottom 8 million and having also grossly reduced the total sales of the upper half by only counting income per distributor at $2,400, the mid-point. Using your DSA-sourced  $2,400 median income figure, a fuller inclusion would perhaps put total sales above $100 billion or more, just in the USA.
  • How many salespeople could have sales of about $10,000 in order to gain the income of just $2,400?  This is determined by dividing $10,000 into the $30 billion = 3 million
  • So, if 3 million salespeople had  just $10,000 in sales in order to gain just $2,400, that would account for ALL industry sales of $30 billion (3 million salespeople times $10,000 average sales is $30 billion) The other 13 million would, therefore, earn nothing. Zero. The MEDIAN income could, therefore, not possibly be $2,400. In fact, it would be ZERO.
  • The MEAN average SALES is only $1,875 ($30 billion/16 million). That figure alone shows that is impossible for a median income to be $2,400.

The article also described one Chicago resident as “typical” for multi-level marketing. It said that after three months in Herbalife, he was making enough money to quit his job as a parking valet. Such a story – – if true – – is far from typical. Even if he was only replacing a job which earned him $20,000, he would have to NET $20,000 after all expenses in order to replace that income.

A look at the Herbalife income disclosures suggests that this seller would be anything but typical. To net $20,000 after business expenses, he would probably have to gross $35,000 or more. Based on 2012 compensation figures, that would put him in the top 2,321 of distributors for 2012, out of a total of about 494,000 distributors. That means he’d be in the top less than one-half of one percent of all distributors (0.005%). Put another way, he’d be earning more than 99.53% of all Herbalife distributors. This is any but “typical.”

And so the game of deception continues. Even a reporter who appears to have taken care to present both sides of the multi-level marketing story was duped into claiming that participants in MLMs make $2,400 per year on average, and that the former parking valet’s income is typical. This is why I continue to try to educate consumers on the scam called multi-level marketing (or network marketing, or dual marketing, or direct sales, or referral marketing, or the less-flattering “pyramid selling”).

So is MLM a legitimate business method? The answer is still no, since 99% or more of the participants lose money. It is nothing more than a money transfer scheme, hidden by a legitimate-sounding product that is not widely retailed to third-party customers.

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28 thoughts on “Is Multi-Level Marketing a Legitimate Business Method?

  1. Girl, if you ever make it out to AZ on business, let me know because I want to take you out for dinner and drinks!!!! LOVED this article!!!

  2. Dave

    Tracy, I have to wonder why no one has looked into Monavie. A year from now, Herbalife won’t be around. It’s unfortunate that it took an upset investor to bring them to the national media’s attention.

  3. Dave

    yes i did. Tonight I am having the argument with someone about Ignite/stream Energy. Yes, I did send them your article about it.

  4. Tracy Coenen

    Oh, that’s right. It was for a friend. Well Ignite/Stream are even worse than MonaVie, if that’s possible. :)

  5. I think the problem with this thinking that there’s some legitimate business model is that at some point in the distant past there were companies functioning with salable products and without making ridiculous claims or requiring ridiculous start out investments.

    Looking now what Tupperware, Mary Kay. & Avon are doing now bears little resemblance to what they were like in the 70s.

    I think anyone trying to expose these companies’ current business models would garner more serious attention by the older set, by comparing their current business model and goals of direct sellers to what the companies were doing 30 years ago, and the market they operated in, compared to now.

    Because there’s a lot of seniors out there, for example, who may have been housewives in the 60s & 70s, who successfully earned some extra pocket money, with very little up front investment, while getting a discount on products they actually used, and don’t see the problem with that.
    And why should they? It worked for what they believed it was supposed to do.
    They have no clue it’s not about housewives & extra pocket money anymore.
    They have no clue that’s not what’s going on now, and how the market has changed so drastically to make that absolutely non-viable, and how these companies have managed to become predatory & dishonest to survive in a market that has no place for them anymore.

    Clearly in a normally functioning market, with proper regulation, companies like this should’ve gone out of business many years ago.

    Why haven’t they?

    The era of weak regulation arrived just in the nick of time!

    More companies jumped on the bandwagon, started by people who saw an opportunity to skirt the weak laws with totally bogus products… or in the case of FHTM – no products at all!

    And then came the financial crisis and serious financial strain for a lot of people who suddenly found it impossible to find traditional jobs like they used to.
    And ready are the snake oil salesmen to prey upon that in the open hole left by an economic crash.

    What I’m confused about is that bullet list of “positive points”. I hardly think they’re arguments to say that a business model is not a fraud.
    There are a lot of illegal and immoral businesses that can make those same boasts.
    A pimp with many recruited prostitutes might be getting a lot of residual income!
    Black market gun runners are often their own bosses & earn big money.
    Higher level illegal drug dealers make money off “recruits” selling the drugs on the street.

    The financial success of those criminals does not make their businesses legal.
    That argument is simply illogical.

    Anyone who tries to defend MLMs by pointing out crap like that should be asked if they would consider gun running, pimping, or drug dealing, if they’re going to present a B.S. argument like that.

  6. Bruce Craig

    Tracy, our paths have crossed often but I just wanted to say that this piece, with the quotes from Taylor and Fitzpatrick, just about says it all. Really nice job

  7. Patrick

    I enjoyed reading your article on Mutli Level Marketing, yet after reading it, I am puzzled by your postion on MLMs. Correct me if I’m wrong, but you condemn network marketing (social marketing, relationship marketing, referral marketing etc.) yet you participate in it. No disrespect is intended by my comment, it’s just an observation.
    I would really like to hear your “opinion” on what form of marketing or what form of distribution is legit?

  8. Tracy Coenen

    Patrick – You are not correct. I do not condone, endorse, or support any form of MLM (or any company that hides behind names like direct selling or network marketing, etc.) I do not support these companies in theory or with any of my money.

    MARKETING in general, is something different than “MLM”. I support marketing by legitimate businesses.

    I support traditional distribution methods other than MLM.

  9. I think it is a legitimate business model. I just don’t think it is a viable one for most people. If you are good at selling, you can actually make money. The problem occurs when you only sell the business and not the products. If everyone does this, and nothing else, then the “business” will fall apart.

    So, it can be a good business model. Or it can just be a pipedream. it all depends on how you approach it.

  10. Tracy Coenen

    You are 100% wrong. In MLM, your level of success has almost NO CORRELATION to your level of skill or effort. You can do it all right and still fail because 99% of people will lose money in MLM. That’s how it’s designed.

  11. I tend to agree that success in a MLM has very little do to do with skill or effort, but is more a relation to the inventory inflation that you mentioned. In that way it’s also rather related to the morality of the affiliate. Almost the only way to make money in most MLMs is at the expense of others, correct. If you can lack to morality not to care about the friends and family that most MLMs end up selling to out of desperation, and lack of a conscience, and have a large enough network of untapped contacts, I’m sure that increases your ratio enough to steal a sizable amount of money.

  12. Kelly

    I stumbled upon your blog just recently so sorry that this comment is months later. I agree with all your observations on MLMs and was curious if you have any opinion on the new one Plexus Slim. We’re I live it is hot right now and everyone I know is jumping on board mostly by posting it 300 times a day on Facebook. I have an X close friend who is at the top of the food chain now and in 6 months she has earned Diamond status, has paychecks of 25,000 a month and just got her Lexus. I Absolutly think these feed into American greed and want nothing to do with it but my question is you say most people really aren’t making money. Is this truly the case even with top sellers and have you done any research on this Plexus Slim?? Thank you

  13. Waldo

    I have read that inventory loading is a key factor in determining an illegal pyramid scheme. How can there be inventory loading if there is a generous return policy like there is at Herbalife? How can there be payment for recruiting if there is no inventory loading? No payments by Herbalife to anybody if product is returned.
    The fact that most don’t make a lot of money is certainly NOT proof that there is anything illegal going on.

  14. Jason Brady

    Hello Tracy, a bit late to the party, great article and factual information.

    I have a question. Let’s say distributors in these companies stopped recruiting and instead focused exclusively on acquiring retail customers – real, third party customers who purchase services and products without becoming distributors themselves. (Assuming, of course, the services/products provide value like products sold in a retail store or online.) In other words, operating like a *real* business. What would your assessment be then?

    It’s an important question, appreciate your feedback. Thank you.

  15. Tracy Coenen

    Jason – If MLMs stopped recruiting and just sold products, they would no longer be MLMs. They’d be legitimate businesses. MLM (multi-level marketing) is MLM because of the recruiting. Take the recruiting away, and it’s no longer MLM. Unfortunately, your hypothetical will never happen because they products are overpriced and nothing special. THat’s why they’re so hard to retail to begin with.

  16. Good Morning Tracy,

    Very exciting, you confirmed what my project team and I contend is the most effective approach to “fixing” the Direct Sales industry (which, obviously, is badly broken and in need of reform): Stop recruiting, focus on serving customers – like every other legitimate business on Earth.

    And you identified the key challenge: Why would anyone buy what we have to sell?

    We believe there are compelling reasons to do so, within certain parameters. It’s not just a question of price; it’s also a question of value received. Our research has uncovered several factors that form a powerful Unique Value Proposition for the Direct Sales industry, and we are in the process of evaluating, testing and refining these elements in the marketplace. We’ll post the results on our blog as the project unfolds.

    Appreciate your insights, Tracy. The Direct Sales industry has so much potential to contribute to the health and well-being of people, community and planet – potential that is being squandered and wasted, leaving a trail of chaos in its wake. It’s time for change!

    Jason Brady
    Director, Simple Solutions Project
    Garden Grove, California

  17. Tracy Coenen

    The “direct sales” industry has NOTHING to contribute. They have substandard, overpriced products sold via a business model that is outdated and irrelevant. Why waste your time?

  18. Jason Brady

    So what you’re telling me is

    a) You’ve personally surveyed every single product offered by every single direct sales company and compared them to what’s available in the mass market in terms of value, performance, convenience, environmental impact, price, customer satisfaction and other factors? We don’t have the resources to conduct such extensive market research. Please share – the data would be invaluable!

    b) The Direct Sales business model, the person-to-person marketing of services and products, is outdated and irrelevant? Better tell the Girl Scouts – they sell almost a billion dollars of tasty cookies each year through person-to-person marketing. Besides, some of us prefer to work together and help each other one-on-one, face-to-face, in joyful service to ourselves, our families, our communities and the planet.

    When we support person-to-person business, we bring community and relationship to us. Perhaps if one wants to live in a sterile, impersonal, corporate- and technology-dominant world, the old-fashioned idea of people helping people would be outdated and irrelevant.

  19. Tracy Coenen

    All “direct sales” products are overpriced for their quality. That’s because the product is irrelevant to the business model. The only thing that matters is recruiting. So trying to change things…. by taking those exact same bad products and pretending that people are going to pay high prices for them… is destined to fail.

    Yes, the Girl Scouts sell cookies person to person, but (a) there is a value in that beyond the cookie or the money, and (b) yes it’s outdated!!!! “Direct sales” used to be desirable because people’s shopping choices were so limited. Today, the shopping choices are unlimited and so much easier to acquire. Why sit around with a goofball who is trying to push products on you? Why waste the time (and again, the money, because the products are overpriced).

    Add to that the fact that the numbers will never work for you. There is not enough profit in direct sales for the sellers, so you will never make it work. The numbers will never add up, no matter how much research you do. I commend you for trying to do something positive, it is just guaranteed to fail, in my opinion.

  20. Tracy Coenen

    Also, a non-profit organization doing a once-a-year fundraiser by having members sell directly to customers is completely different than trying to establish a business that sells products all year long and both turns a profit, and compensates sellers fairly for their efforts.

  21. Jason Brady

    Hi Tracy, regarding the Girl Scouts, I understand it’s a one-time yearly fundraiser. I only used them as a simple example of a person-to-person sales transaction that most people can relate to.

    Yes, one could say the Girl Scout model is outdated, but I suggest that it succeeds because it’s “old-fashioned.” If the Scouts start selling cookies online and/or in stores, they’d no longer be unique. They’d be just another cookie competing with all the other brands of cookies on the shelf. Besides, isn’t it fun to buy cookies from a smiling Girl Scout? It’s the experience and scarcity of the product that makes it special. (I buy boxes of Thin Mints and freeze them to enjoy all year round.)

    That said, if experts say it’s more beneficial for the Scouts to switch to a different model, who am I to judge? :-)

    The only stipulation is that they bring back the Mango Cremes!

  22. Jason Brady

    Regarding products, price and quality, I can only speak to the particular companies with which I’ve had experience. Like what we find in regular stores, some products are reasonably priced for the level of quality/performance/value and others are shoddy and overpriced. A smart shopper/discerning consumer can decide what works best for their needs, situation and budget.

    My team and I do not believe that every type of product is a good fit. There appears to be certain classes of products that, combined with added-value services, lend themselves more readily to the person-to-person model.

    Here is an example of products I purchased from a direct seller friend that were a good fit and provided exceptional value for the price. Years ago, a friend approached me. She knew I hated cleaning and said she could make my life easier, save me time and money. She showed me how to replace a dozen redundant, toxic, store-bought cleaning products cluttering my kitchen cabinet with only three of her company’s non-toxic, natural and safe products that performed as good or better than the leading national brands.

    The pre-mixed spray bottles were priced comparable to the national brands at the grocery store. The concentrated refills were very economical, 50% less cost than buying an equivalent number of pre-mixed spray bottle replacements. Overall I saved money because I no longer bought duplicate spray bottles or redundant products that sat under the sink. Less waste, too.

    My friend demonstrated how to get the job done more quickly: use this there, that there, now you’re done. BIG time savings. How to streamline, simplify, economize and maximize what I used, be more environmentally friendly, completely safe for my family and pets. If I had questions, ran out unexpectedly, sprayer broke, etc., I could text my friend and have a replacement delivered to my doorstep (or do it myself online). Added bonus: the products were made in the USA by a company with a 50 year track record of stability and commitment to people’s health and the environment.

    Yes, we have lots of choices in the marketplace. Why did I continue buying from my friend? She earned my trust and loyalty because of who she was as a person, the personalized service she provided, the top-quality, safe and natural products she offered and the satisfaction I felt when I used them and did business with her. She genuinely cared about me and my family – a competitive advantage that NO greedy, profit-obsessed corporation with their impersonal big-box stores and web sites can EVER match.

    Yes, she made money from serving customers. The company had a 10% to 30% retail margin plus a performance bonus based on customer sale volume. Over time, working steadily and methodically, she created a large satisfied customer base and significant part-time supplemental income. She treated it like a real business, offered top-quality products and added-value service, and created a caring, educational and fun experience for her customers. It was a very effective formula for her business success, a positive model to emulate.

    If people buy strictly on price and convenience, and aren’t concerned about personalized service, where things come from, how they’re made or who makes or sells them, then person-to-person business probably isn’t a good fit.

    For those of us who prefer the human touch, buy local when possible, support our friends, families, communities and American jobs, care about our health, the environment and want to make a positive difference in the lives of others, person-to-person business can be a great option.

    We are fortunate to have lots of choices in the marketplace. The choice we make depends on our situation, needs, values and what’s truly important to us.

  23. Tracy Coenen

    Jason – I don’t have a problem with the fact that you like the products. There still is no viable business in just retailing those products. The seller can’t make enough from individual customers to earn a true living.

  24. Jason Brady

    Tracy, This has been an AWESOME discussion! I appreciate you taking time to talk. Always a pleasure to engage with other passionate professionals. Keep up the great work you’re doing with fighting the MLM fraud – we need to put a stop to the insanity and devastation of these corrupt and harmful business practices.

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