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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17 Comments

  • Carmen says:
    11 February 2013

    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!!!

  • Dave says:
    11 February 2013

    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.

  • Tracy Coenen says:
    11 February 2013

    DAVE!!!!! I tried to tell you to stay away from MonaVie and you did not listen to me!

    I’ve did a few things about the company: http://www.sequenceinc.com/fraudfiles/tag/monavie/

    And this site is outstanding: http://www.juicescam.com/

  • Dave says:
    11 February 2013

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

  • Tracy Coenen says:
    11 February 2013

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

  • watermelonpunch says:
    12 February 2013

    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.

  • Bruce Craig says:
    12 February 2013

    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

  • Patrick says:
    18 February 2013

    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?

  • Tracy Coenen says:
    18 February 2013

    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.

  • KDB says:
    3 March 2013

    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.

  • Tracy Coenen says:
    3 March 2013

    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.

  • Sam says:
    20 May 2013

    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.

  • Kelly says:
    10 October 2013

    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

  • Waldo says:
    18 March 2014

    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.

  • Tracy Coenen says:
    19 March 2014

    Waldo – Inventory loading is one problem in MLM, but it is not the single factor used to determine whether something is a pyramid scheme. This article will help you understand why MLMs are pyramid schemes: http://www.sequenceinc.com/fraudfiles/2014/01/are-all-multi-level-marketing-companies-pyramid-schemes/

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