Jon Taylor, PhD has written a thorough and excellent book about multi-level marekting: The Case (For and) Against Multi-Level Marketing: The Complete Guide to Understanding the Flaws – and Proving and Countering the Effects – of Endless Chain “Opportunity” Recruitment, or Product-Based Pyramid Schemes.
If you’re not familiar with MLM, you can see some interesting statistics here. Basically, the odds of a distributor losing money in multi-level marketing are greater than 99%. Despite the fact that participants are almost guaranteed to lose money in MLM, these scams are marketed as business opportunities with the potential for unlimited earnings.
Multi-level marketing is typically viewed as something that does not harm anyone. Participants are painted as failures if they don’t turn a profit, as surely they didn’t work hard enough or didn’t follow the plan. But there are victims. Lots of them. Penn and Teller did a great job illustrating what scams MLMs are on their Showtime series Bullshit!
While the Direct Selling Association trumpets the 15.6 million Americans are distributors for MLMs, and that “sales” in the U.S. in 2011 were almost $30 billion. But this number is misleading. It is an estimated retail sales figure, which assumes that every product purchased at wholesale by distributors was resold to a customer at full retail pricing. If you’ve ever been involved in multi-level marketing, you know that actual sales of products are very low, and often involve discounts off suggested retail prices.
So who are the victims? The distributors who sign up for an income opportunity through which they are almost guaranteed to lose money. If we assume that the average whole price of products is 50% of retail, this means that every year distributors are purchasing $15 billion of MLM products in the U.S. each year. And again, actual retail sales of the products are very low. With 15.6 million participants, that is an average of $961 spent per distributor each year.
The scheme is death by a thousand cuts. MLM companies swindle millions of consumers out of $100 or $1,000 at a time. Then when the distributors fail to make a profit, they are called failures who didn’t work hard enough. We are asked to ignore the fact that the distributors are almost guaranteed to fail. Who profits? The owners of the multi-level marketing companies. Why do you think Herbalife’s stock does so well? Because everyone knows that these scams are profitable for the owners!
Dr. Taylor summarizes some of the key points from his book regarding how multi-level marketing affects people:
What are the effects of MLM on participants and on society? (See Chapters 3-9.)
- Based on available company data, approximately 99.7% of all MLM participants lose money – spending more on company purchases and minimal operating expenses than they receive in commissions from the company.
- Those who lose the most are those who invest the most, having accepted deceptive claims that the MLM is a legitimate income or business opportunity, and having continued to invest in the vain hope of eventually profiting handsomely.
- Based on statistics from the Direct Selling Association, the chief MLM lobbying organization, aggregate losses (which the DSA calls “sales”) suffered by tens of millions of victims exceed tens of billions of dollars a year in the U.S., with far greater losses worldwide. MLMs often plunder vulnerable populations overseas.
- In some cases, monetary losses from MLM participation lead to heavy indebtedness, bankruptcy, foreclosed mortgages, and failed educational and career pursuits.
- Addiction to MLM can result from excessive commitment to MLM – which can become a lifestyle. “MLM junkies” – who have internalized its “easy money” appeal – may find it difficult to work again in a normal work setting.
- Some MLM participants lose more than money. Divorces and rifts among extended families are commonplace. Even suicides and murders related to MLM participation, have been reported.
- MLM is an unfair and deceptive practice that siphons money away from legitimate businesses. And with the FTC’s granting of an exemption to MLMs from having to comply with its new Business Opportunity Rule, the market for legitimate non-MLM direct selling and other business opportunities could be virtually eliminated in favor of an MLM business model that escapes the regulation.
MLM is not a victimless crime. Some say it is not a crime at all. I view it differently.