All good multi-level marketing companies have one thing in common: They fail to disclose enough information to allow consumers and regulators to determine if they are in the business of recruiting or selling products. They disclose just enough facts and figures to make it appear that they are being transparent. But they hide enough information that no one could ever determine definitively if they are running pyramid schemes.
MLMs cleverly avoid the pyramid scheme issue by making it impossible to determine the level of retail sales of products to consumers. The companies effectively use the technique of plausible deniability: They purposely do not track retail sales, so when the business model is challenged with the assertion that few retail sales occur (and therefore they are recruiting schemes), executives can claim that they know no such thing!
Usana Watchdog has released a report on Usana Health Sciences, challenging the company’s failure to reveal meaningful facts and figures that would allow consumers and law enforcement to determine whether the company is running an illegal pyramid scheme.
The crux of his analysis goes like this:
- Usana has a 5 customer rule which requires distributors to sell products to 5 or more customers before becoming eligible to receive a commission check.
- This theoretically ensures that Usana is not paying distributors to recruit, but is instead paying distributors for the sale of retail products.
- Non-distributing associates of Usana are forbidden to retail products, and must have at least 5 preferred customers in their downline before being eligible to receive a commission check.
- Distributing associates of Usana can retail products, and must sell to at least 5 retail customers and/or preferred customers before being eligible to receive a commission check.
- Usana does not verify whether or not associates actually have 5 customers.
- Usana reports that 1/3 of associates receive commission checks. Applied to the 247,000 active associates reported by Usana as of the fourth quarter of 2012, 82,300 associates received a commission check in that quarter.
- 64,000 preferred customers were reported in the fourth quarter of 2012. If we divide that by 5 (the number of customers required to be eligible for a commission check), we can assume that 12,800 of the associates receiving commission checks have met the requirement.
- This leaves 69,500 associates receiving commission checks in the fourth quarter of 2012 for which we know nothing about their customers.
Do these 69,500 associates actually have 5 retail customers each? Or are they receiving commission checks in spite of not having the required number of retail customers?
Of course, Usana doesn’t really track this, so they can’t disclose any useful information. The only check and balance in place is an acknowledgement from distributors that they must have 5 retail customers in order to receive a commission check. No one verifies the retail customers of any associate, so it is possible that associates are purchasing inventory that is never sold (all for the purpose of qualifying for compensation).
If this is the case, Usana could be deemed an illegal pyramid scheme which is paying distributors for recruiting, rather than selling products. Fortune Hi Tech Marketing was shut down by regulators on this very basis. In fact, many multi-level marketing companies have characteristics in common with FHTM, which lends credibility to the allegation that they pyramid schemes.