Recently Robert FitzPatrick of Pyramid Scheme Alert sent out a newsletter that included a discussion of the issue of whether all multi-level marketing companies are pyramid schemes. MLMs are frequently accused of being pyramid schemes, as we see has been the case with Mary Kay Cosmetics, BurnLounge, Herbalife, Medifast, Fortune Hi Tech Marketing, and Usana Health Sciences.
It is common for participants in multilevel marketing schemes to ask whether one MLM or another is also a pyramid scheme. Consumers are hoping that they have found the one legitimate or good multi-level marketing opportunity. The following information comes from Robert FitzPatrick’s newsletter article on the topic:
We have not examined every single MLM but, among the hundreds we have examined, we have not found one yet that met the simple test of legitimacy. The test does not require years of analysis or evaluating the MLM product or pricing. It does not require a legal opinion. Legal or not, the test determines whether the MLM is a valid direct selling income opportunity.
1. Not Direct Selling
We have not found a single MLM in which the majority of distributors (sometimes called IBOs, coaches, associates, etc.) makes a sustainable profit just from retailing the MLM’s product to the general public. We haven’t found one that can therefore be considered “direct selling.” We ask every inquiring consumer to find out if the current distributors are making a profit from selling the goods to people, without also having to sign up new salespeople (to make money off their purchases and sales)? If not, then what is the real business, selling or recruiting? Recruiting salespeople who cannot make a profit from “selling” but must also recruit is not a business. It is a pyramid scheme.
2. Paid to Recruit
All the MLMs we have examined pay a “commission” or “points” leading to a commission on the salesperson’s own purchases or on the purchases of the salespeople they recruit, or both, whether the products are ever resold to the public or not.
When the MLM company pays commissions or awards “points” that lead to commissions based on what the salesperson or his/her recruits buy – the pay plan directly rewards endless recruiting. The MLM’s revenue base depends on getting the salespeople themselves to buy as part of the “income proposition.” Since 99% normally lose, these purchases add to the recruits’ losses.
Additionally, it is obviously unethical and a conflict of interest to “manage” or “coach” a recruit whose personal purchases translate into commissions for the “coach” and other upline managers. The upline “coaches” make money, whether or not the persons being managed do, and they make it directly out of the pocket of the persons supposedly being “trained and supported”!! Even if some retailing occurs, if it is not sustainably profitable, then it is unfair to profit from those “failed” salespeople.
If commissions were only paid on retail sales, at least no one would make money upline until a downline person made some money in the legitimate open market. The focus would be on sales, not extending the sales chain. We have not seen one case of a true retail-based MLM pay plan. As a result, we see only a few recruiters at the top making money, and all else losing.
3. Recruiting as the Only Viable Path to Profit
The sustainable profits in the MLMs we examined, even if some amount of retailing is occurring, comes only when a person reaches the higher levels – executive, gold, president, or some other high position on the chain. To get to that profitable position, all the MLMs that we examined required volume purchase quotas that could only be reached if one had a large “downline.” Why is the MLM person required to maintain a high quota or a specified level of recruits in order to benefit from past recruiting? Two reasons: (1)to keep everyone buying and recruiting and (2)because when they don’t meet their quotas (and nearly all will not), all their accrued payments go to those above them – to the top. The quota and “structure” rules induce buying and recruiting among the salespeople, and when that ends, the requirements serve to transfer accrued rewards lost by the “quitters and losers” upwards to the top.
Where MLMs have specified recruiting requirements the MLM participant must have specified numbers of recruits in specific configurations, e.g., to be “gold” one must have five “silvers” and those five “silvers” must each have 3 qualified “aluminum foils” in the level below them, etc., the so-called “building structure” method of moving up. The higher one goes up the ladder – by recruiting, not personally selling – the higher the commission rate on all the purchases he/she makes plus all those made by the entire downline. So the incentive to recruit is compounding!
When the volume quota is not met or the “structure” breaks due a lower level person not meeting his/her own quota, then the commission amount is drastically slashed, even to the point of losing everything that has been built up.
Because the volume quota and structure requirements can only be maintained by those at the very top, the bottom and middle levels “fail” and quit at rates as high as 80% or more per year.
4. Profit Reserved only for those at the Top
This is hard to explain to people who are blinded by dreams of wealth and happiness that the MLM scheme has promoted. But it is otherwise obvious to see. If profit comes from building a “downline”, then only those at the top of the downline can ever be profitable. For there to be a “winner” at the top, there must be “losers” below. The ratio of losers to winners is pre-determined, usually 100 to 1. It takes a hundred recruits who are losing for one to win anything. This ratio is built into the pyramid “business model.” No matter how large the MLM gets, the percentage of losers and winners remains constant.
Since there is no sustainable profit from just retailing (costs and time outweigh income), but only from recruiting, and the recruiter must have a “structure” with a large “group volume,” there will always be just a tiny few winners. The MLM is not an opportunity “for everyone”, as the MLMs always claim, but only for a very few. We have not found a single MLM in which more than 1 in 100 made any profit at all in a year, and a much smaller percentage made sustainable incomes when all recruits are included over a longer time. This success rate does not qualify as an “opportunity.” Gambling at a casino offers better chances.
5. The trick, the delusion and the fraud of the “endless chain”
Those blinded by “unlimited income” promises made by the MLM and the testimonials of “$10,000 per month” have a hard time seeing the “endless chain” trick. That’s why it works!
All the MLMs we have examined play this trick on the recruits. They offer “unlimited” income based on a chain of recruits that never ends. The last person to join is offered exactly the same incentives to recruit as the first people were when the company was started, as if the market size never reduces. It is always “unlimited.” This promise is inherently deceptive and is at the root of why MLMs cause huge failure rates.
The endless chain trick claims everyone can make “unlimited” money even though the money on which the income would be based is the participants’ own money! An obviously limited amount of money is said to have the potential to generate “unlimited” rewards. This truly is the miracle of the loaves and fishes performed by MLM magicians. If 1,000 people all buy $1,000 of products on average, there is $1 million in revenue. That’s all there is to pay rewards from. So how could everyone make more than they paid in? Obviously, some of the money from many of the 1,000 will be transferred to a few in that group. Why would some get more? Because they are at the top of the chain or joined earlier than others, that’s all. Reward depends on “position” and timing. Most must therefore lose (receive less than they paid in). If some are making large incomes, then nearly all the others have to lose.
The MLM cult rules always require continued paying of money to the MLM’s and free marketing work for the MLM. Doubting the rules or the promise is a MLM sin. Questions are MLM heresy. Criticism of MLM is treated as evil. Even associating with non-believers in MLM is discouraged. This is not business.
Since every MLM we have examined is designed exactly on this same impossible model of “endless expansion”, we must conclude they have based their promise on a lie.
So, for these reasons – lack of retail profit opportunity, commission paid on recruits’ purchases, recruiting/volume quotas, profits based on pyramid recruiting and the “endless chain” lie – we inform consumers to avoid schemes that have these characteristics. And all the MLMs we have looked at have them!