MLM: It’s About Recruiting, Not Sales

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pyramid-scheme-mlmI’ve been telling you for years that multi-level marketing is NOT about selling products. It’s about recruiting people into a fake opportunity. The products are the “front,” meant to make MLM look like a legitimate business. In reality, very little product is retailed to actual consumers. Instead, it’s sold to new recruits into the scheme, who have little chance of ever retailing those products for a profit.

Look no further than the case of Herbalife to prove my point. (This point is usually difficult to prove, as MLMs do their best to hide the numbers so we never see the truth behind the scam.) This month Herbalife entered into a settlement agreement with the FTC that has them paying $200 million and substantially changing how the company does business.

Herbalife falsely claimed: “Settlement Does Not Change Herbalife’s Business Model as a Direct Selling Company.”

The FTC clearly disagrees, and said in its press release about the settlement (emphasis mine):

Herbalife International of America, Inc., Herbalife International, Inc., and Herbalife, Ltd. have agreed to fully restructure their U.S. business operations and pay $200 million to compensate consumers to settle Federal Trade Commission charges that the companies deceived consumers into believing they could earn substantial money selling diet, nutritional supplement, and personal care products.

In its complaint against Herbalife, the FTC also charged that the multi-level marketing company’s compensation structure was unfair because it rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program, rather than in response to actual retail demand for the product, causing substantial economic injury to many of its distributors.

“This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit,” FTC Chairwoman Ramirez said. “Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices.”

According to the FTC’s complaint, Herbalife claims that people who participate can expect to quit their jobs, earn thousands of dollars a month, make a career-level income, or even get rich. But the truth, as alleged in the FTC complaint, is that the overwhelming majority of distributors who pursue the business opportunity earn little or no money.

And now the lack of actual retail sales has been illustrated beautifully in an article in the Los Angeles Times (emphasis mine):

At issue is whether Herbalife’s rising sales come from actual consumer demand for its supplements. According to the FTC’s investigation, the company’s compensation program for distributors was driven not by selling products to people who actually consumed them, but by recruiting additional people into the network.

The system, the agency said, put pressure on distributors to buy large quantities of weight-loss powders and other products so that they qualified for greater discounts and recruiting-based rewards.

As a result, many distributors bought Herbalife products they found difficult to sell, the FTC said. Those distributors gave away the powders and teas to friends, consumed the goods themselves, or threw them away, the agency said. Some distributors sold excess products at flea markets or auction websites, the FTC said, despite Herbalife rules prohibiting such sales.

One top distributor paid more than $8 million for Herbalife products, which were purchased in the names of junior members down the line from that person’s place in the network, according to the FTC. Those purchases generated so much in additional rewards and higher payments from Herbalife that they more than covered the distributor’s $8-million outlay. The distributor then donated the products to charity, the FTC said.

This is how it’s done, people. In order to be a “top earner” in multi-level marketing, you must recruit hundreds or thousands of people into the scheme and get them to make product purchases (in quantities that they will never sell for a profit) or make product purchases in their names. The way the compensation structure works, a person toward the top of the pyramid can purchase products to achieve certain levels and bonuses … and the compensation will be greater than what they spent for the products.

This, my friends, is the grand scam that is multi-level marketing… pyramid schemes which our government allows to continue to harm millions of consumers per year.

4 thoughts on “MLM: It’s About Recruiting, Not Sales

  1. I think your comment is a bit unfair. I think this behavior is a model of efficiency: becoming garage qualified without needing an actual garage… what an innovation! Oh well, that was tongue in cheek, of course.

    It proves once and for all that not only do retail margins go to zero in MLM, retail revenue goes to zero, and the products become free samples in the end as recruiting takes over completely from retailing.

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