Robert FitzPatrick, one of the foremost experts on multi-level marketing, published a piece entitled “What John Oliver Didn’t Have Time To Say In His Hilarious Exposé Of Herbalife And MLM” on Seeking Alpha. (register for free to read the whole article) As always, he did a masterful job o flaying out the case against MLMs, which are nothing more than elaborate pyramid schemes set up to look like legitimate businesses.
As of the writing of this post, the YouTube video of the complete episode Multilevel Marketing: Last Week Tonight with John Oliver (HBO) had over 5 million views. The program made the point (in a very articulate, yet humorous way) that MLMs are nothing but pyramid schemes.
FitzPatrick expands on the episode:
…essentially, all MLMs are the same. Trickery, lying, and losses, as well as “lack of retail sales”, which were discussed in the show, are intrinsic to a pyramid scheme, including:
- 99% of consumers are unprofitable
- actual “income averages” are not disclosed or obscured
- churn rates are massive and are always covered up
- owners and top recruiters get virtually all the money while virtually no one else makes a dime.
- little or no retailing, despite being called “direct selling.”
- products are absurdly priced and insanely hyped for having miraculous (and obviously false) health powers.
- inexplicable “growth” even when the economy tanks, there is no demonstrable “demand” for the scheme’s “product” and 80% of the salespeople quit each year.
- targeting economically vulnerable people
- majority of revenue ultimately comes from the MLM participants, not the general buying public.
I’ve summarized below some of FitzPatrick’s facts about multi-level marketing.
- Endless Chain Recruiting – MLM features endless chain recruiting, in which rewards are contingent on recruiting others. However, it is statistically impossible to succeed in such a scheme. The last ones in always lose, and they’re always the vast majority of the total participants. MLMs promote the idea of “unlimited income” and that the newest person has the same opportunity as the first one in, but both of these are false and fraudulent.
- Pay to Play – In order to participate in the MLM scheme, you must pay. There are initial fees and product purchases. The products must be purchased on an ongoing basis in order to continue to “qualify” for commission payments. The purchase of the products looks legitimate because the participants could sell those products to customers. However, the reality is that very little retailing for a profit actually occurs.
- Money Transfer – A key feature of MLM is the transfer of money from the last person to join to those above him or her. There is a complex pay plan that divvies up the payments to multiple levels, and most receive very small amounts that are nothing more than a carrot dangled to keep them in as long as possible. FitzPatrick writes: “At Nu Skin, for example, 80% of all the reward money winds up in the hands of the top 1%. 93% of the participants get paid nothing at all. And since the MLM’s use “products” to camouflage the transfer, only about 40-50% of the total “purchase” money paid in by the newest recruit can be transferred as reward. The rest is needed to cover the scheme’s product and administration costs, and raked off as “profit” for the owners and their shareholders.:
- Closed Market Swindle – The money for rewards in MLM comes from the participants. If someone pays $100 to join and that is the only source of funds, then no one can gain from that $100 investment without others losing. Essentially, the money is just being transferred in the chain. Of course, the MLMs claim that the payments are actually “purchases” and that there is another source of money: retailing of the products. But time and again, it has been found that profitable retailing does not occur in MLM on any meaningful level.