23 Feb

Why MLMs are Pyramid Schemes

Multi-level marketing companies (MLMs) are nothing but pyramid schemes. Oh sure, there are websites that go to great pains to discuss the difference between MLMs and pyramid schemes. But when you boil it down, MLMs are indeed pyramid schemes, and ta class action lawsuit filed against Arbonne International last year explains this well.

First they describe a typical pyramid scheme:

A classic pyramid scheme operates as follows: recruits pay into the scheme for the right to receive compensation from the scheme based, in large part, on bringing new recruits into the scheme. Each recruit’s money is used to pay other recruits in the scheme (particularly more senior recruits), as well as the scheme promoter. The more recruits one brings in, and the closer to the top of the pyramid he is, the more money he might make. Recruits will necessarily lose their money unless they recruit enough new people into the scheme, who will also lose their money unless they recruit enough new people, and so on. Because there is little or no outside money flowing into the scheme from real operations (other than recruitment), because payments from recruits are shared disproportionately with the persons closer to the top of the pyramid, and because the scheme operator takes a healthy cut for himself, the vast majority of recruits are doomed to lose most or all of their investments.

Multi-level marketing companies say that it is obvious that they are NOT pyramid schemes. They say they aren’t “pay to play.” They have a product and it’s being sold to customers, so it can’t be a pyramid scheme.

But the lawsuit goes on to explain how MLMs really are pyramid schemes with the following points:

  • Arbonne is a pyramid scheme masquerading as a direct seller of health and beauty
    products.
  • Arbonne requires [independent consultants] to purchase start-up packages and pay annual dues, and the Arbonne system makes it a virtual necessity that the distributors purchase Arbonne products—lots of them.
  • In return, the Consultants receive the right to receive compensation based in primary part on their recruitment of new Consultants (who pay fees, pay dues, and purchase product).
  • Just like a classic pyramid scheme, the more new Consultants a Consultant brings into the Arbonne program (and the more payments those new Consultants make), the more money a Consultant can make.
  • Unlike participants in a classic pyramid scheme, the Arbonne Consultants receive
    health and beauty products, which the Consultants can theoretically sell. But that fact makes Arbonne no less a pyramid scheme. As a group, the Consultants may sell a limited amount of products at retail, but the bulk of the money paid to the Consultants comes from other Consultants.
  • Just like a classic pyramid scheme, Consultants are feeding off the money paid by other Consultants.
  • Arbonne’s sale of product to Consultants is merely a ruse to disguise payments to a
    pyramid scheme, much as if the promoter of the classic pyramid scheme described above “sold” participants $100 toothpicks and the right to compensation from bringing in new participants to purchase $100 toothpicks. The sale of toothpicks merely provides a mask of legitimacy to the pyramid scheme, allowing the promoter to claim he is a toothpick-seller rather than a pyramid scheme promoter. Here, rather than disguising pyramid scheme payments as purchases of overpriced toothpicks, Arbonne disguises the payments it receives as purchases of overpriced health and beauty products.
  • Other than the theoretical possibility of selling Arbonne products for a profit, the
    financial incentives Arbonne provides its Consultants depend on recruiting junior Consultants.
  • At the same time, Arbonne provides meager incentives for retail sales.
  • Moreover, Arbonne’s system strongly encourages Consultants to buy more and more
    product, regardless of whether they need it for personal use or retail sales. Every month Consultants must (either through their own purchases or purchases made by persons in their “downlines”) achieve certain levels of purchases to maintain their eligibility for each type of payment from Arbonne.

It really is just that simple. MLMs deny being pay to play schemes, but they’re lying. Every MLM has requirements for minimum purchases that must be made to stay active in the company and to “qualify” for commissions and other payments. What is that requirement if not pay to play?

As the lawsuit sets forth, the MLM companies use pay plans that encourage people to buy products they likely won’t ever be able to sell (because the retail sales to people outside of the MLM are so low):

So, to incentivize Consultants to purchase lots of product, Arbonne offers a variety of bonuses through its overly complicated SuccessPlan. As described herein, each of these bonuses is designed to encourage Consultants (a) to purchase product they do not need and cannot sell, just so they can maintain or increase their status in the Arbonne organization, and (b) to recruit new Consultants who will do the same.

But each of these bonuses results in Consultants being paid with other Consultants’
money. Relatively little money comes in to Arbonne from Retail Clients or Preferred Clients. Most of Arbonne’s sales are to the Consultants, and so the money Arbonne uses to pay bonuses to Consultants comes from other Consultants. In this way, Arbonne bears the most critical aspect of a pyramid scheme: the payment of money to participants using other participants’ money. Whether they know it or not, the Consultants are feeding off each other, their payments from Arbonne completely dependent upon an influx of new money from Consultants.

So how is an MLM like Arbonne a pyramid scheme?

  • Consultants are incentivized to pay Arbonne more and more money through various fees and through product purchases
  • They are rewarded for bringing in new consultants
  • They pay consultants with money from other consultants
  • While it is possible for the consultants to sell the products, the reality is that very few can actually sell the products at a profit

The lawsuit also talks about the proof that Arbonne doesn’t care if there are any retail sales:

  • The company could calculate compensation based on actual retail sales, but instead does so based on wholesale purchases of products by consultants
  • Arbonne doesn’t even try to track retail sales
  • Consultants are prohibited from selling on e-commerce platforms, which severely limits their opportunity to make retail sales
  • Even though MLMs may have policies against inventory loading (large purchases of inventory that will likely never be sold to actual customers), they do not monitor retail sales or otherwise try to determine if inventory loading is happening

Arbonne is no different from other multi-level marketing companies. They all use their products as bait to bring in new recruits. It makes the “business opportunity” look legitimate and allows them to appear as if they are not a pyramid scheme. But when you drill down into the details and you consider how little product is actually sold to bona fide customers, it becomes clear that these MLMs are indeed pyramid schemes.

3 thoughts on “Why MLMs are Pyramid Schemes

  1. Right, they are. I recall John Oliver speaking about it on his show last year as well. Here the link: youtube.com/watch?v=s6MwGeOm8iI

    What I wonder is why they are still operating… the government should have closed them long ago.

  2. What frustrates me is how the MLMs portray legitimate corporate jobs as exploitative of employees. The CEO makes big bucks off the backs of the regular workers, they say. But how much more is this true in MLM, where 99+% spend more than they make, and only the very top thin slice make any money? It is common for the media to expose the salary gap in the form of, “CEO makes x% more than average employee”. What if they included MLMs in this little exercise? Wouldn’t that make some headlines! Just to see a competitive ranking of the top 100 corporations compared to the top 10 MLM companies on this metric would be a game changer. After seeing such a metric, it would be very difficult indeed for MLMers to continue with the “corporate slavery” message they love to peddle.

    Note: If they used “net income” instead of gross pay-outs, that ratio would be “infinite”, since the average rep “nets” zero or less, creating a divide-by-zero problem in the metric. Ouch!

  3. Pingback: AdvoCare Quitting MLM – Pink Truth

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