Does This Describe Your MLM?

Kevin Thompson hires himself out to multi-level marketing companies to give them legal counsel. Supposedly he knows his way around the legality of MLMs, just like my buddy Gerry Nehra supposedly does.

So I was perusing Kevin’s website and came across this interesting diatribe about what separates “legitimate” MLMs from illegal pyramid schemes. I’ve written a lot about Mary Kay Cosmetics, Usana, Herbalife, Prepaid Legal, and the like. And guess what? All of them seem to violate the most basic rule Kevin sets forth… to be legitimate you have to sell mostly to people not affiliate with the scheme, but these companies have distributors who purchase the bulk of the products!

Legitimate network marketing companies pay commissions on the sale of products and services to customers. The issue of legitimacy hinges on the definition of “customer” and the amount of revenue required to come from customers, not distributors. Legally, companies are required to generate a substantial amount of revenue from customers outside the program.

Ist it ok if 99% of a company’s revenue comes from its distributors buying the products for personal use? would you be suspicious if you drove down the street and saw a sign at McDonald’s that said “Over 1 billion burgers sold” and then read the fine print that said “99% of the burgers were bought by franchise owners”? If the vast majority of revenue comes from the sales force, it would seem that hte only way to advance in the company would be to recruit additional distributors to purchsae the products and recruit other participants. And therein lies the problem.

With pyramid schemes that try to appear as legit network marketing companies, people under the influence of a faux opportunity might purchase products they otherwise would never purchase at prices they would never pay at quantities they would never consume… all with the hopes of recruiting others to do the same. When there are hardly any customer sales, the products being sold might be considered “token products” designed to disguise the illegal nature of the endless scheme.

If the compensation plan requires you to recruit other participants in order to advance up the pay scale, it’s a factor to consider. Ask yourself: “Do I advance my position and potential income potential [sic] by recruiting additional distributors down a fixed hierarchy of distributors beneath me, who in turn advance by recruiting other distributors, etc.?” If yes, the result is self-appointment through recruitment to increasing payout levels in the distributor hierarchy. Translation: If a person climbs up the compensation ladder by recruiting active distributors, it stronly suggests a pyramid scheme.

An easy example is with forced matrix plans. If a plan is 5×5, the only way to advance to the next level is to fill the first level by recruiting 5 active distributors. Retail sales are not part of the equation towards advancing up the pay scale. Advancement requires recruitment. When the financial incentives reward recruitment, the distributors will naturally follow the rewards.

The MLMs I’ve studied all essentially require recruitment to advance or to have any chance of making a decent income. (Not that most do, since 99% of people involved in MLMs lose money.) If he really believes what he has written, it seems a better business model for Kevin might be representing those who have been defrauded by MLMS?


  1. Tracey,

    Thanks for sharing the content of my article. And I’m glad you found it informative. I agree, there are a lot of problems currently inherent in the industry. When you mentioned your observation that most companies require recruitment to advance, I would say that a lot of those companies are driven by volume, not by “active” distributors. Still, if most of that volume comes from the sales force, I would agree that there’s a problem.

    I want to be a part of the solution in the industry. The bad companies need to be weeded out and resources like your website help. In addition to representing start-up MLMs, I do represent defrauded consumers. I will be filing a class action lawsuit within the next two weeks against a pyramid scheme. Stay tuned. When you hear about it, I would greatly appreciate some added buzz about the lawsuit. Thanks and take care.

  2. Tracy Coenen

    I want to be part of the solution too. I have yet to find even one MLM that is nothing more than an endless chain recruitment scheme. I wish all MLMs would go away. They drain billions of dollars each year from millions of families. That money could be used in a much better way, rather than flushing it down the toilet on some overpriced crappy MLM products.

  3. It doesn’t help matters that a number of direct sales companies, like Avon, which do have sales overrides, belong to the DSA which is home to some very dubious elements.

    Ironically, the DSA has lost control of the legislative program. By rejecting the FTC’s new Biz Op Rule, their earnings claims are now going to be governed by the new FTC’s guidelines under Section 5 for testimonials.

    The removal of the safe harbor is a game changer.

  4. Gary

    There is one simple thing that all network marketing companies can do to help put an end to people like you who write negative things about them and that is to cancel the monthly purchasing requirement. Almost all MLM companies claim that their product is superior and can therefore charge way more than their competitors.

    If their products really were that good, then their distributors should know that and be willing to buy the products willingly each and every month. If that is the case, why have the monthly requirement? The reason is simple, which this article points out. The company needs to sell these over priced products to someone, so they make the distributors do it and the only reason why distributors are willing to do this is because of the dream of making a ton of money. Without the “business” part of all of this, very few people would buy these products.

    If you think about it, this whole MLM structure is genius if you were to start a company that sold products most people wouldn’t buy because of the price. You can basically guarantee that as long as your recruitment base kept expanding, your sales would increase every single month.

    Show me a company that doesn’t require a monthly purchase of the products, one that leaves the decision up to the rep, and I’ll praise that company. Any takers? No one? I didn’t think so. And no, the argument that “you can’t be promoting what you don’t personally use” isn’t valid. It’s just an excuse to enforce monthly purchases. Again, if the products were so good, having reps buy the products every month shouldn’t even be a problem but apparently, it is.

  5. Pingback: Fraud Files Forensic Accounting Blog » Anne Coughlan is Wrong on Herbalife

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