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?