Commentary on fraud, scams, scandals, and court cases.

Is MLM a Legitimate Business Method?

pyramid-scheme-mlmDefenders of multi-level marketing (MLM) are often heard saying that it’s a legitimate business method! Even government regulators say MLM is legitimate. And it is true that state and federal governments in the United States generally allow multi-level marketing companies to operate with little oversight. This is despite the fact that structurally and operationally, MLMs are nothing more than pyramid schemes.

Oh sure, the MLMs are careful to use lots of window dressing that makes it appear they don’t violate anti-pyramiding laws. There are even lawyers who whore themselves out to tell owners of MLMs how to “stay legal.” And of course, the massive lobbying on behalf of “direct sellers” and multi-level marketing companies ensures that current laws against pyramid schemes will not be enforced, and that no new laws impeding MLMs will be enacted.

Typical positive MLM talking points include:

  • Low start-up cost
  • Ability to be your own boss
  • Commissions made off recruits
  • Possibility of six-figure compensation

The Direct Selling Association claims that annual sales from MLM in the United States total $35 billion per year. However, this figure is completely fabricated. It is derived from the wholesale sales of multi-level marketing companies to their distributors, which is then increased to suggested retail pricing…. assuming every single product purchased by distributors during the year is sold to a customer, and sold at full suggested retail pricing.

The problems with this figure are many: Very little actual retailing of MLM products occurs. Much of the product that gets in distributor hands is never sold to a customer, because the distributor is purchasing to meet minimum requirements of the pyramid. When products are sold, there are often significant discounts involved.

The truth is there is no real difference between a “legitimate” multi-level marketing company and an illegal pyramid scheme. All MLMs have the  same flaw: They depend on endless chains of recruiting new members. Multi-level marketing is the epitome of unfair and deceptive business practices.

And here’s where it gets really fun. The Federal Trade Commission says there is such a thing as an unfair or deceptive compensation structure that harms consumers:

An MLM compensation structure that incentivizes participants to buy product, and to recruit additional participants to buy product, to advance in the marketing program rather than in response to consumer demand in the marketplace, poses particular risks of injury. Where such an unlawful compensation structure exists, a participant is unlikely to be able to earn money or recover his or her costs through selling product to the public. In such circumstances, participants will often attempt to recruit new participants who will buy product, and pressure existing recruits to buy product, with little concern for consumer demand. Where an MLM has a compensation structure in which participants’ purchases are driven by the aspiration to earn compensation based on other participants’ purchases rather than demand by ultimate users, a substantial percentage of participants will lose money.

I have never in my 20+ years of researching MLM found a company that doesn’t incentivize people to buy products and to recruit people to buy products.

The FTC used to have a document that differentiated between MLM and pyramid schemes by saying this:

There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. Inventory loading occurs when a company’s incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company’s distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. The people at the bottom make excessive payments for inventory that simply accumulates in their basements. A lack of retail sales is also a red flag that a pyramid exists. Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.

The reality is that most MLMs in the United States have very, very little retail sales to third party customers. The bulk of the products are sold to distributors who are unable to re-sell them, and who purchase them primarly to move up or keep their position in the pyramid. MLMs have minimum purchase requirements, typically on a monthly or quarterly basis, which distributors must meet in order to be commission-eligible.

That, my friends is inventory loading. In some companies, such as Mary Kay, the inventory loading is heavy on the front end. In other companies, the inventory loading goes on continuously, little by little. You’d be amazed at how much unsold inventory a distributor can accumulate via monthly purchases that appear relatively small.

Welcome to multi-level marketing, people. MLM is a rigged game in which the vast majority of people lose money. It’s not just FHTM. It is nearly every MLM, yet the FTC refuses to act on a large scale.

The Direct Selling Association  used to brag that “median earnings” were $2,400 per year. They’ve since backed away from that statistic (mostly because there was no data behind it), but Robert FitzPatrick once analyzed it as follows:

  • 8 million salespeople times $2,400 income (at an absolute minimum) is $19.2 billion in INCOME. (8 million X $2,400 = $19.2 billion)
  • If they received an average of 25% commission on company sales (which would be generous), then the minimum average SALES for the upper half to have earned $2,400, must be at least $9,600 each ($2,400/25% = $9,600)
  • Using just a minimum of $9,600 each for the average annual SALES of the upper half, then total SALES credited to the upper 8 million has to be about $77 billion! ($19.2 billion/25% = $76.8 billion). You reported that the DSA reports TOTAL SALES are just $30 billion. There is a $47 billion discrepancy without even factoring the sales of the bottom 8 million and having also grossly reduced the total sales of the upper half by only counting income per distributor at $2,400, the mid-point. Using your DSA-sourced $2,400 median income figure, a fuller inclusion would perhaps put total sales above $100 billion or more, just in the USA.
  • How many salespeople could have sales of about $10,000 in order to gain the income of just $2,400? This is determined by dividing $10,000 into the $30 billion = 3 million
  • So, if 3 million salespeople had just $10,000 in sales in order to gain just $2,400, that would account for ALL industry sales of $30 billion (3 million salespeople times $10,000 average sales is $30 billion) The other 13 million would, therefore, earn nothing. Zero. The MEDIAN income could, therefore, not possibly be $2,400. In fact, it would be ZERO.
  • The MEAN average SALES is only $1,875 ($30 billion/16 million). That figure alone shows that is impossible for a median income to be $2,400.

So is MLM a legitimate business method? The answer is still no, since 99% or more of the participants lose money. It is nothing more than a money transfer scheme, hidden by a legitimate-sounding product that is not widely retailed to third-party customers.

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