Summary
of Findings about MLM (Multi-level Marketing)
Jon M. Taylor, MBA, Ph.D., Consumer Awareness Institute
About
the author:
- Expertised in business analytical skills
- Doctoral level research, training, and experience evaluating others’ research
- Many years of experience in direct selling and in sales management
- A wide range of entrepreneurial and home-based ventures
- Direct experience in a leading MLM and success in building a downline
- Experience analyzing hundreds of MLMs, using a well-researched and consistent analytical model
- Compilation of the experience of thousands of participants in a wide range of MLM programs
- Communications with top executives and communicators of leading MLMs
- Strong
grounding in ethical principles, including authorship on MLM ethics
- Extensive
writings on MLM quoted by attorneys, legislators, and the media
- Presentations
to regulators at nation-wide conferences on MLM
- Promotion
of legislation and rulings to protect against MLM fraud.
- Consultant
and expert witness in many legal cases regarding MLM abuses
After analyzing the
compensation plans of over 500 MLMs (multi-level marketing programs),
summarizing thousands of pages of research, collecting18 years of
worldwide feedback, reviewing applicable federal and state laws, and
testing the Nu Skin program for a year, I come to the conclusions below in
answer to key questions about MLM.What is the appeal of recruitment-
driven MLMs, such as Nu Skin?
1. The “easy money”
appeal of MLM is often couched in terms such as “time freedom”
(to do what you want), perpetual or “residual income” (like
author’s royalties or annuities), and “unlimited income
possibilities,” with the success of recruits limited only by their
efforts.
2. MLMs are often sold
as a viable alternative to an unfavorable job market and as a better
route to retirement than traditional plans.
3. MLM programs
typically sell “pills, potions, and lotions” or other products
that are consumable, that have unique appeal, and
that can be claimed to deliver benefits not available elsewhere.
4. One sees a strong
sense of belonging, or an “us versus them” cultish mentality. As
a business model, are recruitment- driven MLMs like Nu Skin
legitimate?
1. MLMs depend on
unlimited recruitment of a network of endless chains of participants.
2. Participants secure
and advance to ranks or positions in a pyramid (“downline”) of
participants based on timing and recruitment, rather than on merit or
appointment.
3. As endless
entrepreneurial chains, or “opportunity” recruitment schemes,
MLMs assume an infinite market, which does not exist in the real
world. They also assume virgin markets, which don’t exist for long. They would be
doomed to eventual market saturation and collapse, except that some
avoid this by expanding to other countries and/or repyramiding
through the same markets with new product offerings and divisions.
4. Therefore, as
endless chains, MLMs are inherently flawed, unfair, and deceptive –
profitable primarily for those at or near the top (top-level
“upline”, or “TOPPs”, for top-of-the-pyramid promoters) –
who are often the first ones to join.
5. Worldwide feedback
suggests that MLMs can be extremely viral and predatory. As endless
chains, MLMs quickly spread from state to state and often to
vulnerable foreign markets.
6. I have challenged regulators to
identify any “business opportunity” that is systemically more
unfair, deceptive, viral, and predatory
than MLM. None have met the challenge.
7. MLMs typically finance
their operations from purchases by participants who are incentivized
to buy overpriced products to qualify for
commissions and to advance to higher levels in the pyramid of
participants. With the exception of some party plans, the majority of
sales are typically to participants.
8. Typically, MLM
products are unique (making it difficult to compare with alternative
products), consumable (to encourage repeat purchases), and priced
higher than products sold elsewhere – to pay commissions on many
levels of participants.
9. In MLMs, most of the
commissions are paid to those at or near the top levels in the
hierarchy of participants (TOPPs). It is this extreme concentration
of commissions paid to TOPPs that motivates them to work
tirelessly to Intro.- 8 expand downlines, thereby assuring the MLM’s
survival and growth. They also must continually recruit to replace
dropouts due to high failure rates.
10. Most MLMs become
even more top- weighted with five or more layers in their
compensation plans – more than are functionally justified.
11. Some have asked if
it is possible to design an MLM that is honest and fair to all
participants. To accomplish this would require major adjustments,
such as the following:
a) Commissions would be
paid only on sales to non-participants – and no overrides or
commissions for personal consumption of
partici- pants.
b) Most (over 50%) of
the commissions and bonuses paid by the company would be paid to the
front-line person who sells the products, with amount of commissions
decreasing at each higher rank level.
c) The number of levels
on which commissions can be paid would be limited to four (the
maximum needed to manage any standard sales function, including
branch, division, regional, and national managers).
d) There would be no
minimum ongoing purchase requirements to qualify for commissions or
rank advancement. Unfortunately, to my
knowledge, none of the MLM founders have taken such steps to achieve
honesty and fairness.
12. The villain in MLM
abuse is not so much the leaders as a flawed system built on
unlimited recruitment of endless chains of participants as primary
customers. MLMs enable the transfer of moneyfrom a rapidly churning
supply of new recruits to TOPPs, founders, and the company itself.
13. MLM promises what
it cannot deliver. To be successful, MLM promoters depend on a litany
of deceptions, including much self-deception. Misrepresentations
regarding products, income potential,and legitimacy are
commonplace in MLM. Based on the foregoing and on the research
discussed below, if asked if MLM is a moral or ethical business
model, I would have to answer – no!
What are the effects of
MLM on participants and on society?
1. Based on available
company data, approximately 99.8% of Nu Skin distributors and 99.7%
of all MLM participants lose money – spending more on company
purchases and minimal operating expenses than they receive in
commissions from the company. Attrition rates are high.
2. Those who lose the
most are those who invest the most, having accepted deceptive claims
that the MLM is a legitimate income or business opportunity, and
having continued to invest in the vain hope of eventually profiting
handsomely. 3. Based on statistics
from the Direct Selling Association, the chief MLM lobbying
organization, aggregate losses (which the DSA calls “sales”)
suffered by tens of millions of victims exceed tens of billions of
dollars a year in the U.S., with far greater losses worldwide. MLMs
often plunder
vulnerable populations
overseas.
5. In some cases,
monetary losses from MLM participation lead to heavy indebtedness,
bankruptcy, foreclosed mortgages, and failed educational and career
pursuits.
6. Addiction to MLM can
result from excessive commitment to MLM – which can become a
lifestyle. “MLM junkies” – who have internalized its “easy
money” appeal – may find it difficult to work again in a normal work
setting.
7. Some MLM
participants lose more than money. Divorces and rifts among extended
families are commonplace. Even suicides and murders related to MLM
participation, have been reported.
8. MLM is an unfair and
deceptive practice that siphons money away from legitimate
businesses. And with the FTC’s granting of an exemption to Intro.-
9 MLMs from having to comply with its new Business Opportunity Rule,
the market for legitimate non-MLM direct selling and other business
opportunities could be virtually eliminated in favor of an MLM
business model that escapes the regulation. Are
recruitment-driven MLMs like Nu Skin legal? If not, what explains the
inaction by law enforcement, and what actions can be taken by and for
consumers to protect them?
1. The case can easily
be made that Nu Skin and virtually all MLMs are violating some
federal and state laws, although law enforcement seldom acts against
them – partly because victims of endless chains rarely file
complaints. For the same reason (as well as financial support from
MLMs and the DSA – see #3 below),
the Better Business Bureau seldom issues a negative report on major
MLMs. The media are also largely
silent.
2. The DSA (Direct
Selling Association, the major MLM lobby group), together with major
MLMs, work together as a cartel to weaken laws and regulatory efforts
against product-based pyramid schemes. Through
promised votes and carefully placed political contributions to
Attorneys General and other key politicians, they have been
successful in getting laws passed in Utah and other states that
exempt MLMs from prosecution as pyramid schemes. They have donated
heavily to the political campaigns of
presidential candi-dates to assure that no action is taken on the
federal level by the Federal Trade Commission or any other agency.
3. Even the Better
Business Bureau is corrupted by support from the DSA/MLM cartel,
members of which are “corporate sponsors” of the BBB. Amway, for
example, gets an A+ rating from the BBB – which says more
about the BBB than it says about Amway.
4. Most MLM
participants spend no more than a few hundred dollars in products and
services and then drop out. They are the lucky ones. In spite of
having spent more than they received, few blame the company for their
losses – even large losses. They have been taught that they (not
the company) are responsible for any
failures. Except for the first ones to join an MLM, generally those
who invest the most, lose the most. New recruits are being sold a
ticket on a flight that has already left the ground.
5. The silence of
victims of MLMs is also explained by the fact that in every endless
chain, major victims are also perpetrators, having recruited friends,
relatives, and others in a vain effort to recover costs of
participation. So they fear self-incrimination if they file a formal
complaint, and they fear consequences from or to those they recruited
– which often include close friends or family members.
6. Consumers must get
informed, and regulators should insist that crucial information be
made available to prospects to make informed decisions about
participation, such as average commissions from – and payments to –
the company for all participants.
7. To get the attention
of law enforcement, victims must complain to authorities. Defining
MLM Recruitment-driven MLMs
(which is virtually all MLMs, including Nu Skin) can be distinguished
from legitimate businesses by the following characteristics in their
compensation plans:
1. They assume
unlimited recruitment of endless chains of participants.
2. Participants advance
by recruitment, rather than by appointment like other businesses.
3. In order to qualify
for commissions or advancement, participant must make minimum
incentivized or “pay to play” purchases of products or services.
4. Most of the override
commissions paid by the company are paid to those at or near the top
of a pyramid of participants Intro.- 10 – often the first to join.
Founders may also skim a percentage of all revenues..
5. For most MLMs,
company payout is to five of more levels of participants, with
commissions to those at the bottom levels seldom enough to cover the
cost of “pay to play” purchases.
I conclude with likely
the only accurate, research-based, and consumer-friendly definition
of the business model labeled “multi-level marketing”:
Multi-level marketing (MLM) is a purported income opportunity, in
which persons recruited into a network of participants make ongoing
purchases of products and services,
and recruit others to do the same, and they still others, etc. – in
endless chains of recruitment and
personal consumption, in order to qualify for commissions and bonuses
and to advance upward in the hierarchy of levels in a pyramid of
participants. Product purchases become the means of disguising or
laundering investments in the scheme. Typically, prospects
are lured into an MLM with exaggerated product and income claims. And
because the pay plan is heavily stacked in favor of those at the
highest levels in the pyramid, the vast majority of participants
spend more than they receive and eventually drop out, only to be
replaced by a stream of similarly misled recruits, approximately 99% of whom are likewise
destined to experience loss and disappointment.
