MLM Mythbusting: When Will DSA Recognize the Danger of Product-Based Pyramid Scheme to the MLM Industry?

DSA, or Direct Selling Association, is the "industry group" of network marketing, direct selling, multi-level marketing... whatever companies. It periodically holds surveys, and has a code of ethics that it requires its members to adhere to, which it claims will protect the consumers and affiliates from unscrupulous companies. DSA thus far has done an admirable job, both in Public Relations, and Industry Watchdog. However, DSA has a severe blindspot: DSA does NOT acknowledge the existence of product-based pyramid schemes and how similar it is to MLM, and that denial may lead to the destruction of itself and the industry it serves.

DSA pretends that "product-based pyramid scheme" doesn't exist, by pushing multiple narratives which are myths, not reality:

• MYTH: "Internal consumption is legitimate"
  REALITY: Internal consumption is legitimate... only in "reasonable" amounts, else it is indistinguishable from product-based pyramid scheme
• MYTH: "There is a CLEAR divide between pyramid scheme and MLM"
  REALITY: "Product-based pyramid scheme" is VERY close to MLM and this clear divide no longer exist. It's one huge gray area. 
• MYTH: "Pyramid schemes rarely involve products. If they do, they aren't worth much."
  REALITY: "Product-based pyramid schemes involve actual 'legitimate' MLM type products."

It recently re-emphasized these blindspots by pushing its article "The difference between legitimate direct selling companies and illegal pyramid schemes" which again emphasized the three myths, which is no surprise as this was penned with the assistance of mlm attorney Jeff Babener, whom I have previously identified as having a bit of blindspot himself 

Let us go over each myth on why each is a myth, and what is the reality.

Did you get a "Placebo Solution" that doesn't solve anything

After studying the aftermath of various scams and alleged scams, it is very often they seem to follow the same script.

As customer complaints start to pile up, they announce some sort of customer support revamp.

After a few months it's server outage.

After a few months it's "we got hacked"

After a few months it's "we got defrauded by international credit card scam that slammed us with hundreds of fake numbers"

The order may vary a bit, but the truth is the *same issues* seem to pop up at all these schemes and suspect schemes.

One wonders if they are offering "placebo solutions" just to keep the sheeple from complaining too much?

Herbalife's Petition By Omission: CEO Johnson asking members to fudge details with their congressional reps.

In July 2013, Herbalife CEO Michael O. Johnson, after having flown to Washington D.C. and consult with various Hispanic members of congress and other Latino civic groups, realized that he will not be able to convince them to stop pressuring FTC into looking into Herbalife. So he attempted an end-run... he circulated a template, to be given to all Latino distributors of Herbalife, to be customized and mailed to their own representative, to "call off the hounds on Herbalife".

Nothing wrong in rallying your own people, but are the points in the template accurate? Not really. The template, obtained by various media sources, including NY Post and Mr. Robert Fitzpatrick of PyramidSchemeAlert, shows that the letter is a perfect example of fudging details, mainly by claiming things that is in serious doubt even by Herbalife's own materials.

But first, let's go over a few facts. By facts, I mean those that can easily be found and VERIFIED in public. Indeed, many are from Hebalife themselves.

FACT: Herbalife CEO Michael Johnson is one of the highest paid CEO in the US, taking home $89.4 million in 2011, including salary, bonus, cashed stock options and such. (Actual salary is about 8 million) That number fell to $10.3 million in 2012 due to lack of stock options exercised in 2012  (source: CNBC and Bloomberg)

FACT: Herbalife CEO Michael Johnson was also the 2nd largest individual shareholder in Herbalife since 2011. That's over a million shares. At today's rate, that's worth $60-70 million.

When you combine the two, you perhaps can understand why Michael Johnson is fighting so hard... Johnson stands to lose his job and his personal fortune.   He's not merely defending his company, he's also defending his job and his nest egg.

FACT: Herbalife states that 60% of its sales are made through Latino distributors (presumably, to Latino consumers).

FACT: Latinos comprise just 17% of US population.

When you combine these two facts, perhaps you can understand why the Latino community, including various members of the legislature, civil rights and community groups, and such are wondering why is Herbalife so... pervasive in Latino communities vs. in OTHER communities.  You'd expect such a large company to be commonplace through all communities, not concentrated in Latino communities.

FACT: Herbalife CEO Johnson has emailed Herbalife distributors, asking them to email their representatives based on the following form letter. The form letter contains a lot of omissions which will create the wrong impression of Herbalife without any fact checking. The letter is included below, courtesy of PyramidSchemeAlert (where it's available with Mr. Fitzpatrick's commentary):

Bad Argument: "Focusing Bias" used as "proof" of viewpoint

Focus Bias (also known as Focusing illusion, Focusing effect, or Spotlight Effect), is a type of cognitive bias where the mind emphasize the portion of the issue they have exposure to (personal experience, personal calculation or consideration, etc.) and ignore / de-emphasize the portion of the issues that they don't see / understand, and thus cannot evaluate. This very often happens in MLM. Supporters of a scheme tend to overemphasize the importance of portions of the MLM system they have been exposed to, while ignoring the portions of the system they know little about.

One way this manifests itself is the supporter thinks because they experience ONE PART of the scheme, and that part seem to work fine, the entire scheme must be fine (and legitimate!)  I termed this "it paid me!" argument.

For TVI Express pyramid scheme, it would be the website, or sometimes, the actual trip that came with the membership, and for a few, the actual payout at one or two levels of the matrix. They don't care about the obvious pyramid scheme aspects of the scheme.

For Zeek Rewards, it would be the penny auctions, the "giving away bids", watching their "cash account" build up, and for some, real money in their bank. They pay no attention to where the money is really coming from, are there enough auctions to generate that much profit, and so on.

For Lyoness, it would be the how shopping build up their "accounting units" therefore they conclude that Lyoness works great, and they pay no attention to the part where you can BUY your units and recruit others to do so and thus benefit from it.

For each of these scams or suspect schemes, the supporters basically had the focusing bias where they focuses almost EXCLUSIVELY on the parts they have been exposed to, and they somehow feel that is the ONLY part that mattered (to them), while ignoring any other parts they had not been exposed to or know about.

That is a very dangerous position to be in, as there's more than a few ways a MLM business can cause you trouble.

Watch How Magician Thief Apollo Robbins explains Misdirection

TED (conference) (Photo credit: Wikipedia)

Your brain has limited amount of processing power available, and generally it concentrates on one sense or another, or it can spend time going over your previous memories, but rarely if ever, do both with any sort of proper efficiency. Thus is the power of misdirection... Focusing on the things that you thought were important, but wasn't.

Apollo Robbins, the "gentleman thief", otherwise known as a theatrical pickpocket, makes a living by taking stuff out of other people's pockets in front of live audiences, and returning them, in amusing and mind-boggling ways. He recently got on TED talk and explained how his techniques work: your attention span (aka "Frank") is solo-tasking... can only do one thing at a time. Sound, vision, touch, smell, taste, or memory search. It can't do multiple things at once. And even when you see or hear, you engage only a tiny portion of your various senses.

When you see something, you only focus on the portion you need to focus on, even though you technically saw the whole thing. If I ask you to take our your smartphone and ask what icon is in lower right corner, put it away, then ask you did you see what time it was on the phone... would you know? That's part of the misdirection... You did see the phone... you just didn't see the clock portion (upper right in almost all instances).

Thieves and scam artists use the same tricks to get you to pay attention on parts you *can* see, known as the "focusing bias", and ignore the parts you can't see (fraudulent claims of profitability).  Magic always have a link with cons, as magic is basically playing with your confidence of your senses. However, magic is benign, while scams are not, as observed by magician Joss Stone.

How Does Peter Principle Affect MLM?

Peter Principle states that "employees tend to rise to their level of incompetence". Of course, Peter Principle is talking about work and promotion within a company, where there are rules and ethics and such governing such promotions. Does Peter Principle apply to the MLM world? Very much so, albeit with much more disastrous consequences.

At its heart, Peter Principle is about how human beings apply their bias: why change what works, even though its a new situation. When this is applied to people, i.e. a person will keep doing what he's doing, even though he's promoted to a new set of responsibilities, that person will no longer advance unless s/he learns new set of skills.

However, such change of responsibility are sorely lacking in network marketing. When you "grow" in MLM, you don't really take on bigger responsibilities other than training or inspiring new members.

Network marketing has two primary skills: sell products/services, and recruit people. Both can be called "sales" to a certain extent, but require very different persuasive arguments.

To sell a person the product/service, you will argue that the service/product will make his/her life better in some way, and the price to benefit ratio is good, esp. among any competitors.

To sell a person the position (i.e. recruit), you will simply appeal to the person's greed, envy, and pride. Don't you want to be financially independent? Don't you want to be successful (like other people)? Don't you want to join a winning team? So on and so forth.

One appeal to base desires (7 deadly sins, any one?) while the other appeals to logic. Guess which one is easier? Appeal to the sins, of course.

Bad Argument: I Know What I Am Doing! (No you don't)

NOTE: this is a completed version of a previous post

Sometimes, when you tried to reason with a supporter of suspect scheme, and they have no logical retort to your points, they will instead bring out the "I know what I am doing" bad argument, which generally goes like this:

A: Acme XYZ is a scam because ____, ____, and ____.

B: I know Acme XYZ is not a scam. I know what I am doing. It's my business, not yours.

This is a total red herring, because it neither argues against the premise, nor argues for the counter-premise. It is completely unrelated.

What's more, there are several problems with one. One of which is "illusory superiority", in that we always think we are better than we really are. It's called "self-esteem". But there's more.