MLM Basics: Why are there so many names for MLM?

Have you ever wondered why are there so many different names for multi-level marketing? Here are most of them:

• 

  Network marketing? Multi-level marketing?
  Home-based Franchising? Direct Sales?
  Concentric Marketing? Affiliate Marketing?
  Referral Marketing? Inline Marketing?
  WTFIsIt Marketing?
  (Photo credit: Wikipedia)

  Multi-level marketing, the main term
• Network marketing (most often used alternative)
• Home-based Business Franchising -- WARNING: franchising is NOT multi-level marketing
• Direct sales -- selling direct to consumers, related to but NOT equivalent to MLM
• Affiliate Marketing -- now used by Vemma, often plagued by fraud
• Seller-Assisted Marketing -- mostly a "business opportunity" scam
• Referral Marketing / sales -- marketing via word of mouth; some forms may be illegal
• Dual Marketing / Dual-Level Marketing -- mainly used by Mary Kay, still MLM
• Concentric Marketing -- used by convicted pyramid scheme Burnlounge, replaced "levels" with "circles", but otherwise, the same as MLM
• Consumer Direct Marketing -- the consumer is doing the marketing, potentially illegal if recruitment heavy, as it becomes recruiters recruiting more recruiters. 
• Inline Marketing -- trademarked by "Nutraceuticals Inc", it's still MLM

There are probably a few more I missed. If you spot some new ones not on this list, as a something-marketing, feel free to let me know via the comments.

Any way, why are there so many fancy names for the same thing?  Fraud experts, such as Tracy Coenen say this is an attempt to obfuscate and distract from the bad reputation multi-level marketing had picked up over the decades it had been in existence. However, I think this is also a symptom of how the decentralized nature of MLM became a sin, not a virtue. People are just appropriating terms that sounds SOMEWHAT similar to multi-level marketing, and in some cases, inventing them out of thin air.

First, let us define multi-level marketing... a marketing strategy where the sales force is compensated on multiple levels... direct sales profit, and portion of sales profit achieved by other salespeople they recruited (downlines). Remember, MLM = direct sales + commission based on downline sales.

But first, we have to clear up a few myths...

MLM Dictionary: Pyramid scheme

A pyramid scheme is a type of financial fraud that usually disguises itself as a business, but the participants earn compensation by first paying into the system some sort of fee, in exchange of right to recruit additional participants and sell the product / service, and will be compensated primarily by the number of additional participants they recruit (who also pay the fee). Little if any of the compensation will be based on actual sale of the product or service.

The earliest pyramid schemes, and modern HYIP matrix schemes, are investment frauds, in that you pay in (buy a position), recruit others, then when enough people joined, you are "cycled out" and get the big payout. This has lead to much confusion in modern times where scammers insist on using the original definition of pyramid scheme and insist their business cannot possibly be a pyramid scheme (by the old definition).

In the US, pyramid scheme is defined by the Koscot Test.

Pyramid scheme is related to Ponzi scheme, but pyramid scheme requires participants to recruit in order to be compensated, whereas the Ponzi scheme do not require recruiting.  There are many other differences between pyramid scheme and Ponzi scheme.

Pyramid schemes are known by several names to law enforcement, including franchise fraud, chain referral / endless chain, matrix scheme, and pyramid selling.

Franchise Fraud 

Franchise fraud is mainly used by the US Federal Bureau of Investigations (FBI), it stated:

pyramid schemes — also referred to as franchise fraud or chain referral schemes — are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses

Basically, this sort of pyramid scheme sells the opportunity itself, rather than the products. Thus, it is a disguised pyramid scheme.

Note that franchises are governed by franchise laws, under the purview of the Federal Trade Commission (FTC), which also prosecutes pyramid schemes on the Federal level as consumer fraud.


Chain Referral / Endless Chain

In many US states, including California, "endless chain" is the same as pyramid scheme. The California Office of the Attorney General (OAG) writes:

Millions of Americans have lost money participating in pyramid schemes which are also known as "endless chains" - - because they cannot work unless the chain is endless and, of course, it cannot really be endless because at some point there are no more people willing to join the scheme.... An "endless chain" or an unlawful pyramid is a plan in which a person pays money or buys merchandise for the chance to receive money when additional participants are introduced into the scheme.

Chain referral scheme can also describe a fraudulent sales plan, where you order an item at the given price, but if you can make friends and family to also buy the same item, your price of the item will be reduced (possibly all the way up to free).  However, in reality, the item is vastly overpriced, and the demand for the item is vastly exaggerated. This was prosecuted many times by Postal Inspectors as mail fraud in the 1970's.

Please note that referral sales is ILLEGAL in the US, and if a company offers such a plan... It may be in legal trouble.

MLM Dictionary: Amway Safeguard Rules

English: Honda- Amway（AVCL）Hồ Chí Minh (Photo credit: Wikipedia)

Amway Safeguard Rules represents a set of "rules" (actually concessions) implemented by Amway when it was sued by the Federal Trade Commission (FTC) in 1975. With the reform of the compensation plan where the IBOs (independent business owners, i.e. sales affiliates) are only paid for what they sell and what their downlines well, and the provisions in these rules, FTC reluctantly agreed that Amway does NOT fit the Koscot test for pyramid scheme. This was finalized in 1979, and became the basis for the entire "multi-level marketing" industry.

In the successful 1975 FTC prosecution of "Koscot Interplanetary" and earlier prosecution of "Dare to be Great", FTC specified the four specific problems they have with the pyramid scheme:

• a) Large membership fees (Dare to be Great can cost up to $2000 or more in 1970's!)
• b) Front-end loading (buying a huge "starter kit") and inventory loading (buying so much inventory just so your upline can get the commission)
• c) Programs in which distributors were misled as to the amount of commission they might reasonably earn (misleading income claims), and
• d) Programs in which commissions were not based on the sale of product to the ultimate consumers. (no true retail customer means it's a money circulation game)

SEC had also previously joined in the prosecution of "Dare to be Great" in 1973, as it considered a pyramid scheme similar to a ponzi scheme...  you put in money, and you expect to get more out of it with rather minimal effort, via the rule known as the "Howey Test".

In fact, many states as well as the US Postal Service have also joined in the prosecution of misleading direct sales, esp. those sent through the mail. Some argued that this patchwork of regulations, different from state to state, created such a hostile atmosphere for direct sales that it would have perished...

An infamous player of this era is called Cambridge Plan International, founded by Jack and Eileen Feather. Some of their most infamous products are "Mark Eden Bust Developer" (diet supplement to make women's boobs bigger), "Astro-Trimmer" (diet supplement that shrinks your tummy fat), and their namesake, the "Cambridge Diet", powdered drinks, soup, and such, only 350 calories, developed by Cambridge professor!  Cambridge eventually went bust when it tried to shift from mail order model (prosecuted multiple times for mail fraud) to direct sales, then the direct sales went bubble and burst. It started with 25 reps in 1981, to 150000 reps in 1982...  and declared Chapter 11 bankruptcy in 1983.

Direct sales basically would not have survived had Amway not survived the FTC lawsuit, and it did not survive unscaped. The ruling, 1979 FTC vs. Amway, resulting in a consent decree where the company agreed to several fundamental changes, that became known as the "Amway Safeguard Rules". (Incidentally, Amway also agreed to tone down income claims, and agree not to restrict the power of affiliates to set prices, i.e. price-fixing).

So what are the Amway safeguard rules? It's quite simple... 3 simple steps.

MLM Dictionary: Koscot Test

Koscot Test was a 4 part test that determines whether the business or a scheme is a pyramid scheme. It was established in 1975 in the court case "FTC vs. Koscot Interplanetary" i.e. 86 F.T.C. 1106, 1181 (1975) "Koscot".

Koscot Interplanetary is a part of "Glen Turner Enterprises", ran by Glen W. Turner (who's still around!). Despite the fancy name, Koscot sells "Kosmetics (sic) for the communities of tomorrow!"

Original charges from the FTC was filed in 1972, and the trial started two years later. During the trial, the court created what's known as the Koscot Pyramid Test, often shortened to Koscot Test. It has four parts:

(1) Payment of money to the company;
(2) The participant receives the right to sell a product (or service);
(3) The participant receives compensation for recruiting others into the program;
(4) The compensation is unrelated to the sale of products (or services) to the ultimate user.

Koscot case has been referred to in every suspect pyramid scheme case since.

MLM Dictionary: Autoship

Previously a commenter asked me if I can put up a glossary page where some of the terms I often use are defined. I haven't thought about it for a while, as at the time adding to a page over and over sounds a bit... boring. Then I realized... why not define the term as a blog post, and link to relevant articles if I already discussed it?

Meet the new segment: MLM Dictionary

Today's term:  

Autoship (n)

Autoship refers to the periodic "subscription" of products shipped from company to you and your account is automatically debited. The amount is usually just sufficient to meet the minimum sales quota to stay qualified for certain amount of sales commission or rank level.

DSA code of ethics require DSA members to honor cancellation of autoship as well as accept returns of merchandise with a clearly defined return policy (usually it's 90% of price paid within 6 months). 

Usage: New affiliates are highly encouraged to enroll in "fast start", which includes autoship of 1 unit of product XYZ every month, thus qualifying you for rank of "supervisor" immediately.  

Analysis: Autoship is a somewhat controversial practice that has attracted attention of critics.