When in Doubt, Consider Doing... Nothing

One of the tactics scammers have to make you pay up is to goad, tease, entice, push, or otherwise force you into making a decision quickly, without giving you any time or reason to think things over. They need to get your money TODAY, not tomorrow, not week from now. They will always have a few cliches such as

• Just do it
• No fear
• Early bird gets the worm
• Analysis paralysis
• Too much thinking, not enough doing
• He who dares, wins. 

and so on and so forth. 

You may recognize a lot of these, but those are referring to procrastination and laziness, NOT careful contemplation and evaluation of the factors involved in the decision. 

This is such a prevalent state of mind, philosophers covered it. 

To do nothing at all is the most difficult thing in the world, the most difficult and the most intellectual.—Oscar Wilde

Clearly, scammers don't *want* you to be intellectual, if they want to push you into action (i.e. join their scheme).

They clearly want you to be as stupid as possible. And they want to keep you that way.

How Conman Misrepresent Risk To Defraud You

In any go/no-go decision, your brain evaluates a simple equation:

if (reward > (risk * cost))  then go else no-go. 

So if a conman wants to defraud you, they will exaggerate the reward, and minimize the risk and cost.

But how is the risk minimized? Through neglect to mention, outright lie, and if all else fails, a dare.

Neglect to Mention

I always hear this radio ad... How would you like to invest in a market immune to stock fluctuations, and earn up to 15% annual returns?

It'd be lovely, but clear, this investment has its own set of risks. It's just NOT in the stock market, but in some other market.

You hear "no stock market risk", and you thought you heard "no risk". The risk is elsewhere. It's conveniently left out of the ad... neglect to mention, indeed.

So how *do* you recognize a pyramid scheme? Fitzpatrick shared some tips

Robert Fitzpatrick, who runs Pyramid Scheme Alert, has been warning people about pyramid schemes (and its very close cousin, MLM) for decades. He just penned an article on Seeking Alpha. Here's a quick summary (any bad interpretation is mine)


Recognition is NOT Sign of Legitimacy

Equinox Intl sold water filters and such and was loudly featured on Inc. Magazine as #1 in "Inc 500 fastest growing privately held companies", with 100000 distributors, as of 1996. By 1999, it was shut down as a pyramid scheme by the FTC and various state regulators.


Pyramid Selling Schemes Are Currently Legal in Certain Forms

Pyramid selling schemes are about recruiting people, not about selling. Yet modern MLM companies, even those listed on Wall Street, simply disclose that they may get hit by regulators for being too close to a pyramid scheme (without admitting to be one) but still structure their comp plan to entice people to recruit, not sell. By disclosing that "risk" to the public, they go on operating.


One hit is all it takes

MLM, due to its complexity and volatility, can attract quite a bit of capital and interest. However, MLM's weak foundation means one hit, by ANY regulatory agency, will likely bring down the company. In 2008, then Attorney General Jerry Brown hit YTBI (i.e. Your Travel Biz) with an injunction that it's a chain recruiting business opportunity. While the case resulted in a settlement (the company agreed not to do business in California and paid a fine), that essentially drove the company out of business.

What is MLM to You? Is it selling or recruiting?

MLM means different things to different people. But should they?

MLM, or "multi-level marketing", aka "network marketing", aka "direct selling", should be about selling / marketing. Any recruiting should be secondary and optional. Yet, it seems most MLMs are recruitment heavy.

The CNBC report says that often, the only way to get ahead and make real money is to recruit people.

That has sparked a growing debate over whether Herbalife and other multi-level marketing companies, are essentially pyramid schemes. That's when distributors make more money recruiting other sellers, rather than selling the products themselves, with profits flowing to the very top at the expense of those at the bottom.

sourced from http://www.cnbc.com/id/100364629

Even another MLMer's pitch claimed they only made money by recruiting, not selling. (I added "bold" to two sentences)

The next network marketing business opportunity was in the telecommunications field. We ran hard with this and quickly advanced to one of their Executive Director leadership positions. While making a part-time income in the mid-five figures annually, we realized that almost all of this extra income came from recruitment bonuses. Our monthly residual income from hundreds of team members’ customers telephone usage was in the fifty dollar range. Still not enough to quit our day job.

That is when it hit us. We were nothing more than cheap sales labor for these billion dollar MLM companies. Sure we were in our own business but the terms of our compensation was dictated to us by pay plans which paid us pennies for selling their lotions, potions and pills…or less than pennies when it came to long distance telephone usage.

sourced from zackcovell.com/mlm-jokes

So how widespread is this? How do you really get ahead in MLM? Is it more about recruiting, or selling?

More Analysis of Herbalife's OFFICIAL Rebuttal of Ackman Slam

Português do Brasil: Representação gráfica do marketing multinível (Photo credit: Wikipedia)

In response to Ackman's December 2012 accusation that Herbalife is really a pyramid scheme, Herbalife fired back a full 100+ page rebuttal on January 10th, 2013.

I've previously commented on a summary by someone else via Seeking Alpha. I've now located the original 100+ page presentation via BusinessInsider, and here are some additional reactions.

This "consumer survey" done by Lieberman Associates was a little vague, but you need to read between the lines:

In other words, the survey is not actual consumers of Herbalife products, but rather, random people surfing the web. They are surveyed for their age, gender, income, region, and ethnicity. Those who don't supply enough details are dumped. Then random number of people are selected so that the quota to match the US census was found until they reached 2000 total, then those people's answers are tabulated.

Of the 2000 people surveyed, 72% has heard of Herbalife (positive or negative, we have no idea)

Of the 2000 people surveyed, 5% (100) have actually bought Herbalife product in last 90 days (could be anywhere from a single shake to distributor).

Of that 100, 67% (67) will definitely buy again.

That's 1933 that would not definitely buy.

CNBC's MLM Investigation... What did MLM NOT Tell You?

CNBC, which had a long undercover investigation into MLM, chose to move up their publication schedule when the Herbalife new broke. It has a lot of interesting info, but nothing really new under the sun. However, there are four revelations that stood out:

The more you recruit, the more you make

MLM should be about selling, and thus, most of your income should come from SELLING. However, that does not seem to be how MLMs operate. The CNBC story said:

Many of the people interviewed discovered that selling the products was harder than they thought. After hitting up family and friends to buy products, sellers often resorted to spending hundreds and even thousands of dollars buying sales leads, which sometimes led nowhere.

The real money, they found, is in recruiting others to sell the product, creating what's known as a "down-line" of distributors. The more distributors they recruit, the more money they are likely to make, based in part on a combination of bonuses and commissions. And the higher a distributor is in the pecking order, based on his or her purchases, the more likely he or she is to get a share of the profits.

In other words, selling stuff, which is what MLM should be about, does NOT make money. What really makes money is recruiting other people to do what you *should* be doing: sell stuff. But that was what your upline did... recruit you!

So is MLM really a recruiting game? Or did the system gone "off the rails" somewhere?


Many big MLMs do NOT enforce Amway Safeguard Rules

Amway Safeguard rules are 3 rules that Amway enacted back in the 1970's when it was sued by FTC of being a pyramid scheme. By enacting these rules, it was able to convince FTC that it is NOT a pyramid scheme. Thus, these rules were adopted by all legitimate MLMs (or at least those that *want* to at least appear legitimate). One of the rules is "ten customer rule", that requires each distributor to sell to 10 different retail customers in order to qualify for commissions / bonuses. There's another rule, known as the "70% rule" that distributors must resell at least 70% of their inventory before ordering more products. Many companies do NOT actually audit the rules, but simply rely on the distributors promising ("by signing below, I certify that...") to enforce the rules on themselves.

However, Federal Court had previously ruled, in Webster vs. Omnitrition, that the safeguard rules, unless enforced, may not protect the company. Yet some companies today do NOT enforce the rules at all. From CNBC report again:

For example, distributors are required to certify that a certain amount of product is sold to genuine customers outside of the distribution network. But in a regulatory filing, 10-K, Herbalife said, "We rely on certifications from the selling distributors as to the amount and source of product sales to other distributors which are not directly verifiable by us."

In other words, Herbalife is doing the same thing that Omnitrition got hit on.

What is a Brand's Worth? More Thoughts on Herbalife

Herbalife product brochure Cover
SE Sweden Sverige
(Photo credit: www.goherb.eu)

One of Dan Loeb's rebuttal against Bill Ackman's slam of Herbalife was that a disagreement on the product's "worth".

Ackman made a case that Herbalife's products are overpriced compared to similar products in the market, and is not backed up by enough advertising and R&D. Loeb's counterargument is that the product markup is due to "brand recognition", and basically used Starbucks as an example... that nobody complains about the $3 lattes at Starbucks even though you can make it at home for less than $1. You're paying for the brand.

The more I thought about it, the more Loeb's counterargument missed the mark.

You go to Starbucks not because they serve great coffee. You go to Starbucks for

1) Good selection
2) Good customization (want Splenda instead of sugar? Soy instead of milk?)
3) Speedy service
4) Consistent quality
5) Lots of alternatives, like snacks, salads, and such

All of which are associated with the Starbucks brand. Starbucks have become almost synonymous with coffee.

Is it a valid comparison to Herbalife though? I think not.