Sunday, January 12, 2014

MLM Mythbusting: Does Having a real product prove business is not a pyramid scheme?

One of the most often repeated myths spoken in the network marketing industry is "we have a product, therefore we are not a pyramid scheme". In fact, this position had apparently been adopted by Direct Selling Association itself. Here's one example:

Is this myth confirmed, plausible, or busted? Let's examine a few things:

  • Is there an example (or more) where a proven pyramid scheme (closed by FTC or other authorities) have real, actual, non-woo products? 
  • Does the definition of pyramid scheme precludes the existence of real non-woo products? 

Let's get started.

Question 1:  Is there a proven pyramid scheme (closed by FTC or other authorities) that sold real non-woo products that clearly has "real actual value"? 

Answer 1: Absolutely. Fortune High Tech Marketing (FHTM) was one such, closed in early 2013. FHTM sold everything from DiSH satellite subscription, Frontpoint Home Security, cell phone plans, and so on. From the FTC press release:
According to the complaint filed by the FTC and the state attorneys general, the defendants falsely claimed consumers would earn significant income for selling the products and services of companies such as Dish Network, Frontpoint Home Security, and various cell phone providers, and for selling FHTM’s line of health and beauty products.  Despite FHTM’s claims, nearly all consumers who signed up with the scheme lost more money than they ever made.  To the extent that consumers could make any income, however, it was mainly for recruiting other consumers, and FHTM’s compensation plan ensured that most consumers made little or no money, the complaint alleged.
Dish Network, FrontPoint Home Security, etc. are real companies and their services are real. Yet FHTM is a pyramid scheme.

How about another example? FTC vs. Burnlounge. From FTC press release:
The FTC filed a complaint against BurnLounge in 2007 as part of its ongoing efforts to protect consumers from fraud and deception. BurnLounge had touted itself as a cutting-edge way to sell digital music through multi-level marketing, but music sales accounted for only a small percentage of its sales. The agency charged that BurnLounge recruited consumers from across the country by telling them that participants earned huge incomes. Investors could buy into the BurnLounge organization for prices ranging from $29.95 to $429.95, plus monthly fees. While participants were compensated for music and album sales, most compensation came from recruiting others into the plan.
Burnlounge sells music, online, real licensed stuff too. Yet Burnlounge is a pyramid scheme.

Thus, having a real product (or service) has NOTHING to do whether the company itself is a pyramid scheme or not. These two examples prove that there is no such correlation.

Question 2: Does the definition of pyramid scheme preclude the scheme from having a real product/service? 

Answer 2:  The true definition of a pyramid scheme is the Koscot Test and thus we must examine that. The 4 steps in the Koscot Test are:

(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.

There is nothing here that says the product/service being sold had to be non-existent or have "little or not actual value".

Conclusion: Busted. Having a real / valuable product/service does NOT preclude the scheme from being a pyramid scheme (and vice versa).

But why would DSA have such a view of things? We need to look a little deeper into the issue on how did this mistaken view was formed.

By definition, network marketing is about selling products. Thus, having either no products, or products with little or no retail value is definitely a warning sign that one is not dealing with network marketing, but its illegal cousin, the pyramid scheme.

The problem is when you try to apply the criteria in reverse... That a pyramid scheme *must* have no product or product with little or no retail value.

Let me write it a different way:

  • network marketing is about selling products to people who want to buy them
  • scheme X has no products, or products nobody would buy at the price given
  • scheme X is not network marketing
  • network marketing done illegally is a pyramid scheme
  • scheme X is a pyramid scheme
(technically, this is not quite true as the 4th statement is not always true, but it's true often enough so we'll just let that go for a moment)

The problem is when you turned the statement around, and try to use that one definition "not network marketing", and apply that to "pyramid scheme". 

See the problem? In formal terms, this is called 'denying the antecedant', which confuses cause and effect.

  • I can hear the rain on my roof if it rains
  • I heard no rain on my roof
  • Therefore it did not rain
or in other words, "If P, then Q. Not P, therefore Not Q". 

That's clearly not true, as a drizzle can "rain" and got the ground wet, yet make no sound on the roof. 

If we rewrite the argument, it becomes "If a network marketing company sells worthless products, then company is a pyramid scheme. Scheme X has real products not worthless, therefore it is not pyramid scheme". 

The problem here is the statement itself, "If P, then Q", that the inverse version "Not P, therefore Not Q" is not true.  That's a fallacy, with two real live example that sold real goods, yet closed as pyramid schemes. 

But *why*? The problem here is a very subtle logical flaw... 

You see, the proper version of this logical statement is

"If and only if P then Q. Not P, therefore Not Q". 

In other words, if the ONLY characteristic is P that leads to Q, then if we ruled out P, then it's clearly not Q.  or in other words, if the ONLY characteristic of a pyramid scheme is "worthless product", and the products are NOT worthless, then there is no pyramid scheme. 

But clearly, worthless product is NOT the ONLY characteristic of a pyramid scheme. In fact, it's not even a primary characteristic. Worthless product is just easier to setup and make the pyramid scheme that much more OBVIOUS. A truly dedicated scammer would insist on making the scam UN-obvious.

Having a real retailable product does NOT prove the business is not a pyramid scheme.  It makes it somewhat less likely to be one, but not impossible.

So when next time someone tries to claim 'we have a product, we must be legal', you would know he's talking cow poo. 
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1 comment:

  1. When is the deep explanation about the Amway Rules and the Omnitrition case coming? Can't wait for that article! ;)