Sunday, July 19, 2015

MLM Basics: Is Multi-Level Marketing a Shared Delusion?

In a blogpost back in 2014, author Robert Fitzpatrick, who operates the website PyramidSchemeAlert postulated that Multi-level Marketing, i.e. MLM is really a delusion that redefined various terms to create a myth around itself that cloaked its true nature (as a part of his "Myths of MLM" series). It is an interesting viewpoint, and I can see how he came to that conclusion. The premise can be narrowed down to five separate yet related delusions that MLM participants perpetuate. Fitzpatrick claimed that by accepting the myth jargon, the participants gave the MLM myth power over themselves.

The MLM Myth has five major components, according to Fitzpatrick:

1) MLM is described as "direct selling", but few if any participants actually make retail sales or profits from such.

2) MLM is described as "income opportunity" even though most MLM participants lose money.

3) MLM is described as a "business" even though there is no fair exchange of value... Majority of people lose money.

4) MLM is described as "legal" even though it's merely "have not been proven to be illegal", i.e. presumed innocent

5) MLM is described as "network", "relationship", "personal" even though it disrupts the social norm.

Let us examine each part and see if Mr. Fitzpatrick is right.

Is MLM really Direct Selling? 

From my personal experience, most people in MLM had learned to emphasize the "multi-level" part of MLM rather than the "marketing" part. I have read comments of hundreds of people on BehindMLM and many commenters believe one cannot succeed in MLM without recruiting, and the emphasis should be on recruiting and retaining downlines, rather than product sales. Not that BehindMLM attracts the "typical" MLMer, of course.

It is also interesting that the MLM industry association is called Direct Selling Association, even though the organization actually predated MLM by about 20-30 years. DSA started its life as "Agent Credit Association" in 1910, and its members are companies that employed door-to-door sales, and Avon, then known as California Perfume Company, was a founding member. It wasn't until 1968 that it adopted its current name, Direct Selling Association.  Most people accept that MLM was popularized with California Vitamin Company, later Nutrilite, in the 1930's, which eventually became an Amway brand, founded in 1950's. Thus, MLM came AFTER direct selling, but took over the name direct selling.

For what it's worth, Avon was direct sales up to 2005, when it went multi-level. Didn't seem to help its bottom line though.

There is no doubt that MLM is supposed to have a direct sales component, but in reality, this is rarely put into practice. When the companies themselves count purchases BY the distributors as "sales" for calculating commission, instead of actual retail sales by the associates, there really is little if any incentive to retail. Even Direct Selling Association want to formalize "self-consumption" as a RIGHT of MLM distributors, i.e. they have the RIGHT to NOT retail what they buy, and still have that counted for commission. A couple states even put that into law thanks to lobbying by DSA.

Indeed, in the past decade or two DSA has fought every attempt by various groups to require the companies to document how much retail was actually performed by the industry. Any stats they compile are based on estimates by the companies themselves based on sales to distributors.

In 2013/2014 Herbalife was accused by none other than Bill Ackman to be a huge pyramid scheme. You'd think that Herbalife would simply produce some numbers proving they were retailing their products, and if they didn't, they have a WHOLE YEAR to gather that data, but no, instead, it spent money on hiring lobbyists instead, and hire survey teams, but NO ACTUAL RETAIL FIGURES. And DSA said nothing, because DSA is not a regulatory body... DSA is a lobbying organization for the companies.

Think about it. The Direct SELLING association does NOT want its members to prove they are actually SELLING stuff, through their distributors, to the public. And claims it is a RIGHT for distributors to NOT SELL their stock.

Verdict: MLM is now mostly NOT direct selling, even though it was meant to be.

Is MLM really an income opportunity? 

Proponents of MLM claimed this is a way to earn supplemental income, part-time income, side job, with potential transition to full-time if you find yourself attracted to it.

The REAL pros in the business knows that to make serious income in MLM you need to dedicate two to five YEARS to build your organization and during which you will achieve MINIMAL income.

Thus one can be answered pretty definitively: NO, not for a vast majority of the people involved.

From DSA's own statistics for 2014:
  • 18.2 million people involved in direct selling
  • Estimated product sold 34.47 billion dollars
That's average SALES of... $1894 dollars per person PER YEAR. And that's just revenue, not profit. We haven't taken into account any of the expenses involved either. Even if the person was able to achieve 50% profit, (i.e. $947) AFTER counting expenses (highly unlikely), and spent only two hours a week on this... That's only that's $9.10 per hour, not much above Federal minimum wage of $7.50 an hour.

Furthermore, Herbalife, in their own defense, claimed that 73% of their own distributors DID NOT JOIN FOR INCOME. This is one of their own slides released as rebuttal of Bill Ackman's claim that Herbalife is a pyramid scheme.
Herbalife, in 2013, claimed that 73% of distributors did NOT join for income as primary reason

Thus, MLM can be an income opportunity... for a tiny minority of people who made it to the top. The rest of you are likely to lose money or earn minimum wage, or not even that, as you get no benefits or even income security, unlike a minimum wage job.

Verdict: MLM in general is not income opportunity (with small exceptions)

Is MLM really a business? 

MLM is invariably described as a home-based business you can start with minimal startup costs. Robert "Rich Dad" Kiyosaki, former Amway ambot, is popular with the MLM crowd because he claimed that MLMers are business owners, by owning a piece of the system. He specifically said "network marketing is what I recommend for people who want to move to the B(usiness owner) quadrant". However, there are many problems with this train of thought.

Fitzpatrick points out that if majority of MLM participants lose money even though they invest time and effort, then there is no fair exchange of value, which is a fundamental part of any legitimate business.

But it's simpler than that. A business, per, 3rd definition is:
... a person, partnership, or corporation engaged in commerce, manufacturing, or a service; profit-seeking enterprise or concern.
As we had established in the previous question, if MAJORITY of participants lose money, then can MLM be termed a "business"?

And remember Herbalife claimed that MAJORITY of their distributors did NOT join to seek income? Here, let me show you their slide again:
Herbalife, in 2013, claimed that 73% of distributors did NOT primarily join for income
So instead of distributors... they are actually CUSTOMERS. Instead of selling, they are BUYING.

MLM is a marketing method, not a business model . The last M stands for "marketing", and marketing is meant to sell goods or service.  In answering the first question, we have established that MLM has little if any emphasis on selling product or service. It also is NOT profitable for majority of its participants. The only logical conclusion is MLM has devolved to sell itself instead of products or services.

Marketing designed to sell itself (i.e. recruit more members) instead of products is called a pyramid scheme, aka "endless chain" and is illegal. Which brings us to our next question.

Verdict: while MLM can be a business, evidence suggest that it's far more likely to be an illegal pyramid scheme

Is MLM really legal? 

Most people AUTOMATICALLY assume that MLM is legal, but is it really?

It has been in MLMSkeptic's experience that most MLM participants have NO IDEA what makes a MLM legal or illegal. They generally have some vague (and mistaken) notions that "If it pays, it's not a scam", "it has products or services, therefore it's not a pyramid scheme" or even "if it were illegal the government would have shut them down long time ago". When questioned, few if any can actually name the law or decision that defined the modern MLM.

The case that defined MLM started in 1975, when FTC sued Amway, alleging Amway was a pyramid scheme. In 1979, FTC settled with Amway when Amway agreed to reform its practices so their business model no longer triggers the "Koscot test" which determines if a business is really a pyramid scheme. The reforms became known as the "Amway Safeguard Rules" which other MLM businesses adopted, hoping that it will similarly save them from FTC prosecution. Basically, the argument is "We are like Amway, therefore we are legal."  but the reality is "We are kinda like Amway, and Amway is not illegal (back then)."

Since then there were several cases, at both Federal and State level, about pyramid schemes, including Omnitrition case and Burnlounge case, among many others. California successfully forced out "YTB", alleging it to be a travel-based pyramid scheme many years ago, on a state level.

So what does this have to do with modern MLM, if they all adopted Amway Safeguard Rules? Simple: because schemes evolve. What constituted sufficient safeguards in 1979 may not be sufficient today, with the preponderance of "product-based pyramid schemes", where products are used to disguise the movement of money in a pyramid scheme. On the surface, product-based pyramid scheme (PBPS) looks just like a regular MLM.

So how do you tell PBPS apart from MLM? Pretty simple... How much of their sales is true retail, i.e. sold to the public, not distributors? If a MAJORITY of their sales ends up in the public's hands, they are MLM/DS. If not, distributor is not really distributor, but recruiter-customer, and makes money by recruiting yet more distributors recruiter-customer, making the whole thing an endless chain pyramid scheme.

MLMs that had adopted Amway safeguard rules should have no problem proving it has plenty of retail.  Amway Safeguard rules, one of which, known as "10 retail customer rule", stated that each distributor needs to sell to ten different retail customers a month to qualify for commissions.

So why were DSA and the largest MLM companies, such as Herbalife, resisting any attempt to find out how much products actually were retailed?

The only logical conclusion is MLM had thrown out at least 1/3 of the Amway Safeguard rules out the window a long time ago. MLM IS VERY LIKELY NO LONGER LEGAL.

Verdict: MLM can be legal, but there's no way for you, the average layperson, to know for sure about a particular company, if the company does not release such data, and often, it refuses to even collect such data. And without the Amway safeguard rules, you as distributor are the real losers.

Is MLM really socially disruptive? 

There is no doubt MLM is socially disruptive, because it mixes market norm with social norm, two domains that are normally separated.

You don't know what that means? Hmmm... Ever seen the movie "Indecent Proposal", where a millionaire offers $1 million bucks to sleep with the just married pretty wife? It's been told as a joke since at least 1937, and with various famous personalities substituted. It generally goes like this:
He: Would you sleep with me for $1 million dollars?
She: Sure, why not.
He: How about $5?
She: (Angrily) Who do you think I am?
He: We've already established that. We're just haggling over the price.  
It's humor, albeit somewhat crude, and it's funny because it clashes our social norms with our market norms. The social norm says you can't pay for love or friendship, otherwise you're dealing with a prostitute or sycophant, not true lover or friend.

In a similar idea, your friends who came to help you move, will probably be extremely offended if you try to slip each of them a $5 at the end of the day.  You're trying to respond to a social norm (thanks, guys) with a market norm (Here's $5).

Yet that is exactly what MLM does. Most MLM training will have you start by compiling a "warm list", i.e. people you already know somewhat, even though you may not have contacted them for YEARS, and go after them first. It is not unusual to have strangers who call you up, and claimed they knew you from school 10-20 years ago... then they mention they have this great opportunity they would like to introduce you to, i.e. recruit you. You're thinking "catching up on old times", they instead want to talk $$$$.

No wonder why people find MLM to be polarizing... you love it... or you hate it with a passion, and the "haterz" far outnumber the lovers.

But this has a secondary effect... it turns the participants into social pariahs to be avoided at all costs, which only encouraged them to throw it "all in" to MLM, because "nobody else understands".

Verdict: MLM is extremely polarizing and may turn you into a social pariah among your friends and family, on- or offline, esp. if you learned from people who taught you to go after your friends and family first.

Overall Verdict: Fitzpatrick is mostly right

While there are small exceptions in each of the 5 cases Fitzpatrick brought up, all five are "generally" true (most of the time). To recap:
  • MLM had lost its will to direct selling
  • Most MLM participants lose money and thus cannot be "income opportunity"
  • Thus, MLM cannot be a business, as it neither sells products nor profits participants
  • Which makes MLM an illegal pyramid scheme in most cases
  • and even if it isn't, you risk being turned into social pariah when you join
Thus, MLM can be termed a shared delusion designed to profit the early joiners and the corporate leaders at the expense of the participants. 

There are bound to be people who disagree, so, keep it civil, and I may approve your comment even if I don't agree with you. If all you want to do is spam, vent, or sprout logical fallacies, you may find your comment / reaction being ridiculed. 



    1. Wouldn't surprise me at all, thanks for the tip!

  2. This comment has been removed by a blog administrator.

    1. Can you please repost that without the spam link?

  3. A very interesting read and it really does make you think about the dynamics of MLM.