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)

Bad Argument: Distributors can't lose money if they enjoy the product (WTF?!)

One of the contentious issues between MLM proponents and critics is the definition of a "customer" vs. a "distributor".

Logically, the differences are crystal clear:

Customer spends money, buys stuff (from distributors).

Distributor earns money, sells stuff (to customers).

However, in the MLM world, things are never so clear. And one of the arguments proponents often use is "if the distributor enjoys the product for internal consumption, they could not be considered having suffered financial loss".

Or as someone argued on reddit /r/vemma...

Because even those "poor souls" who join the business but don't earn commissions still aren't losing money, just like when you buy anything else in life that you ultimately consume or use you don't think of it as losing money. 

This is bogus logic. Can you imagine a bar owner drank all his own stock of liquor, and need to close the bar, and then tell himself, "I didn't really lose money because I got drunk"?

There's another reason though... consuming the stock prevents distributor from getting a refund.

BREAKING NEWS: Herbalife confirmed it is under investigation by FTC

In a webcast, Herbalife confirmed that it is indeed under investigation by FTC.

http://www.marketwatch.com/story/federal-probe-is-latest-twist-in-herbalife-saga-2014-03-12

BREAKING NEWS: FTC responds to Senator Markey's Letter... with nothing

FTC just made public their response to Senator Markey's letter regarding Herbalife and its investigation.

They took 3 pages to get to the point, which can be roughly summarized as

"We're looking into it, and we can't answer your questions without giving ourselves away. Stay tuned."

Here's Kevin "The MLM Attorney" Thompson of Thompson-Burton discussing the response.

http://thompsonburton.com/mlmattorney/2014/03/01/ftc-responds-to-senator-markeys-letter/

MLM Basics: Why Had Network Marketing Lost Its Love of Retail?

Modern network marketing companies lost their love of retail, and thus its primary purpose.

According to the law and their implied purpose, a network marketing company's purpose is to retail stuff through their affiliates (IBOs, distributors, counselors, salespeople... whatever). However, few if any of modern MLM's verify that the products they sold to their affiliates are actually retailed. Almost all network marketing companies merely require a signed "promise" from the affiliates that they promise to honor the Amway Safeguard Rule #1 "Retail Customer Rule". And without retail, the common affiliates's only income would be to recruit additional affiliates (who also do not retail, since retail is hard). If you extrapolate this out, you have a bunch of salesepeople who sold stuff to themselves, while recruiting yet more people like that. That would make it a pyramid scheme.

The Omnitrition Case and Lack of True Retail

In the Webster vs. Omnitrition case, Webster, an affiliate of Omnitrition, sued Omnitrition of being a pyramid scheme. The company responded by asking the court for a summary judgment, i.e. "Court, please tell me (and whoever sued me) I am NOT a pyramid scheme! I use Amway Safeguard Rules! I can't be!" After looking at the evidence,  the court ruled that if the company (Omnitrition) does not audit actual retail, then the company cannot use this "signed promise" to prove they are not a pyramid scheme. Omnitrition then immediately settled the lawsuit with Webster, as they apparently find paying off Webster, et al. to be easier than actually auditing their retail.

Yet dozen years after Omnitrition case, no major network marketing company that I know of, audits retail.

The implication is mindblowing: virtually all major network marketing companies in the US are in danger of being declared a pyramid scheme, despite their claimed adoption of Amway Safeguard Rules that supposedly separated network marketing from pyramid schemes, because they do NOT audit retail.

When Herbalife was first accused by Bill Ackman to be a pyramid scheme at the end of 2012, Herbalife cannot cite how many retail customers it has. Even now in 2014, Herbalife is STILL citing the retail number it EXTRAPOLATED from surveys it conducted in 2013. Herbalife cited a lot of ancillary numbers, like "amount of products directly shipped to non distributors" (31% IIRC), but it has NO RETAIL NUMBERS.

Herbalife classified their ranks by amount of downlines they have (no downline, single level downline, multi-level downlines), and claimed those with no downline are "customers", and those with single level downline are retailers.

THIS MAKES NO SENSE. By definition, EVERY distributor, no matter if they have downline or not, ARE RETAILERS, if the company was following the Amway Safeguard Rules!

Herbalife also produced survey results in 2013 that claimed 44% of its distributors have NO INTENTION OF RETAIL PROFIT, and 73% PRIMARILY JOINED FOR 25% DISCOUNT.

Why would a company NOT encourage retail, which is at the heart of network marketing?

Because lack of retail enrich those at the very top of the company and the company itself, with minimal effort and expenses needed all the way around (company or affiliate).

Wall Street Runs on Greed... And Conspiracies (so Don't Trust Them)

English: Wall Street sign
on Wall Street
(Photo credit: Wikipedia)

Previously, MLM Skeptic had pointed out the futility of using stock price as a measure of the company's "legitimacy". Wall Street will drive the stock prices higher as long as the company remains profitable, no matter how many people it screwed over.

However, Wall Street also runs on fear. Merely mention of Senator Markey's letter to SEC and FTC asking for an investigation into Herbalife dropped its stock price down more than 10% in a day.

And this fear had turned some stock analysts into conspiracy theorists, looking for someone to blame, and who better than the ultimate stock market boogeyman, and Herbalife "nemesis" Bill Ackman?

Brian Bolan published an essay on Zachs that claimed not only is Herbalife a good bet, he outright accused Senator Markey of colluding (perhaps unwittingly) with Bill Ackman to drive down Herbalife stock price to help with Ackman's epic short that started back at the end of 2012!