Are Serial MLMers Insane, by a common cliche definition?

There was a quote often mis-attributed to Albert Einstein:

The definition of insanity is repeating the same mistakes over and over again and expecting different results

However, the quote had been mis-attributed to a variety of people including Albert Einstein, Mark Twain, Ben Franklin, and others. However, its real origin is from a Narcotics Anonymous newsletter dated 1981 (scroll to page 11). Which means this is a quote about addiction.

Which makes it oddly appropriate about MLMers, specifically, about SERIAL MLMers, those people who keep joining one MLM after another, looking for "success" and kept spending money on the products, on his or her upline's advice, always having an excuse (the leader made a mistake, the market wasn't ready for us...)  As they keep doing the same thing over and over, hoping for a different result.

One such example was the "confessimonial" on SaltyDroid... a story by "Roger Wilco". RW described a relationship with a woman who was heavily into MLM, spent well over 200K into various MLMs over 7 or so years, and in the end, chose MLM instead of him, never finding any success.

Addicted people, by certain "colloquial" definition, are "insane" because they are driven by their addiction into making choices that no "ordinary" people would make.

And MLMers, similarly, are "addicted" to MLM that they make choices that no "ordinary" people would make. That is a form of insanity.

MLM Mythbusting: "If I can succeed you can too" is a double myth

One of the most persistent myths in MLM is "If I can succeed you can too", usually spoken by a relatively higher-ranked guy in the MLM. However, this is a VERY MISLEADING statement. The word "can" here is an equivocation.  The IMPLICATION here is a very high percentage (100%?) of people who do the MLM as hard as he does will succeed. The reality is the actual people who succeed like the speaker is only a few percentage of total.

Let's analyze this in two parts... The question of "succeed", then the fallacy of "you can too".

What is definition of "success" in MLM? 

What exactly is "success" in MLM? It's usually to make a comfortable living. Since MLM often claim to be replacing the conventional job and so on... Let's define it as... earn more than US median personal income, how's that?

So what's the US median personal income? According to Wikipedia, that's about 32K as of 2005.  (see graph to right)

So how many people in, say Vemma, makes more than 32K a year?

Good question. They don't know. In fact, NONE of the "mainstream" MLMs know exactly how much money their brand partner / affiliate / consultant / distributor / whatever makes. All the company know is how much commission the company had paid out. (And this is actually bad for the company, as there's no proof of "retail" activity, but they don't really care)

Let's just look at what data's available, okay? So, what's Vemma's stats?

MLM Advice: Stop making irresponsible statements online or offline

Image via CrunchBase

Recently, in a spade of lawsuits and prosecutions, what you can say online has been tightened... for the common good. Shill reviews have been prosecuted as fraud. However, it seems that MLM participants had not gotten the message, and continue to make statements that could potentially get themselves and their company into trouble.

Crack Down on Shill Reviews

Yelp recently sued a lawfirm for posting fake reviews of itself.  There are extenuating circumstances that the lawfirm had previously sued Yelp for not delivering on its promise, so read the whole story with a pinch of salt.

New York Attorney General sued 19 different firms for posting fake reviews... By going as far as creating a fictitious business and going to "reputation management" firms who flood the net with fake positive reviews. The fake reviews are typically written by Filipinos and Bangladeshis and other cheap online labor. Often, the flood of positive reviews drown out negative reviews. Those are typically paid about $1 a review, while the reputation management firm charges hundreds, even thousands of dollars for the "management" of such.

Gartner Media predicted that 10-15% of all online reviews will be fake reviews by 2014.  There are statistics that suggest review sites like AngiesList, Yelp, and so on can contain as much as 25% fake reviews.

But what about MLM reviews and ads and comments?

Bad Argument: "You are biased!" (with bonus Vemma debunking)

A couple months back, I documented the bad argument "Demand for Parity", where defenders of a suspect scheme often react to "negative" information about their scheme with "I demand you cover some POSITIVE aspects of our scheme!"  I have already explained that "demand for parity" is an unethical debate tactic, as there is no proof that the two sides are equal, thus there is no "parity" to be sought. However, recently I ran into a variant of this bad argument, which I'll summarize as "You are biased!" bad argument.

It generally go like this:

A: Magazine _____ has published an article that states MLM ____ may be a pyramid scheme. 

B: That is a biased article! Don't believe them! MLM _____  is not a scam!  I am proof! It paid me! 

Somehow, in B's mind, being biased is mutually exclusive from being true. If it's biased, it cannot be true. That clearly can't be right. He believes that MLM is not a scam. Is his opinion biased? Of course it is! Thus, by his own standard, it can't be true! And of course, he used "it paid me" bad argument to justify his position, which is, of course, false proof.

A biased article can be absolutely true. It just may not be the complete truth. 

What's hilarious (or disturbing) is B then usually launches into a tirade of bad arguments that proves he's far more biased (albeit of a supporting nature) than whoever s/he had charged of being biased. The difference however, is that the defender often end up using various fallacies as defense.

Now let's get to a real example:

Russian SEC Member Calls Herbalife a Pyramid Scheme

Herbalife (Photo credit: netodarkis)

Andrei Volgin, who claims to be a member of the Russian Securities Market Commission (their equivalent of the American SEC), just published an essay on SeekingAlpha, where he declared FLAT OUT that HERBALIFE IS A PYRAMID SCHEME. Not only he's joining Ackman in the short, he thinks it's perfectly ETHICAL thing to do.

You may or may not agree, but it's worth reading his points, and he brought up something I had thus far neglect to mention: the churn rate in MLM.

The "churn rate" of a MLM is the amount of distributors that does NOT choose to continue participating in the MLM. It is sometimes known as the "attrition rate" or "distributor turnover". (see wikipedia)  However, how does it affect whether the business is a pyramid scheme or not? That again, goes back to the matter of "self-consumption".

According to Herbalife's SEC 10-K filing of 2004:

For the latest twelve month re-qualification period ending January 2005, approximately 60 percent of our supervisors did not re-qualify and more than 90% of our distributors that are not supervisors turned over.

This was left in the footnote was one of the tables in the filing, NOT in the main body of text. (One wonders if Herbalife was hoping people will ignore it? But let's put that observation aside...) What does that MEAN? 

It means 60% of the people who were earning multi-level commissions ("supervisor") failed to KEEP earning such, by meeting "sales goals" (of 2500 points for 2 consecutive months, or 4000 points for a single month) just ONCE out of that 12 month period ending January 2005. In other words, 60% of people qualified for "supervisor" once in 2003 (bought at least $4000 of stuff), failed to requalify in 2004 (i.e. buy that much again). 

But here's the shocker: "more than 90% of our distributors that are not supervisors turned over." As it's the SAME SENTENCE, there's only one interpretation: over 90% of "distributors" (from 2003, did not qualify as supervisor with the big purchases) bought NO Herbalife product in 2004 (i.e. turned over). 

The conclusion is simple: Herbalife has very few repeat customers, not enough to support the lowest rank of distributors. 

Which leads to another conclusion: only the people on the top are getting rich because they are attracting a new bunch of distributors every year who were told to buy a starter kit and TRY to sell it to over people (and failing, so they quit, and replaced by a new batch next year). 

Such is a sign of pyramid scheme: if you stop recruiting, you die. 

Bad Argument: You have no CONCLUSIVE proof that this is a scam!

Sherlock Holmes, drawn by Sidney Paget
(Photo credit: Wikipedia)

When discussing the legality of a potential scam, often the defender of such scheme will resort to a "demand conclusive proof", which often takes this form:

A: Acme XYZ is a scam because of ____, ____, and ____

B: That's not conclusive proof! I demand to see CONCLUSIVE proof!   

This is sometimes also known as "demand for smoking gun".

Not all crimes are solved by "smoking gun" evidence. Indeed, it was a Sherlock Holmes story that gave us the expression, and none of Sherlock Holmes' cases have a "smoking gun"... Crimes are solved MOSTLY via deduction. Demand for "smoking gun" proof of fraud is just... idiotic.

Sometimes B will even specify what s/he considers to be conclusive proof, and it may not be "smoking gun", but certain amount of circumstantial proof. However, often the type of proof demanded does not exist (yet).

For example, if the scam is a pyramid / Ponzi scheme, the demand is often "I want to see convictions! investigations!" or sometimes, "I want to see alleged victims telling me it's a scam and they've been cheated out of their money!"

Frankly that's just as idiotic. Investigations are almost always conducted in secret, and fraud victims remain ignorant that they are a victim UNTIL the day either they realized it's a scam, or the government stepped in a shut the whole scam down. Just look at Zeek Rewards... People were lined out outside their office day after day... Until one day US Secret Service showed up and changed their door locks, shutting the whole operation down and froze all related funds. Even a year later, some people can't believe they were scammed by Zeek, and rather believe government ruined a money-making opportunity.

A financial crime that had not been shut down or collapsed will have few if any visible and self-aware victims. Thus, demand for such is about as useful as demanding a sign from God (whatever his name) that the scam is indeed a scam.

Social Cost of MLM: How it exploits group mentality and cult indoctrination

There is a new article over at SaltyDroid which includes a true story by a member whose handle is Roger Wilco, and he has a sad story to tell. However, before I send you off to read it, I need to get my point across: MLM has a very heavy social cost, and some MLM leaders are exploiting their downlines through cult indoctrination and group mentality (whether they are aware of it is a good question) that they basically rose to success on their member's backs.

Much of MLM makes fun of people in regular jobs (which EVERYBODY have at one point or another) as a deadend, wage slave, and so on, while those in MLM will succeed, be their own boss, blah blah blah, which is a psychological attack, on both the company and personal (upline to downline) level to a person's self-worth and self-identity. The overall message is simple: do what MLM says, you no longer think for yourself. All of your thoughts came from the MLM and your upline. You became a parrot and sycophant without even realizing it.

And now the alienation starts.