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Copyright 1997, Robert L. Fitzpatrick
The multilevel marketing (MLM) field grows, and its
member companies multiply. Solicitations to join seem
to be everywhere. Its promoters would like you to believe
that it is the wave of the future, a business model
that is gaining momentum, growing in acceptance and
legitimacy, and will eventually replace most other forms
of marketing. Many people are led to believe that success
will come to anyone who believes in the system and adheres
to its methods.
Unfortunately, the MLM business model is a hoax that
is hidden beneath misleading slogans. Calling it a "great
business opportunity" makes no more sense than
calling the purchase of a lottery ticket a "business
venture" and winning the lottery a "viable
income opportunity for everyone." MLM industry
claims of distributor income potential, its glorified
descriptions of the "network'" business model,
and its prophecies of dominating product distribution
have as much validity in business as UFO sightings do
in the realm of science.
The very legality of the MLM system rests tenuously
upon a single 1979 court ruling on one company. The
guidelines for legal operation set forth in that ruling
are routinely ignored by the industry. Lack of governing
legislation or oversight by any designated authority
also enables the industry to endure despite occasional
prosecutions by state attorneys general or the FTC.
MLM's economic scorecard is characterized by massive
failure rates and financial losses for millions of people.
Its structure in which positions on an endless sales
chain are purchased by selling or buying goods is mathematically
unsustainable, and its system of allowing unlimited
numbers of distributors in any market area is inherently
unstable. MLM's espoused core business -- personal retailing
-- is contrary to trends in communication technology,
cost-effective distribution, and consumer buying preferences.
The retailing activity is, in reality, only a pretext
for the actual core business, which is enrolling investors
in pyramid organizations that promise exponential income
growth.
As in all pyramid schemes, the incomes of those distributors
at the top and the profits to the sponsoring corporations
come from a continuous influx of new investors at the
bottom. Viewed superficially in terms of company profits
and the wealth of an elite group at the pinnacle of
the MLM industry, the model can appear viable to the
uninformed, just as all pyramid schemes do before they
collapse or are prosecuted by authorities.
The growth of MLM is the result of deceptive marketing
that plays upon treasured cultural beliefs, social and
personal needs, and some economic trends, rather than
its ability to meet any consumer needs. The deceptive
marketing is nurtured by a general lack of professional
evaluation or investigation by reputable business media.
Consequently, there is widespread belief that MLM is
a viable business investment or career choice for nearly
everyone and that the odds of financial success in the
venture are comparable or better than other employment
or business ventures.
MLM's true constituency is not the consuming public
but hopeful investors. The market for these investors
grows significantly in times of economic transition,
globalization, and employee displacement. Promises of
quick and easy financial deliverance and the linking
of wealth to ultimate happiness also play well in this
market setting. The marketing thrust of MLM is directed
to prospective distributors, rather than product promotions
to purchasers. Its true products are not long distance
phone services, vitamins, or skin creams, but the investment
propositions for distributorships which are deceptively
portrayed with images of high income, low time requirements,
small capital investments, and early success.
Here are ten lies I have identified during more than
20 years of observing the MLM marketplace:
Truth: For almost everyone who invests, MLM turns out
to be a losing financial proposition. Fewer than 1%
of all MLM distributors ever earn a profit and those
earning a sustainable living at this business are a
much smaller percentage still.
Extraordinary sales and marketing obstacles account
for much of this failure, but even if the business were
more feasible, sheer mathematics would severely limit
the opportunity. The MLM business structure can support
only a small number of financial winners. If a 1,000-person
downline is needed to earn a sustainable income, those
1,000 will need one million more to duplicate the success.
How many people can realistically be enrolled? Much
of what appears as growth is in fact only the continuous
churning of new enrollees. The money for the rare winners
comes from the constant enrollment of armies of losers.
With no limits on numbers of distributors in an area
and no evaluation of market potential, the system is
also inherently unstable.
Truth: Personal retailing -- including nearly all forms
of door-to-door selling -- is a thing of the past, not
the wave of the future. Retailing directly to friends
on a one-to-one basis requires people to drastically
change their buying habits. They must restrict their
choices, often pay more for goods, buy inconveniently,
and engage in potentially awkward business relationships
with close friends and relatives. In reality, MLM depends
on reselling the opportunity to sign up more distributors.
Truth: Fewer than 1% of all retail sales are made through
MLM, and much of this is consists of purchases by hopeful
new distributors who are actually paying the price of
admission to a business they will soon abandon. MLM
is not replacing existing forms of marketing. It does
not legitimately compete with other marketing approaches
at all. Rather, MLM represents a new investment scheme
couched in the language of marketing. Its real products
are distributorships that are sold through misrepresentation
and exaggerated promises of income. People are buying
products in order to secure positions on the sales pyramid.
The possibility is always held out that you may become
rich if not from your own efforts then from some unknown
person ("the big fish") who might join your
"downline."
MLM's growth does not reflect its value to the economy,
customers, or distributors, but the high levels of economic
fear, insecurity, wishes for quick and easy wealth.
The market dynamics are similar to those of legalized
gambling, but the percentage of winners is much smaller.
Truth: The most prominent motivational themes of the
MLM industry, as shown in industry literature and presented
at recruitment meetings, constitute the crassest form
of materialism. Fortune 100 companies would blush at
the excess of promises of wealth, luxury, and personal
fulfillment put forth by MLM solicitors. These appeals
actually conflicts with most people's true desire for
meaningful and fulfilling work at something in which
they have special talent or interest.
Truth: The use of spiritual concepts like prosperity
consciousness and creative visualization to promote
MLM enrollment, the use of words like "communion"
to describe a sales organization, and claims that MLM
fulfills Christian principles or Scriptural prophecies
are great distortions of these spiritual practices.
Those who focus their hopes and dreams upon wealth as
the answer to their prayers lose sight of genuine spirituality
as taught by religions. The misuse of these spiritual
principles should be a signal that the investment opportunity
is deceptive. When a product is wrapped in the flag
or in religion, buyer beware! The "community"
and "support" offered by MLM organizations
to new recruits is based entirely upon their purchases.
If the purchases and enrollment decline, so does the
"communion.'"
Truth: The commercialization of family and friendship
and the use of"'warm leads" advocated in MLM
marketing programs are a destructive element in the
community and very unhealthy for individuals involved.
People do not appreciate being pressured by friends
and relatives to buy products. Trying to capitalizing
upon personal relationships to build a business can
destroy one's social foundation.
Truth: Making money in MLM requires extraordinary time
commitment as well as considerable personal skill and
persistence. Beyond the sheer hard work and talent required,
the business model inherently consumes more areas of
one's life and greater segments of time than most occupations.
In MLM, everyone is a prospect. Every waking moment
is a potential time for marketing. There are no off-limit
places, people, or times for selling. Consequently,
there is no free space or free time once a person enrolls
in MLM system. While claiming to offer independence,
the system comes to dominate people's entire life and
requires rigid conformity to the program. This is why
so many people who become deeply involved end up needing
and relying upon MLM desperately. They alienate or abandon
other sustaining relationships.
Truth: MLM is largely fear-driven. Solicitations inevitably
include dire predictions about the impending collapse
of other forms of distribution, the disintegration or
insensitivity of corporate America, and the lack of
opportunity in other occupations. Many occupations are
routinely demeaned for not offering"unlimited income."
Working for others is cast as enslavement for "losers."
MLM is presented as the last best hope for many people.
This approach, in addition to being deceptive, frequently
discourages people who otherwise would pursue their
own unique visions of success and happiness. A sound
business opportunity does not have to base its worth
on negative predictions and warnings.
Truth: MLM is not true self-employment. "Owning"
an MLM distributorship is an illusion. Some MLM companies
forbid distributors to carry other companies' products.
Most MLM contracts make termination of the distributorship
easy and immediate for the company. Short of termination,
downlines can be taken away arbitrarily. Participation
requires rigid adherence to a "duplication"
model, not independence and individuality. MLM distributors
are not entrepreneurs but joiners in a complex hierarchical
system over which they have little control.
Truth: The sale of products does not protect against
anti-pyramid-scheme laws or unfair trade practices set
forth in federal and state law. MLM is a legal form
of business only under rigid conditions set forth by
the FTC and state attorneys general. Many MLMs are violate
these guidelines and operate only because they have
not been prosecuted. Recent court rulings are using
a 70% rule to determine an MLM's legality: At least
70% of all goods sold by the MLM company must be purchased
by nondistributors. This standard would place most MLM
companies outside the law. The largest MLM acknowledges
that only 18% of its sales are made to nondistributors.
An FTC trade regulation rule that forces honest disclosure
of potential MLM distributor income is desperately needed.
Toward this end, Pyramid
Scheme Alert has launched a petition drive urging
the FTC to force multilevel companies to disclose the
true income of their distributors. The requested data
would include: (a) the total number of distributors
involved in the company for at least three years (or
since the company's founding if less than three years);
(b) the average incomes of all distributors who have
signed up for a distributorship by percentiles, not
just the ones deemed "active"; and (c) a "weighted"
overall average income of all distributors so that the
extraordinary high incomes of the small number at the
top are not calculated in with vast majority so as to
give a more statistically valid figure.
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Mr. FitzPatrick consults and writes about trends in
manufacturer/distributor relationships. He founded and
is president of Pyramid
Scheme Alert, a consumer advocacy group focused
on exposing and preventing pyramid schemes. He has served
as an expert witness in several cases involving pyramid
schemes and MLM companies. He writings include False
Profits (a book about MLM deception) and "Pyramid
Nation" (a booklet that laments the growth and
"legalization" of pyramid schemes.)
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