Lazy Man and Money

No, Your MLM Health Product Doesn’t “Work.”

by 101 Comments

Stop MLM

[Today we’re continuing to celebrate National Consumer Protection Week with more MLM scam awareness via an article from the past. The FTC has some good advice on MLMs from its recent consumer warnings, “Most people who join MLMs make little or no money. And, if promoters emphasize recruiting as the real way to make money, walk away.”]

I write today’s article in response to the thousands and thousands of comments that I’ve gotten from multi-level marketing (MLM) distributors for various products who make the claim that their products helped with such and such medical condition. Some of these include Le-Vel Thrive, DoTerra Essential Oils, It Works, Enagic Kangen Water, Youngevity, ASEA, Plexus, and Beachbody Shakeology. Those are just the companies/products that are still around.

Some of the popular MLMs that have disappeared are: MonaVie, Jusuru, Nerium, Vemma.

As you can tell, I wrote some in-depth reviews on all those companies/products. I think those are about half of the MLMs that I’ve covered in detail on this blog. Over the last 5 years I stopped covering MLMs for 4 reasons:

  1. They are all 99% the same – Health MLMs copy what makes sales from each other and below can be seen as their marketing blueprint. Once you debunked a dozen of the same scams, it gets kind of boring.
  2. I had two wonderful boys who deserve my time.
  3. I got bored with winning defamation lawsuits. Four companies spent over 2 million dollars in lawyers and court fees. It creates a lot of work and time.
  4. Great organizations like Truth in Advertsing are now around to fill the need.

As Dr. Jonny Bowden has written:

“New Rules: No More Claiming Mona Vie Cures Cancer!

Nor, for that matter, AIDS. Nor lupus, GERD, acne, age spots, arthritis, a balding scalp or sagging libido.

Nope. Sorry.

And lest you think I’m picking on poor MonaVie, the same is true of Xango, Mangosteen, Xocai, Tahitian Noni, and all the other ridiculously overpriced and oversold juices promoted by scientifically illiterate multi-level marketing ‘distributors’ who repeat these claims with the sincerity and earnestness of a Kucinich volunteer.”

Dr. Bowden isn’t alone in citing that these testimonials are bunk. Neil DeGrasse Tyson, perhaps best known for the popular Cosmos show, says such testimonials are “the worst form of evidence that you could possibly bring forth.” The key quote begins around the 1:50 mark, but you should invest the 6 minutes to watch the whole video.



Having received thousands of testimonials like Dr. Bowden mentioned and documented them on this site, I think it is safe to say that the people making these claims are typically those who are scientifically illiterate. They don’t offer up the clinical trials that measure the efficacy of the products. The companies themselves never put together large-scale clinical trials to prove their products are safe and effective. They rely on the “worst form of evidence”, testimonies because the scientific process in place would expose the products as ineffective.

Dr. Bowden wrote that article before the aforementioned Jusuru and Asea were around.

When you include the products that Bowden mentioned, we have 8 products that are all reportedly able to cure or aid with almost every condition known to mankind. I’ll add Xowii, Zrii, and Nopalea to round out to an even dozen. Though some of them have overlapping exotic ingredients like acai, there is no single ingredient common to all of them that could provide a reasonable explanation of healing benefits. Additionally, other products with the same exotic ingredients such as Sambazon (which has organic acai) that are sold through traditional retailers have no reported healing benefits. These 12 products only have three things in common (that I can see): they are digested, they are all sold via MLM, they are all extremely expensive. In addition, each company (I think) has hired a doctor (or a scientific advisory board) to endorse their product, which is something you don’t find with Ocean Spray (a juice like MonaVie, Jusuru) or your standard multi-vitamin (similar to some Youngevity products).

Clearly, the only logical conclusion is that selling a product via MLM bestows some magical properties allowing it to cure nearly anything or everything. Wait that isn’t logical, is it? Well, I can’t think of any other reasons for the claims… or can I?

What’s Behind All These MLM Health Claims

There are a number of factors at play with these claims:

  • The Placebo Effect – This provides the most obvious answer as to why people feel these products help them. The American Cancer Society says that placebos have an effect in 1 of 3 people. Here’s a great 3-minute video illustrating The Strange Powers of the Placebo Effect. This alone explains why people report a product with no known therapeutic value “works”:



    Update: Actually I like this short video better:

    Need a little more convincing? Here’s Dove’s Real Beauty Patches campaign that has 20 million views:

    Note: It looks like Dove took down the original video at https://www.youtube.com/watch?v=EGDMXvdwN5c. Maybe the campaign ended, I found another version of the video here:

    While the product seemed to be effective to the women using it, it had no therapeutic ingredients at all. There’s not really a difference between an MLM miracle cure and this Dove patch. Both have testimonials of people swearing that it works. Neither has the large-scale clinical trials to convince the FDA that the product has a therapeutic effect.

    In Time’s review of the campaign, the author says: “I just can’t believe the thinly-veiled marketing ruse that there is a patch that can make us more beautiful. It makes women seem too gullible, too desperate, and overall helpless against the all-knowing master manipulators at Unilever.”

    Imagine what happens when the product is a juice or a pill and pitched for some internal medical condition. It’s much more believable than Dove’s patch, which gives you an understanding of the master manipulators of MLM.

    Some people try to claim that the placebo effect can’t possibly be a factor because they didn’t believe it would help them. Research shows that even if you know you are taking a sugar pill with no active ingredients, it can make you feel better. So if you find yourself feeling better, you might just want to go to a local CVS and buy the cheapest you can find, maybe a low-dose of vitamin C.

    However, it’s worth understanding that it is well-known and well-researched that Vitamin Supplements Don’t Provide Health Benefits. Of course we knew that studies confirm that you shouldn’t waste money on vitamins for years.

    Need still more evidence of the placebo effect? It seems that 20% of people can “hear” this silent gif:

  • Spontaneous Improvement Regardless of Intervention – Sometimes things get better over time even without intervention. Many distributors are subject to drawing a causation between taking a product and the condition getting better when no such causation exists. The Latin for this fallacy is Post hoc ergo propter hoc, which means “after this, therefore because of this.” This is sometimes referred to as the “Rooster Syndrome”; “believing that the rooster’s crowing causes the sun to rise.”
  • Observer-Expectancy Effect – Since the products are usually pitched with the health claims, one taking the product may have this expectation.
  • Conscious Deception – Let’s call a spade a spade. It’s very difficult to convince people to buy $40 bottles of juice when they are used to spending $3 for juice. One of the easiest ways to close this gap is to pitch the product as an alternative to costlier medicines. I’m not saying that every MLM distributor is dishonest, but let’s agree that some are. What percentage? It’s impossible to say.
  • Price-Placebo Effect – As the Washington Post reported, people who were able to buy identical energy drinks at different prices showed very significant differences in unscrambling words. Even though the researchers made clear that the drinks were identical, those paying more had better performance. The researchers concluded, “The price-placebo effect comes from the fact that you form this global belief that low price equals low quality.” The article also showed, “A wine connoisseur who pays extra feels different from someone who pays less for the same bottle of wine because the larger financial investment increases the motivation to be satisfied.”

    In addition, the LA Times reports ‘Expensive’ placebos work better than ‘cheap’ ones, study finds. An interesting quote:

    “Instead of testing a placebo against an actual drug, they pitted two placebos against each other. The only difference between the two sham treatments was their purported price.”

    So this study shows a direct correlation as to why even a non-salesman, product-user of MLM products could be convinced that the products “work” while even people using known “sham treatments” would report the same.

    Thus when I show that Youngevity products’ prices are 4 times Amazon’s for nearly equivalent nutrition, I get a response from distributors that they “feel” the difference. Let’s go back to the placebo video above (this one). It notes that paying more for a product makes the placebo effect stronger. That’s proof positive that there’s an additive effect to these points.

  • GroupThink – Unless you’ve taken a psychology class or two, you may never have heard this term before. Wikipedia explains it:

    “Groupthink is a psychological phenomenon that occurs within a group of people, in which the desire for harmony or conformity in the group results in an incorrect or deviant decision-making outcome. Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative ideas or viewpoints, and by isolating themselves from outside influences.

    Loyalty to the group requires individuals to avoid raising controversial issues or alternative solutions, and there is a loss of individual creativity, uniqueness, and independent thinking. The dysfunctional group dynamics of the ‘ingroup’ produces an ‘illusion of invulnerability (an inflated certainty that the right decision has been made). Thus the ‘ingroup’ significantly overrates their own abilities in decision-making, and significantly underrates the abilities of their opponents (the ‘outgroup’).”

    In addition Abraham Maslow’s Hierarchy of Needs, puts Belongingness amongst his 8 basic needs of humans.

    Both of these dynamics come into play with MLM as GroupThink inhibits the ability to analyze the opportunity. In fact, MLM proponents often suggest that people can “plug into the system” removing all individual creativity, uniqueness, and independent thinking. MonaVie has used GroupThink to send its distributors a message of “you are either with us or against us” and tell them to unfriend distributors from social networks who have moved on to other companies.

    I’m reminded of the Funny or Die demonstration of how students tricked into drinking nonalcoholic beer exhibited drunk behavior:

    Groupthink at its finest, right?

  • Social Proof From a Trusted Friend – Many of these products are introduced by a friend or family, who are often quite zealous about the product and the “business opportunity.” This enthusiasm coming from a trusted source creates an obvious motivation for wanting the product to “work.”
  • Cognitive dissonance – Cognitive dissonance can be thought of a person altering reality to fit his/her perception. Specifically, the Wikipedia article claims, “After someone has performed dissonant behavior, they may find external consonant elements. A snake oil salesman may find a justification for promoting falsehoods (e.g. large personal gain), but may otherwise need to change his views about the falsehoods themselves.”

    This is the same kind of phenomenon that is found in those predicting the world is going to end, except at least with those people there is a clear expiration on their erroneous belief… when the world doesn’t end. Unfortunately, with MLM health products, there is no clear and obvious end-result that can be pointed to.

Any of the above by themselves would explain the testimonials. However, when you combine them all together, the result of the testimonials is of little surprise. We humans in general are an optimistic bunch and we all want to believe that these products are the solution to our health and financial security for not only us but our friends (by sharing the “opportunity” with them). To use the Washington Post’s words, “our motivation to be satisfied” is significantly increased by the business opportunity and our desire to help our loved ones.

Let’s run some numbers. If the placebo effect is responsible for 1 in 3 people making a claim the MLM products work, what about all the above additional factors layered onto that? I’m going to speculate that pushes it to 60%, perhaps even higher. I admit this is speculation, but I don’t have a research lab and wouldn’t know how to really conduct an accurate experiment combining all these factors. If an MLM gets 10,000 people to try the product, that’s 6,000 people who are going to come away with a positive experience. The other 4,000 will move on with their lives and probably never mention the product again. A good percentage of the 6,000 will join the MLM to make money and spread the word that the products “work.” They explain away the 4,000 by saying something to the effect of “Everyone’s different and nothing works on everyone.” In actuality, the products haven’t been shown to work for anyone.

(And if my speculation of 60% (due to the factors above) is off, the placebo effect alone still counts for 3,333 people thinking it worked and another 6,667 that continued on with their lives never thinking about the product again.)

Nonetheless, that’s where you get thousands of testimonials for any number of unrelated medical conditions across any number of unrelated products that are all sold via the same MLM distribution method. Maybe it’s just me, but I find it a better explanation than, “Whenever a product is delivered via MLM the product gets bestowed with magical healing powers.”

For these reasons, it really is best to avoid the “Just Try Our ‘Product X!'” pitch when it comes to MLM products. You don’t have the time or the money to try all the health products in the world anyway.

It’s easy for distributors to ignore the fact that if any the products worked as promised, the companies would get their products approved as treatments for such medical conditions and make billions of dollars. Many MLM distributors falsely say that such claims can’t be about supplements, but when supplements work, the FDA allows claims to be made. You don’t have to look any further than calcium and vitamin D which have been shown to help with osteoporosis.

The Appeal to Good Health

Each of the companies that I mentioned makes an appeal that it will make you healthier. Since everyone has a vested interest in their own good health, it is an easy sales pitch to make. There are plenty of news reports citing promising supplement studies, which makes some of the products seem credible. The news rarely reports on the subsequent studies that show that the supplements don’t work. Something “not” working isn’t news and doesn’t bring in high ratings by giving people hope. This NY Times article covers this phenomenon well.

It turns out that there’s extensive evidence in studies involving millions of people that you shouldn’t waste your money on supplements. If you think this article is thorough, I implore you to read that one as I think it is just as thorough.

Still, people seem to ignore it and go with anecdotal evidence instead. That kind of evidence can go both ways though. Here’s a Slate article from someone who grew up doing all the healthy things, but didn’t get vaccinated. The result was that she was sick all the time. The article even makes the point that it is anecdotal and decisions shouldn’t be based on it, yet that’s what people are doing with these MLM products all the time. If you took away the anecdotes from all the reasons above, you’d have a product that no one would buy at the exorbitant price points… unless as part of some kind of misleading business opportunity such as the MLM ones that the FTC describes here.

What is “working”?

You may have noticed I put “working” in quotes throughout this article. That’s because that’s the magic word distributors use when leaving comments on my site. “MonaVie works” and “Youngevity works”, etc. The interesting thing is that there is no consistent definition of what constitutes “working” with these products. I often ask them what clinical effectiveness research is behind the product, because as PubMed says:

“Clinical effectiveness research finds answers to the question ‘What works?’ in medical and health care.”

None of the products that I’ve mentioned have clinical effectiveness research to say that it “works” for any medical condition.

But As Long As People Feel Better It’s All Good, Right?

A first glance this appears to make sense. Many supporters of MLMs have said, “Who cares as long as people feel better?”

There are at least three things wrong with this line of thinking:

  • The Economics – What about the people who are paying an expensive price who don’t experience anything special? They might be thinking that they are doing their health a great service, but aren’t. That money could be used for proven health improvements like healthier food or maybe a gym membership. What about the people who actually believe that the product represents a legitimate health breakthrough and invest a significant portion of their life savings in a “business opportunity” where it is extensively shown that 99% of people lose money.
  • Placebos are Dangerous – That article make the point pretty clear.
  • Self-Licensing Causes An Overall Decrease in Health – This Wikipedia article makes a point about study involving supplements:

    “A 2011 study published by researchers in Taiwan indicated that people who take multivitamin pills, especially those who believe that they are receiving significant health benefits from supplement use, are more prone to subsequently engage in unhealthy activities. Participants in the study were divided into two groups, both of which were given placebo pills; one group was correctly informed that the pills contained no active ingredients and the other group was told that the pills were multivitamin supplements. Survey results showed that participants who thought that they had received a multivitamin were predisposed to smoking more cigarettes and more likely to believe that they were invulnerable to harm, injury, and disease… Participants who believed they were given a multivitamin were also less likely to exercise and to choose healthier food and had a higher desire to engage in ‘hedonic activities that involve instant gratification but pose long-term health hazards, such as casual sex, sunbathing wild parties, and excessive drinking… In the ‘multivitamin’ group, the more supplements a participant used, the less likely they were to exercise, and smoking was highest among participants who expressed a conscious belief that multivitamins increased health.”

In my MonaVie article, distributors had erroneously claimed that 2 ounces of MonaVie was equal to eating 13 fruits. They then said that this justified the $40 price for the bottle. As a result, these people were making bad health decisions due to misinformation. That doesn’t even factor self-licensing in.

Are These Claims Even Legal?

It doesn’t seem as if they are. MLM distributors are typically not educated by the companies to follow the FTC guidelines on endorsements. That article states:

“Advertisers still must have adequate substantiation to support claims made through endorsements in the same way they’re required to if they had made the representation directly. In other words, advertisers may not convey through testimonials claims they could not otherwise prove with competent and reliable evidence. But one key revision of particular interest to electronic retailers is the new standard for endorsements that don’t represent the experience buyers can expect from using the advertised product themselves.

…

Despite the unequivocal requirement that the disclosures must be clear and conspicuous, some advertisers flouted this directive by cherry-picking their best-case scenario, touting those results in banner headlines, and dropping an all-but-invisible footnote with the cryptic statement, ‘Results not typical’ or ‘Individual results may vary.’

No more. As the revised guidelines make clear, testimonials reporting specific results achieved by using the product or service generally will be interpreted to mean that the endorser’s experience is what others typically can expect to achieve. That leaves advertisers with two choices: 1) Have adequate proof to back up that claim, or 2) ‘Clearly and conspicuously disclose the generally expected performance in the depicted circumstances.'”

MLM distributors endorsing the products simply aren’t allowed to give a testimonial that they believe that the product helped with their arthritis… unless the MLM company has demonstrated significant scientific proof. As mentioned above, no MLM company has met the requirement to show the FDA that it works. I don’t know of an MLM company that has even tried.

Not only are these claims a violation of the FTC endorsement guidelines, but they are also a violation of The Dietary Supplement Health and Education Act of 1994 (DSHEA) where supplements can’t make claims to help with medical conditions with the notable exception of these well-studied claims such as vitamin D and calcium helping with osteoporosis.

As MonaVie CEO said to Newsweek in 2008 about keeping its million distributors (at the time) compliant with these laws, “It’s next to impossible, like herding cats.” Unfortunately, Newsweek didn’t pose the logical follow-up questions to him, “Why did you unleash the cats in the first place? Why don’t you just solve the problem by distributing through traditional means where there are no false claims?” The solution to the problem that MonaVie caused is obvious, it just doesn’t help sell $40 bottles of juice.

I’ve found that most often MLM companies will cover their ass in public with a blog post saying all the right things, but in private they coach distributors to use these illegal medical claims.

It’s not just a few bad eggs either. It’s commonplace. How common? Truth in Advertising extensively show as many as 97% of nutritional companies have these claims. Here are some of their findings:

“TINA.org’s investigation found that out of 62 member companies selling nutritional supplements, 60 have distributors who are making (or have made) claims that their products can diagnose, treat, cure, prevent, alleviate the symptoms of, and/or reduce the risk of developing a multitude of diseases, which means they are making illegal disease-treatment claims.

TINA.org has cataloged well over a thousand such inappropriate health claims, ranging from cancer cures to disappearing gangrene.

Or as I like to put it, “How else are you going to sell $40 bottles of juice?” Perhaps that the reason why MonaVie collapsed. It was never the juice which was outed to be nothing more than “expensive flavored water” by its inventor.

What About Weight Loss Shakes?

A number of MLMs such as Herbalife, One 24, ViSalus and MonaVie sell some kind of weight-loss shake. These products “work” as expected. That is to say that their nutritional label is likely to be accurate. Beyond the label, there’s nothing that special. You can save a lot of money by going with Slim Fast or Carnation Instant Breakfast Essentials that has essentially the equivalent nutritional content at usually less than 1/3rd the price.

Picking one weight-loss shake over another isn’t going to make or break a diet. It’s everything else, eating well and exercising, that has been shown time and time again to work. People normally don’t stay on shakes their whole lives. Without a change of underlying diet and/or exercise habits the weight comes back. For this reason, I’m not a huge fan of meal replacement shakes.

Final Thought

I’ll let you in on a little secret. When I create Lazymandium, a mix of garlic, turmeric, cacao, and chili powder, and sell it via MLM at a price of 30 pills for $50, it doesn’t “work.” I’m simply using known psychology to exploit you and make your wallet a little lighter for my own benefit.

Originally Published: February 16, 2013.

Is Every MLM a Scam?

by 131 Comments

Stop MLM

[Today we’re continuing to celebrate National Consumer Protection Week with more MLM scam awareness. The FTC has some good advice on MLMs from its recent consumer warnings, “Most people who join MLMs make little or no money. And, if promoters emphasize recruiting as the real way to make money, walk away.”]

A few years ago, I wrote an article asking if Miessense Scam. One of their distributors wrote in an email to me:

I get the impression that people think you are against all direct selling / network marketing companies. Perhaps one of these days, you can take a look at the company I am involved with … although we are direct selling / network marketing, we consider ourselves much different than most of the others … we put an emphasis on obtaining customers more than we do recruiting reps.

When you see all the components of our company, you may just be able to write something positive and shut some of these naysayers up :)

MLMers often use this as criticism of critics. Usually, it is the more simple form, “You just hate MLM.”

No, it’s not that “I just hate MLM”, it’s that I hate consumer fraud and illegal pyramid schemes. If I wrote about how wrong domestic violence was, what kind of nut would respond with, “You just hate domestic violence!”?

That comparison hinges on my opinion that MLM is fraud and an illegal pyramid scheme. Hopefully, I’ll prove that in this article. However, the complexity of the fraud is so expansive that books spanning several hundred pages are written on the topic. I hold that as a higher level of proof than I can provide in this blog post.

My argument is going to be like a horse and water. You can bring the horse to water, but you can’t make him drink. I’ll bring the information to readers, but if they are brainwashed to think MLM is legitimate, I won’t be able to change their minds… even as I cite the FTC. Even as I cite an article designed to help deprogram the brainwashed MLMers.

MLM, Fraud, and Pyramid Schemes

It sounds dangerous to say that every MLM is a scam. However, I have looked at and written about dozens now, there hasn’t been one that has been CLOSE to being legitimate. Is every person in prison guilty of a crime? I can’t be certain for sure, but at some point the pattern is unmistakable. Here’s a sampling of some I’ve looked at:

Le-Vel ThriveIt Works!Plexus
Beachbody Shakeology
DoTerra
Youngevity
Neora
Asea
Vollara

I’ve looked at a lot more than that box above, but many of them are out of business. Some of them have been found by the FTC to be scams after I’ve written about them. Those include AdvoCare, Vemma, and Herbalife.

Many of the MLMs I looked at were confidence games that relied on shady company “doctors” relying on bad science to push their nutritional supplement. That pattern has led to numerous MLMers erroneously claim that their product is a miracle or “helps the body heal itself.” No the MLM products do not do this.

But are MLMs pyramid schemes? I keep going back to what the FTC said in the past:

“Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”

When I look at the people making the top money in MLM, it is because they have massive organizations of recruits and the money is based on their sales to them. In fact, this is the pitch of every MLM I’ve looked at. It is very common for them to show that if you recruit/enroll 3, who recruit/enroll 3, who recruit/enroll 3, etc. you’ll have an organization of hundreds or thousands of people.

I can’t see any way of interpreting the FTC’s words other than these very high-ranking distributors at MLMs are running illegal pyramid schemes. The MLM company itself attempts to shield itself legally from its distributor’s actions, but that argument is like Napster claiming that they didn’t foster illegal activity when users shared music. MLM companies are in a far worse legal position than Napster was because Napster wasn’t directly paying people for the illegal activity and taking a cut of the profits for themselves.

No one has ever been able to explain to me how MLMs could possibly be legitimate.

Their best efforts point to companies that are still running after a number of years. They make the claim, “If it was illegal it would be shut down.” That is what Fortune Hi-Tech Marketing said… before the FTC shut them down for being a rigged game.

It was true for Vemma and AdvoCare that ran their pyramid schemes for a decade or more before being shut down.

There are thousands of MLM companies and the FTC’s budget is very limited. They have a lot of things to do outside of MLM and one single MLM could tie up millions of dollars of that budget in a court battle. There’s a great explanation on Bloomberg about this: An Insider Explains Why the FTC Can’t Put an End to Pyramid Schemes.

A lack of effective law enforcement does not make something legal. If I become really good at stealing old ladies’ purses in a town that has no policemen, it doesn’t mean it is legal because I haven’t been caught.

No one wants to bring up the fact that Bernie Madoff ran a $50 billion scheme or how Enron was a $100 billion-dollar company. These MLM companies are peons in comparison to those schemes that ran unchecked for years and years. It isn’t surprising that many MLMs would be able to fly under the radar.

As much as they try to fly under the FTC’s radar. It feels like every MLM I’ve covered has gotten sued for being an illegal pyramid scheme. You can see a number of them here or this amazing list. There seems to be a new MLM getting into trouble every month.

If a company is legitimate and has a legitimate product, it doesn’t make business sense to associate themselves with MLMs/pyramid schemes. They could simply pay a good commission that would make people want to join without the recruitment/pyramid scheme aspect. Such a simple change would save a legitimate company from taking on the legal risk that could be a death blow to their business.

Since it doesn’t make sense for a legitimate business to take on this unnecessary risk, it stands to reason that companies that purposely choose to take on this risk do it because they know it is necessary for them… and that they aren’t legitimate businesses.

Why It Is Hard or Impossible to Find a Legitimate MLM?

I’ve thought long and hard about why this would be. Why doesn’t anyone any come up with a good MLM? It isn’t really that hard to do. I’ve written How an MLM Can Show It Isn’t an Illegal Pyramid Scheme. I’m happy to consult with an MLM to make them legit.

I believe that MLMs don’t want advice on how to become legit. I think I know why… legit MLMs can’t compete with the illegitimate ones and be profitable.

To understand why that may be the case you have to know that as Harper’s Magazine says:

“[Mary Kay’s consultants] couldn’t have it all because Mary Kay’s business model (like that of any multilevel-marketing enterprise) is designed primarily to profit from, rather than enrich, its workforce.”

It is reinforced by this article showing that MonaVie’s business model is MLM not juice. The product is juice, but no one buys $40 bottles of juice. The business model is getting people interested in a business opportunity that happens to have an admission fee of buying $40 bottles of juice.

The FTC found this to be true of BurnLounge in its pyramid scheme investigation:

Simply put, products sold by a legitimate MLM should be principally sold to consumers who are not pursuing a business opportunity. For good reason, the law has always taken a skeptical view of paying compensation to someone based on the presumed ‘internal consumption’ or ‘personal consumption’ of recruits who are pursuing a business opportunity. When a product is tied to a business opportunity, experience teaches that the people buying it may well be motivated by reasons other than actual product demand.

One of the more vivid examples of this comes from the BurnLounge case. The activities of the BurnLounge defendants included selling packages of music-related merchandise. Before the FTC brought its enforcement action, anyone who wanted to participate in the business opportunity was also required to buy a package. BurnLounge had monthly revenues of over $475,000 from package sales, but those revenues did not reflect consumer demand for BurnLounge’s merchandise. After the FTC filed suit, charging that BurnLounge made deceptive income representations and paid compensation that was tied to recruitment rather than the sale of merchandise, the court entered a preliminary injunction that radically changed BurnLounge’s operations. Under the preliminary injunction, distributors could still buy BurnLounge products if they liked the merchandise, but they could no longer advance in the business opportunity.

What happened to sales? In only two months, they plummeted from over $475,000 to less than $11,000. As it turned out, at most, only a small minority of sales had been motivated by actual product demand…

MLMs compete fiercely for other MLM distributors. They poach distributors from other MLMs all the time. Almost every MLM makes distributors sign an agreement to not work for another MLM. It doesn’t matter if the product they are selling is unrelated. That’s because the people are the product to an MLM company.

This is where MLMs “race to the bottom.”

There has been very little regulation in the industry, so companies and distributors often get away with all sorts of illegal claims. I’ve written about MonaVie juice and being pushed as cancer medication. The Huffington Post has covered it as well back in 2008. Truth in Advertising categorized thousands of these illegal health claims.

Let’s pretend you want to run a profitable legitimate MLM organization. How do you recruit distributors and handcuff what they say in an environment of other companies running illegal pyramid schemes? You can’t. If everyone is allowed to put a pile of aces up their sleeves in a poker tournament and you play an honest game, you aren’t going to be in the tournament very long.

Imagine if there were no drug testing in the NFL. It would be extraordinarily difficult for a clean linebacker to compete for a job against a group that are extensive steroids users. This is precisely the problem that Major League Baseball players had during the steroid era.

This is where I believe MLMs are. Every new MLM has to come up with a selling point to lure distributors. This selling point has increasingly become more and more misleading. It went from selling food containers (Tupperware) to make-up (Mary Kay), to juice/shakes/pills. The juice/shakes/pill MLMs add (bad) science and (illegal) health claims to make the scheme more compelling. Who knows how much worse the deception will go in competition for distributors?

So that’s my answer for the commenters like the one above who says “I get the impression that people think you are against all direct selling/network marketing companies.”

I am against them, but only because I see systemic fraud (as the FTC has warned about) and the lack of active regulatory body despite the FTC’s best efforts.

This article was originally published on March 20, 2015

Why MLM is NOT a Business

by 1,019 Comments

Stop MLM

[Today we’re continuing to celebrate National Consumer Protection Week with more MLM scam awareness. The FTC has some good advice on MLMs from its recent consumer warnings, “Most people who join MLMs make little or no money. And, if promoters emphasize recruiting as the real way to make money, walk away.”]

Multi-level Marketing (MLM) is not a business. Many MLMers say it is a business and act like it is one, but it simply isn’t. It is a wolf in sheep’s clothing.

It’s a tall order for me to prove this. I’m a firm believer that big claims require big support. I don’t believe it is that big of a claim, just the big lie told by the MLM industry. It’s not a coincidence that the average person likely can’t distinguish them from a pyramid scheme.

MLM’s Deceptive Doublespeak

To start, MLM often attempts to disguise itself under other names in hopes that its terrible reputation is not detected. That’s why you see it called “Network Marketing”, “Direct Sales”, or even “Community Commerce.” For now, let’s agree to call it MLM because that’s the only term that explicitly states the “levels” that are the defining characteristic of every MLM. Direct selling could be hosting a yard sale or putting an object on eBay. That is clearly not MLM. Network marketing could refer to an advertisement that you see on ABC/NBC/CBS etc. which is also not MLM.

The naming deception is not one of the reasons it is not a business. I simply needed to address it before we can move forward. If someone tries to recruit you into “network marketing” or “direct sales” it is best to run away from their deception.

Why MLM is Not a Business

With that out of the way, here are just some of the reasons why MLM distributors are not businesses:

  1. Businesses obey the Commandment of Control

    This is something that I first read in The Millionaire Fastlane by MJ DeMarco. (I highly recommend this book.) MLM Distributors do not have control. DeMarco explains:

    I was involved in four MLM companies. Not once do I remember dictating product decisions, research & marketing, marketing restriction, rules, cost analysis or any other activity fundamental to owning a business.

    If you aren’t participating in fundamental activities related to owning a business… you can’t call it a business, right?

  2. Business 101 Excludes MLM
    One of my brilliant readers noted:

    Business 101 teaches that in order for you to be considered a business owner there are three ‘musts.’ You must have control of the product, you must have control of the distribution, and you must have control of the pricing. These people are not business owners, they are recruiters/salespeople.

    Every MLM that I’ve looked at fails these three principles. MLMs claim that distributors set their own pricing, but MLMs set the pricing to their victims excessively high because that’s where they make the money. MLM salespeople can’t charge less or they’ll lose money. They can’t charge more for three reasons:

    1. The products are already excessively high priced from the MLM company.
    2. People can get the products at distributor cost (usually by signing up to be a preferred customer themselves)
    3. The MLM distributor can’t compete on pricing with the other salespeople. They can’t charge more, because they don’t add any value to the consumer.

  3. Businesses obey the Commandment of Entry

    This also comes from DeMarco above. You have to be able to build a moat around your business and prevent others from competing with you. DeMarco again explains:

    “Network marketing, or multi-level marketing (MLM), always fails the Commandment of Entry — unless you own and create the MLM company yourself. If you’re in a room with 2,000 other people who do exactly what you do, you’re fighting stiff probabilities.”

    One thing to keep in mind is that those 2,000 people are taught to recruit more people to compete with your business. There is no moat to protect your business. It is the exact opposite, where they are encouraging more people to compete against you.

    I’ll get to it in a few more bullet points, but this competition is part of the reason why 99% of MLM distributors lose money.

  4. MLM Doesn’t Obey the Laws of Supply and Demand

    McDonald’s won’t let franchise owners open up multiple ones on the same street unless there is sufficient demand. Otherwise, they would compete for few customers and go out of business.

    MLM has no problem with creating millions of distributors even if no one is interested in buying the product. They don’t ensure that there’s enough product demand for the distributor to make money. I often find that plenty of product is available with a simple eBay search.

    If you put ten McDonald’s on the same block, you’d expect them to lose money and go out of business. You wouldn’t blame the individual owners of the McDonald’s franchise. When 99% of MLM distributors lose money, they are the ones that are blamed for the failure.

  5. More than 99% of people LOSE money
    Some MLM companies produce what is called an income disclosure statement so that their distributors can talk about the MLM as if it were a business opportunity. Analysis of these statements show that more than 99% of people lose money in MLM. Need examples? See this or this. I did the analysis for MonaVie a few years long ago. It’s easy to see once you learn to read the fine print in the income disclosure statement. I cover how to do that in my Beachbody article.

    There are a lot of people in MLM bragging about making money. Many of them are “faking it until they make it”. As the FTC says, “blockquotMost people who join MLMs make little or no money.” Some of the people at the top might actually be making money. However, we know that a lottery winner is not the typical representative of what happens when you play the lottery, right? And if those people at the top are making that money from a recruited “downline” it is a pyramid scheme.

  6. MLM is Not like Any Other Small Business
    Some MLMers claim that small businesses generally have a high failure rate. “High” is a relative term… and it doesn’t come close to comparing with MLM.

    The U.S. Small Business Administration has this handy PDF of information. It seems that “7 of 10 survive the first two years” (30% failure rate over two years), “half at least 5 years”, “a third at least 10 years”, and “a quarter stay in business 15 years or more.”

    Let’s compare this to an MLM where 90% are failing every year. I’m being very generous given the proof above that 99% of them lose money. If we start with 100,000 people and 90% fail each year, there are 10,000 people after the first year. In the second year, another 90% fail, and we are left with 1,000 people. That’s a 99% failure in MLM vs. 30% in traditional small businesses in just two years. After 5 years, there is just a single person in MLM. In traditional small businesses, you still have 50,000 of the initial 100,000.

    Do you want a 1 in 100,000 chance of being successful or a 50% chance? If you have to think about this question, please have the self-awareness to realize you are not intelligent enough to be that 1 in 100,000.

  7. It Doesn’t Matter How Hard You Work

    As this article reads:

    MLM supporters will claim that those who lose money just didn’t work hard enough. That’s not true. It’s simple mathematics that guarantees almost everyone will lose money. You can only make money if large numbers of people are recruited below you. That necessarily precludes almost everyone from making money, because they can’t recruit into infinity. As the pyramid below you gets wider, the new participants added have an even smaller chance of making money because there aren’t enough people in the world for everyone to make money.

    It’s like telling someone that they can hit ten holes-in-one consecutively in golf. Anyone can work hard on your golf game day and night, but the circumstances of hitting ten holes-in-one are so extremely difficult, that’s hard to say whether it has ever been done. If someone fails to hit ten holes-in-one, we don’t tell them that they didn’t work hard enough… we simply say that the goal was unattainable to start with.

    MLMers might counter that another person in the MLM attained it. It’s always because they didn’t have to work their way up there competing against everyone else. They were people who started at the top or brought their pyramid scheme from another MLM with them.

I hope you made it through all the above (or at least enough of them to realize that MLM is not a business).

Typically, when people understand that MLM isn’t a business they ask me, “What’s better?” I counter with “What’s worse?” A minimum wage job at McDonald’s is much, much better than spending your time to lose money. You might not like to take a job picking up dog poop, but it is profitable in the first hour.

While those are true, they aren’t very inspiring. A McDonald’s employee has a job… he isn’t running a business either. A dog poop service is a business, but you might not be interested in that business.

So why not start a business on your own? Follow your passion… and see if you can find profitable ideas in that area of interest. Here’s an extremely well-reviewed book to get you started: The Lean Startup

This article was originally published on January 15th, 2016. Some of the links in this article may go to books or products where I would earn a commission if you buy it.

Happy National Consumer Protection Week!

by 2 Comments

Have you ever been wished a happy National Consumer Protection Week? I’m going to go out on a limb and presume you haven’t – until now. Its marketing department (the FTC) is not very well-funded. Valentine’s Day has it easy, getting tons of money from Hallmark, Big Candy, and Big Florist.

Consumer protection is a big deal to me. That’s why I include it in the top menu of the site. Everyone is a consumer, so I feel like we should be invested in helping each other avoid scams whenever we can. When the scammers are out of the system, people have more money to spend on positive outcomes – improving their own lives and those legit businesses.

Consumer protection is a broad term. It’s also not the sexiest personal finance topic. So I’m going to keep this short (many of you have probably already click away).

The FTC is having a National Consumer Protection Week. That page highlights my favorite consumer protection organization, Truth in Advertising. Truth in Advertising does a lot of great work, but I especially like their work on MLM scams.

I’ve been writing about MLM scams since 2007 when someone attempted to sell my wife $45 bottles of MonaVie juice to help with her sleep. I suspected a snake oil scam. However, I didn’t realize that there was a pyramid scheme involved where the participants had to buy so much of the juice themselves to qualify for commissions to refer others into the business. Once I found that out, it because a lot more clear why someone would pay $45 for some very ordinary juice.

Stop MLM

That article got very popular receiving 6000 comments and upsetting MonaVie enough that they threatened to sue me for using their trademark. That obviously went nowhere except to bring more negative attention to themselves. They’ve been out of business for several years now as you might expect.

With the popularity of that article, people started asking me questions about other MLM companies. I love when people ask me questions, so I did my best to look online and see what I could find. It’s extremely easy to find the bad behavior of an MLM company if you know what to look for. The companies don’t hide it very well, because they don’t actively police their salespeople/distribution network. They put up a façade, but it doesn’t do much to curb the fraud that’s baked into every MLM plan that I’ve looked at (at least that I can remember).

I haven’t covered MLMs in a few years. A few companies spent a few million dollars on lawyers and lawsuits. I decided that I didn’t want to spend more than my life savings and all my time defending them. It’s much easier to let the lawyers at Truth in Advertising do that good work. The FTC is also warning people about MLM fraud.

All that said, I do have a few MLM articles that I think are appropriate for this week. Some of the articles have been buried on my site since they haven’t been updated in several years. If MLM scams aren’t your thing, I completely understand. (You probably get enough of it on Facebook, right?) Next week, I’ll get back to more exciting personal finance articles.

MLM Review

Filed Under: MLM Tagged With:

Betting On Zero

by 1 Comment

There’s a lot going on in the stock trading markets nowadays with Reddit’s WallStreetBets group taking on GameStop short sellers. Brokerages like Robinhood and getting stuck in the middle of this unprecedented financial war.

I thought I’d bring back this post from almost 5 years ago about what happened when the script was flipped a bit. Back then a billionaire hedge fund manager, Bill Ackman, spotted what appeared to be a pyramid scheme, the MLM company Herbalife, operating in plain view. He shorted the stock and put forth a detailed presentation for why it was a pyramid scheme. He made it clear all the harm it was doing, especially to women and minorities. This went on for years and the stock went up and down as many people went against him to make a quick buck, just like the WallStreetBets group (but not nearly as coordinated).

Eventually, Bill Ackman was proven correct and the FTC settled with Herbalife with the biggest fine it has ever levied on another company. Alas, as part of the settlement, Herbalife got to continue on and it seems little has changed in the long term.

Today’s post is about the movie, Betting on Zero. If the WallStreetBets/Gamestop situation has your interest, I highly recommend you give it a shot. Remember that sometimes the hedge fund billionaires can use their influence to help people too.

Here is the original post from back then:

“Don’t worry. We are going to get them. We are going to get them all.” – Bill Ackman to me

A couple of weeks ago, I wrote about the idea that someone should remake The Big Short, but from the perspective of MLM/pyramid scheme fraud.

My idea wasn’t very unique. Soon after publishing the article, I realized that there was indeed a movie already out there based on Bill Ackman’s billion-dollar short of the MLM, Herbalife. The movie, Betting on Zero, has been in limited screenings at just a couple of film festivals as the producers work on full distribution. That’s one of the reasons why you probably haven’t heard of it.

Last Thursday Betting on Zero came to my neck of the woods (population 60,000) on its 4th stop. I can’t even begin to calculate the long odds that one of the biggest movies exploring MLMs would be coming to me, one of MLMs biggest critics.

We packed up the family for the long 10-minute drive. I had no idea that I’d be in for much more than a movie, but actually meeting Bill Ackman. First, there was a movie to watch. But even before that, there was controversy about the movie even existing.

The Background behind Betting on Zero

Some people might find the background behind the movie just as interesting as the movie itself.

John Fichthorn, Dialectic Capital co-founder has been following MLM since around 2004, where he claims it was sleazy and harming people. He explains that the industry has co-opted its critics, the internet, the legal system, the government, and “obviously Wall Street”, and the Federal Trade Commission.

This Fitchthorn video on CNBC is amazing:

Fichthorn says it was the FTC’s to protect consumers, and “there was nobody out there doing that anymore.” (Ahem… *waves hand*)

This became a “bee in [Fichthorn’s] bonnet” and he approached filmmaker Ted Braun to tell how consumers are getting harmed in a credible way.

He financed the movie anonymously because the industry is so litigious. It’s easy to understand why someone might want to hide when they are exposing a $150 billion dollar industry that co-opts all the groups he mentioned.

Fichthorn challenged Ted Braun to make a movie that’s positive about the MLM industry and/or positive Herbalife. Given the hindsight of the FTC’s findings, some wonder how Herbalife can even be in business.

Herbalife assumed that Bill Ackman funded the film and cybersquatted on the domain name BettingOnZero.com, to trash it as an “infomercial.” Just this morning (8/15/2016), I was able to see an ad of apparently false information Herbalife was running in Google:


BettingOnZero.Com

I didn’t realize that cybersquatting on domain names was legal nowadays. Even if it wasn’t, that simply validates Fichthorn’s opinion of MLM’s sleazy nature.

Fichthorn came out to show that he had no position in Herbalife’s stock and that he was only interested in the altruistic idea of telling the story to help consumers.

He also explained that Herbalife and its supporters were invited to share their side of the story in the movie, but they declined.

Betting on Zero Reviewed

I’m going to start by giving my wife’s opinion on the movie. Why? She represents what I’d call the average person who knows a little about MLM but hasn’t spent nearly ten years of her life studying it as I have. Also, my other option was to ask my 2 and 3-year-olds… and they would tell you it was an adult movie, not a kid movie.

My wife said it was fantastic! So I’m left to presume that highly-educated people that like documentaries would think the same. And just maybe the average public would too if they weren’t focused on what nonsense Kim Kardashian is up to.

It’s hard for me not to be a little more critical of the film. I appreciate that Ted Braun had to take the journey down the rabbit hole to discover the truth about MLM. I’ve taken that journey with hundreds or thousands of commenters on this website, and it’s getting a little old. I want to show them the destination because people are generally too busy to take the journey.

A large chunk of the movie was about the Wall Street aspect of Herbalife specifically. That’s fair… hey it’s what the movie was supposed to be about. However, it’s easy to get so involved with stock prices that you lose sight of the MLM aspect. I’ve read from many sources that there are around 1200 private MLMs. The Wall Street story is great on its own, but it is an intermezzo compared to the main MLM story.

Maybe for others, the Wall Street hook will be what draws them into learning more about MLM fraud.

I want to praise Ted Braun for showing Herbalife’s defense with videos of the CEO even when Herbalife didn’t appear to want to defend itself. Given the FTC’s evisceration of Herbalife, it feels to me that they had no defense other than bemoan after the fact that it was one-sided.

In any case, readers should refer to my wife’s review rather than my own unfair expectations that suit what I want to see.

My favorite parts in the movie involved me pointing out the people to my wife and how I know them. I don’t know how many other people can watch a movie and point out the times you’ve talked with the “cast.” (I’m not sure the term for people interviewed in a documentary.)

For example, I was able to say to my wife: Robert FitzPatrick is the guy you took a message from while I was walking the dog after I wrote Pyramid Scheme Questions Cause Herbalife to Lose 3 Billion Dollars. I would call back Mr. FitzPatrick a few minutes later and talk with him for around 2 hours.

(Side thought: Few people seem to remember the days (mid-2012) when Wall Street’s David Einhorn asked questions that implied Herbalife might be a pyramid scheme. That was before anyone had any clue that Bill Ackman was interested in shorting Herbalife.)

Lawyer Douglas Brooks had a fairly significant role in the film as well. And he has been very helpful to me. While the LifeVantage/Protandim (LFVN) settlement wasn’t the result I was looking for, he provided support at a critical time of need (and the result wasn’t his fault in any way).

I got to tell my wife that Dr. William Keep was the guy who retweeted my comment on MLMs proliferating illegal health claims just the day before the screening:

After the Movie

After the movie was the best part of the event for me. Filmmaker Ted Braun and Vanity Fair’s William D. Cohan participated in a panel discussion with… Bill Ackman.

I moved up for the main event:

The panel was excellent… I have asked Newport Film if they have footage, but haven’t heard back yet. Braun and Cohen were talking about the film with Cohen playing the role of interviewer. It almost felt like they teasing me having Mr. Ackman just sit there quietly.

The questions went on for a bit, and you could almost feel that this is probably the longest Ackman has gone without a microphone in his hand. At one point, he awkwardly grabbed the microphone to answer one of the questions. I’m not sure he gave it up the rest of the night.

Ackman talked about everything from meeting the Hispanic victims to general MLM behavior. My wife and I clapped particularly loud when he said that these companies sue their critics and try to get them fired from their jobs.

It’s a little more difficult for MLM companies to have me fired since I own my own business. Still, I’ve seen dozens of requests from MLM followers to bombard my old employer and demand that I am fired for how I spend the company time. (It’s laughable since I left that company years before I wrote about MLM.)

One of the other interesting things that Ackman mentioned is that it was only the second time he’s seen the film, with the first being at the Tribeca film festival.

After the Betting On Zero Panel

After the panel, Bill had a few words with the NewportFilm people. I hovered while he finished up with them. Then he turned to me and held out his hand. I thanked him for what he’s doing and explained that I’ve been writing about MLMs for 8 years, have had 3 lawsuits, and probably 7 or 8 cease and desist letters.

I explained that I would love to be in his position to declare an MLM a pyramid scheme like he’s done with Herbalife. Herbalife isn’t dumb enough to sue a billionaire Bill Ackman. No MLM company is dumb enough for that. However, burdening “Lazy Man” with an expensive lawsuit is another story.

The conversation went on for about maybe a minute and a half with me doing most of the talking. Bill explained that this is unfortunately how these companies work. He ended with:

“Don’t worry. We are going to get them. We are going to get them all.”

I realized my website could be the perfect honey pot to trap MLM companies. An MLM company could sue me thinking that they are picking on “Lazy Man” and find themselves having to deal with a bunch of consumer advocates such as Bill Keep, Truth in Advertising, and maybe even Bill Ackman’s or John Fichthorn dollars looking to set a further precedent to protect consumers against MLM scams.

We live in interesting times.