[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 Thrive||It Works!||Plexus|
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
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