Multilevel Marketing (MLM) is also called “Network Marketing (NWM)”, “Direct Selling”, “Personal Retailing” and/or “Consumer Direct Marketing” is:
•Network of distributors that sell retail products through nontraditional distribution systems; is a product-based distribution system.
•Pyramid infrastructure based on recruiting individual distributors of goods and services.
•Recruitment-centered, rather than product-centered.
•Products that are sold through MLM networks most likely cannot be found in traditional retailing markets or sectors.
•Products are mostly beauty and health related; (high-priced “potions and lotions”) lotions, skin care, vitamins and health drinks.
•MLM has expanded into service related industries (i.e. Prepaid Legal Services, ACN, Primerica Financial Services).
The History of Ponzi Schemes, Pyramids and Multilevel Marketing (MLM)
•“Ponzi scheme” began in 1920’s by Italian immigrant named Carlo “Charles” Ponzi. Thus emerged the term “Ponzi Scheme.”
•This scheme was based on paying the earlier investors with the incoming money from the new investors.
•The scheme was not based on actual earnings.
•Although cash rich, Ponzi was not wealthy.
•This scam was financially insolvent; robbing “Peter to pay Paul”
Ponzi took in about $200K per day; paying out 50% ROI to first investors.
•In 1934,Ponzi was later arrested, convicted and deported back to Italy.
•Other Ponzi schemes examples: chain letters and pyramid schemes.
•From 1930’s to 1970’s more Ponzi/pyramid schemes grew in U.S.-classic 1-2-4-8 no-product pyramid schemes (“The Airplane Game”).
•MLM (product-based pyramid scheme) emerged in the late 40’s; Amway Corporation founded in 1949 by Jay Van Andel and Richard DeVos; selling soap door-to-door and recruiting distributors.
•In 1979, FTC Judge ruled that Amway was not a pyramid scheme, assuming “retail rules” were satisfied (10 retial customers, 70% sold or consumed before reorder, refund provisions).
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Key Attributes of a MLM Scheme
1)Recruiting of participants is unlimited in an endless chain of empowered and motivated recruiters recruiting recruiters.
2)Advancement in a hierarchy of multiple levels of “distributors” is achieved by recruitment rather than by appointment.
3)Ongoing purchases (products, sales “tools” and etc.) by distributors are encouraged in order for them to be eligible for commissions and to advance to the business (“pay to play”).
4)The company pays commissions and/or bonuses to more than five levels of “distributors.”
5)For each sale company payout for each payout upline participant equals or exceeds that for the person actually selling the product creating an inadequate incentive to sell the products directly and an excessive incentive to recruit.
Common Behaviors in MLM Marketing:
•Mulitlevel Marketing (MLM) is a direct descendant of Ponzi/ pyramid schemes.
•MLM’ers typically operate as independent contractors, not entrepreneurs.
•Many MLM’ers do not acquire a tax ID to operate as a legitimate business.
•Usually prey on people’s fears during difficult economic times.
•Notorious for deceptive practices in recruiting individuals.
•Utilizes a complex web of deceptions in recruiting participants- - For example, refusal to disclose upfront the firm’s name and pyramidal nature of the scheme. their firm’s name up front.
•Misrepresentation of past and potential earnings is common in recruiting.
•MLM performs well in the Bible Belt, Sunbelt, Intermountain West, California and Northwestern U.S.
•MLM’ers exploit personal relationships: friends, family & business associates.
Who are these People Who Join Multi Level Marketing Programs?
A lot of research has been done and the findings are sad...
In one study, Small Business Development Center (SBDC) counselors characterized participants of MLM as:
•Somewhat gullible, socially unable.
•Not very educated about business.
•High-risk dreamers in search of the entrepreneurial “golden fleece.”
•SBDC refuses to counsel anyone involved with MLM as an entrepreneurial venture.
•SBA refuses to finance any enterprise characterized as MLM (SBA 2006). Behavioral and personality differences between
MLM’ers and real entrepreneurs are:
•Lack of education;
•Lack of business experience;
•Lack of innovation skills;
•Motivated by symbolic aspects of success such as money, lavish lifestyle and identity
•Willingness to take on high risk concerning questionable endeavors.
•Entrepreneurial businesses are product/service centered, not recruitment-centered.
At the end of the day, MLM is a specious business model with many risks and limited benefits. Key things to know:
•Highly labor and time intensive; recruiting is difficult.
•99.9%of all people involved in MLM firms never earn a profit.
•High attrition rate: more than 50% who join MLM quit within 1 year;
•SBDC counselors refuse to assist any client involved in MLM;
•SBA refuses to finance any individual or business that is MLM.
•Often sell commodity-based products; that can purchased through traditional supply chains.
•Too recruitment-centered, not product-centered.
•Unethically exploits and strains personal relationships;
•Products are very difficult in terms of brand loyalty;
•Suffers from bad public image. People have strong distrust of MLM.
•MLMer’s are typically “subcontractors”, “salesmen” not entrepreneurs.
•MLM, aka “Personal Retailing”, does not work in this “Wal-Mart Era.”
•MLM is not technically entrepreneurship.
