Consumer Safety & Awareness Part 14

The Truth About Multi-Level Marketing

6uccessLine (spelled with a “6” rather than with an “s)” is a gateway for multi-level marketing. The site says, “Get Paid Working from Home! All you have to do is take a FREE Video Tour and afterwards, we'll call you to see if you have any questions. It's that simple! Just fill out the form above.”

It continues, “Jump onboard the next big Internet wave. Get paid up to five times each and every month. Be mentored by millionaires who have walked the walk. Start living the lifestyle you’ve always dreamed.” If that was not enticing enough, there are testimonials. “Since joining this company at age of 20-years old, I have been empowered to positively impact and motivate people while enjoying a great income and lifestyle from networking.” Yip, that’s the exact quote. The web site’s privacy disclaimer leads right back to the same page. The only way to proceed is to submit your personal information.

“Our opportunity provides the following: Work when you want, where you want, with who you want and even how you want! Get paid monthly residual income, month after month, year after year! Promote yourself up the ranks at your pace! Work part-time or full-time! Time-freedom you never had!” They go on to provide you with services they use. “Our services include the following: Digital Phone Service Wireless/Cellular, Local Calling Service, Long Distance Service, Internet Service.” Gee, I use them too, don’t you?

Other statements fall directly into the pyramid scheme format: “Not only can you work here in the U.S., but you can also build your business all over the world. Who would have thought that a multi-billionaire (Donald Trump) would be recommending people who are looking to be their own boss and start their own business to seriously check out the network marketing industry? Well, it's the truth. Because of the low cost - high return, people who have a strong burning desire can become very successful in a relatively short period of time.”

So what is this “network marketing industry?” If you Google those three words you get 300,000 hits. Most are similar to the one I just presented: join and make a mint without working hard. Fast Company, one of the participants explains what it does this way: “

“Network marketing, or multi-level marketing, is one of the fastest-growing business models of the past few decades. The most prominent examples of direct selling companies include Amway, Avon, Mary Kay, Nu Skin, and Herbalife. In 2003, U.S. total direct selling sales totaled more than $29 billion. Any business model that has achieved this kind of success probably has lessons that all business people can learn from. We define this family of business models as a method of distribution in which people are paid for sales volume generated by people they have recruited into the distribution network.”

“A significant number of network marketers have negative experiences with the industry. That is why 70% of all people who have ever been a direct selling representative are no longer in the industry. One of the things that make the sector most attractive, the low barrier to entry, also creates some its greatest dangers. Many people get into it without the necessary skills to run a successful business. Successful salespeople penetrate an untouched market, and then work to gain a high market share in that market. This is easier to do if everyone in it knows all the players. Why? Because word of mouth in that type of network will spread more rapidly about the value of your product or service.”

"If you think of the whole process like dating, we bring someone to our Web site, and then we ask them to have sex immediately. There has to be some courtship first." One of the delicate aspects of network marketing is that people leverage their personal relationships to sell a product. Although that leverage makes some people queasy, the success of the network marketing model shows that many people do comfortably build multiplex relationships: Their friends are their customers.”

Wikipedia puts it quite simply, “It is sometimes difficult to distinguish legal and reputable multi-level marketing companies from illegal pyramid or Ponzi schemes. MLM businesses operate in the United States in all 50 states and in more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid schemes try to present themselves as legitimate MLM businesses.

The key distinction between these illegal schemes and legitimate MLM businesses is that with legitimate companies a meaningful income can be earned solely from the sales of the product or service to customers who are not themselves enrolled in the scheme. While some of these MLM businesses also offer commissions from recruiting new members, this is not essential to successful operation of the business by any individual member. The distinguishing characteristic is whether the money in the scheme comes primarily from the participants themselves (pyramid scheme) or from sales of products or services to customers who aren't participants in the scheme (legitimate businesses).

The distinction, though, is far murkier. The FTC has found that the vast majority of products sold by multi-level marketing companies fall into a narrow range. They include unproven nostrums that are sold by testimonial rather than by proven scientific studies. Many also sell trinkets as if they are special more expensive objects. Those that have products of value, sell them for a far higher cost than compatible products, thus providing a nice profit for the company and a reasonable income for the lower level salespeople.

Jon M. Taylor, who has an MBA and a Ph.D in business marketing, has spent over 20 years studying multi-level marketing. He states, “Law-enforcement agencies seldom require honest and understandable disclosure of essential information to MLM prospects. I have examined the compensation plans of more than 250 leading MLMs and found that virtually all hide the near-zero odds of making a profit, and in fact almost certain loss. Here are the typical ways they exaggerate to new recruits.”

Misrepresentations and the Truth
They Say -- Presented as a great “income opportunity,” with huge incomes reported for many.
The Truth -- A few are at the top of a pyramid of participants are enriched at the expense of a multitude of downline participants, about 99% of whom lose money.

They Say -- “Everyone can do this” – and earn a good income.
The Truth -- Holding up top earners as examples of what others can do is deceptive. It is unfair to sell tickets when – for nearly everyone – the ship has left the port.

They Say -- Average earnings statements on official reports make MLM’s appear highly profitable.
The Truth -- Reports of average incomes are full of deceptions – (Example - 20 on one page for Nu Skin’s report of “Actual Average Incomes.” The FTC Order for Nu Skin to cease misrepresenting earnings of distributors.)

They Say -- Products can be resold at retail prices for a handsome profit
The Truth -- Products are high priced and sold primarily to recruits to “do the business,” rather than to persons outside the network of participants.

They Say -- Presented as a legitimate business – “not a pyramid scheme”
The Truth -- Product-based MLM companies have been found to be the most extreme of all the types, with the highest loss rates far worse than most games of chance in casinos.

They Say -- Work for only an hour or two a day, and build up a “residual income” that will allow you the “time freedom” to quit your job and spend more time with your family or do whatever you want.
The Truth -- To profit at a recruiting MLM, one must work long hours and be willing to continue to recruit to replace dropouts. One must also be willing to deceive large numbers of recruits into believing it is a legitimate income opportunity. Recruits are only fattening their upline’s commissions. And is there anything immoral about hard work for honest rewards?

They Say -- “The job market is not secure.” The stock market is even shakier. MLM offers a much more secure and permanent (residual) income.”
The Truth -- Multi-level marketing is far more risky than either the stock market or the job market. It even makes gambling look like a safe investment by comparison. Residual income for almost all MLM recruits is a myth.

They Say -- Standard jobs are not rewarded fairly. In MLM, you can set your own standard for earnings.
The Truth -- Fair? Most multi-level marketing compensation plans are weighted heavily towards those who got in early or scrambled to get to the top of a pyramid of participants.

They Say -- “If not legal, the program would have been shut down long ago.” MLM’s have survived legal challenges. The fact that they are still around tells you they are legitimate.
The Truth -- Consumer protection officials are reactive, not proactive. Since victims rarely file complaints, law enforcement seldom acts against even the worst schemes. Victims don’t complain because they blame themselves, and they fear self-incrimination or consequences from or to their upline or downline.

They Say -- If you fail at this program, it is because you failed to properly “work the system.” The Truth -- The system itself is inherently flawed – an endless chain recruitment of participants as primary customers. The vast majority will always lose money.

They Say -- “In any business, one must invest time and money to be successful.” (Committed MLM participants may continue investing thousands, and even tens of thousands of dollars, over years before running out of money or giving up.)
The Truth -- The more one invests in time, money and effort, the more he/she loses – unless willing to deceive enough people to rise to the top of a pyramid of victims. In legitimate companies, sales persons are not expected to stock up on inventory or subscribe to monthly purchases. But in recruiting MLM’s, incentivized purchases (required to participate in commissions and/or advancement) are often merely disguised or laundered investments in a pyramid scheme.

They Say -- Take advantage of “momentum” and “windows of opportunity.”
The Truth -- This kind of appeal has been used for 20 years. The momentum cannot continue indefinitely, leaving those who come in later in a loss position, which is 99% of recruits.

They Say -- The demand for these products is growing at a rapid rate. “They literally sell themselves.”
The Truth -- The sale of products is distributor-driven, not market driven. Most products are sold to new participants to get in on this “ground floor opportunity.”

They Say -- Unlike franchises, business startups, or sales of existing businesses, you can start an MLM business with very little capital.
The Truth -- Multi-level marketing typically bleed new recruits of their funds by inducing them to buy products on a subscription basis, to pay for ongoing training, and otherwise draining them of their resources until they run out of money or give up.

They Say -- You will belong to a great support team. In MLM, you have a whole network of people willing to help you succeed and be your friends.
The Truth -- Some Multi-level marketing companies operate like a cult with an “us vs. them” mentality. Watch how quickly the team ostracizes you when you quit or discover contrary information about the legitimacy of the program.

They Say -- Our products are unique and consumable – perfect for repeat business.
The Truth -- MLM products are typically “potions and lotions.” The secret formulas are a cover for the fact that they are priced too high to compete in standard markets.

They Say -- Products are less expensive because you cut out the middleman.
The Truth -- MLM creates thousands of middlemen, with few real customers outside a bloated network of “distributors”. Typically, they are very expensive, not competitively priced.

They Say -- Our “tools for success” are unbeatable. Sign up for our seminars and conferences, and buy our books and tapes to assure your success in this business.
The Truth -- Hardly anyone makes money selling products, so a lucrative source of income for those at the top is the sale of “success tools” to supposedly assure the success of their downline – who are in fact only further victimized when they buy these motivational items.

They Say -- Some very reputable people are involved in MLM.
The Truth -- This credibility argument is used with many scams. Notables can be bought.

They Say -- Some MLM companies invest in very worthy (and visible) causes.
The Truth -- The mafia supported local charities. And because a bank robber donates some of his take to charity, does that excuse the robbery?

They Say -- You will be helping your friends and family by recruiting them into your downline.
The Truth -- For potential personal gain, you are exploiting those you care about the most. In other words you are squandering your social capital.