Five Things That You Didn’t Know About Multi-Level Marketing (MLM)

[The following guest post is from Lazy Man of Lazy Man and Money is a personal finance blog dedicated to helping people make more money, save more money, and avoid being scammed. In seven years of blogging, he has covered MLM in detail including epic articles on MonaVie and LifeVantage Protandim. The two articles have garnered nearly 10,000 combined comments. In an attempt to make this article "flow" properly, all the citations to the points made in the article can be found here.]

Five years ago, someone tried to sell my wife a $45 bottle of juice. Since that time, I’ve been fascinated about the world of multi-level marketing (MLM) and found many misconceptions about the industry. Unfortunately most of the people in the industry itself are uninformed about its legality and the business prospects. With this article, I want to spread some awareness to the public.

  1. Since MLM has gotten a bad reputation over the years, the industry has come up with a variety of new terms to describe a MLM business. Some of these terms include network marketing, direct selling, and even “community commerce” (by MonaVie). Each of these terms are purposely broad to cover other forms of business besides MLM. It is an attempt to include package MLM as a subset of recognized legitimate business models that have no pyramid scheme questions about them. The terms purposely obscure the notion of multiple levels that define MLMs.
  2. When it comes to MLM, many people think of companies and products such as Tupperware and Mary Kay. Most people think of them as legitimate companies because their products are generally quite good. When you look under the surface things get ugly.The CEO of Tupperware said, “Direct selling left us, because the industry became dominate by buying clubs and what looked like pyramid schemes.” An Investigative journalist has mathematically shown that Mary Kay is “destroying half a million women’s lives every year.” Harper’s Magazine wrote “The women I interviewed for The Pink Pyramid Scheme’ told me stories about struggling to patch together daycare or to survive high-risk pregnancies while working long hours scouting prospects and hosting parties without any guarantee of a sale. Debts mounted, marriages failed. They 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.”These are the examples that supporters of MLM hold out as the best in the industry. Imagine what the typical example looks like.
  3. MLMs can be illegal pyramid schemes. The FTC warns, “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.”
  4. Earlier this year, one MLM company, Fortune Hi-Tech Marketing was shut down by the FTC when it alleged it was an illegal pyramid scheme. It had been operating in the open for over ten years where, according to the FTC, it “defrauded hundreds of thousands of customers out of hundreds of millions of dollars.” More than two years before it was shut down, USA Today published an extensive article on the company asking if it was an “American dream or pyramid scheme?” In the article, the founder and president of the company responded to questions about it being a pyramid scheme by saying, “If it were illegal, I wouldn’t be standing here.”
  5. In a CNBC interview, the former Chairman of the FTC, David Vladeck, admitted that the FTC does not actively evaluate and shut down pyramid schemes, saying “And when we get consumers who are willing to [complain about being defrauded], and the sufficient number of them who are willing to stand up and be counted, then we can do something about it.” Most victims believe that the FTC actively shuts down pyramid schemes (much like the President of Fortune Hi-Tech Marketing’s comment to USA Today). Most victims don’t complain, because they don’t understand that they were victims. They don’t complain and the FTC doesn’t act.This is precisely how a company like FHTM can “defraud hundreds of thousands customers out of hundreds of millions of dollars” over the span of a decade.

Fortunately, the tide is starting to turn. Bill Ackman and HerbaLife’s epic battle on Wall Street has finally started to make people aware of the situation and it start to reach the FTC’s ears. However, HerbaLife is just one of an estimated thousand. What can you do? You can spread this information, write your senators, and file a complaint with the FTC.

4 Responses to Five Things That You Didn’t Know About Multi-Level Marketing (MLM)

  1. I have always wondered about the MLM schemes. It seems there is so much profit in them, as so many people get paid, the product has to cost more.

    But maybe some are legit, and the comparable quality product in a store would cost more, who knows.

  2. The profit generally goes to the MLM company and the 0.5% people who have built a large pyramid “team.”

    The products do cost more, but the reason for it is that those pursing the “business” are generally required to buy it to earn commissions. In cases where they aren’t required to buy it, they have to get others (usually 4 or so) to subscribe to buy the product. This is difficult or impossible to do because of the high prices. In addition, the distributors who lose money by buying expensive product eventually realize it and tend to dump it on Ebay at a discount. It becomes a losing proposition to sell products at the retail price… that’s why so many MLM distributors suggest building the “team”, which is essentially saying, “run a pyramid scheme.”

  3. I will start my comment with a statement “ every coin has two sides”, it is obvious each business has their own plus points and minus points, but especially when it comes to MLM many has to struggle than any profit in the long run. But among such companies, there are even number of successful companies to name a few Amway is one such company who is in business for long.

    • Well, I’m sure a pickpocket would say that their is two sides to their business too… their side and the police’s side. I don’t buy the “two sides to every coin”, unless you are actually talking about coins.

      Amway’s “success” could be debated. Things got so bad, they had to change their name to Quixtar… and then it seems they changed back to Amway again. They also settled a lawsuit in Europe alleging that they are a pyramid scheme for $155 Million dollars: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=arGRzOMOW3X4. I’m of the belief that if you think are in the right, you don’t give away $155 million to make the problem go away. That is a huge amount of money.

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