Consumer Guidance From Extensive Research


This research and information on MLM (multi-level or network marketing, etc.) was prepared with the help of top experts over fifteen years by the Consumer Awareness Institute, directed by Dr. Jon Taylor. Quantitative MLM data collection was conducted by SEO expert, Jonathan E. Brand. Opinions vary widely on MLM’s legitimacy. But here you will find independent research on success and loss rates, compensation plans, viability of MLM as a business model, etc.

What went into the research by Consumer Awareness Institute? The investigative research that formed the basis of these reports includes:

  • Analysis of the compensation plans of over 500 MLM programs
  • Extensive comparative research on MLM compensation plans and alternative business models to clarify differences
  • Worldwide feedback from thousands of MLM distributors and ex-distributors in a wide variety of MLM programs over a period of over 15 years
  • Interviews with the top experts in the field
  • Surveys of hundreds of tax professionals where MLM is concentrated – representing millions of tax returns of MLM participants
  • IRS income tax records of top distributors in one state
  • Public court records in MLM cases
  • Household consumer surveys regarding MLM participation
  • Surveys of leading MLM company presidents
  • Private and public financial disclosures by MLM companies
  • Communications with law enforcement officials at all levels
  • Direct experience with prominent MLM companies.

Are there “good” MLM’s – which are not like typical MLM’s?

Probably not – the notion of a “good MLM” may be an oxymoron.

In studying the compensation plans of over 400 MLMs, I have not seen one with a compensation plan that would not be considered a “recruitment-driven MLM.” The compensation plan of a “good MLM”, if such existed, would be very different from typical MLMs that incentivize an endless chain of recruitment of participants as primary customers.

We also see MLM companies that were once focused on legitimate direct sales to end users. However, perhaps because of unfair competition posed by recruiting MLMs, they begin to make tradeoffs that take away from what was once a great program. Some engage in “channel stuffing,” or pressuring participants to buy products they have a hard time selling, leaving them with out-of-pocket costs that are difficult to justify in conducting a profitable sales operation. Or they have steep “pay to play”(minimum quota of purchases) requirements that make them marginally if not technically recruitment-driven MLM’s. Or they may have excessive levels of distributors that give leverage to those at or near the top of their hierarchy of participants, but make it very difficult for those at the bottom to profit except through aggressive recruitment. Or they may actually pay more per sale to up-line participants than to the person selling the products, again creating excessive incentive to recruit and inadequate incentive to sell to the general public. All MLMs we have studied have at least some of these features.

Comments from a licensed private investigator

ATTN: Jon and CAI editors, investigators and consultants.

You guys rock!!

I can’t tell you how useful your site is. Thank you so much for proving that ethics, moral standards and common sense are not lost. I have a friend who gets involved with the newest MLM every time a recruiter asks him to come to a meeting. It has become such an issue that it has affected our friendship. I will refer to your website often to counter the nonsense and unethical behavior that traps people like my friend. I commend and thank you for your efforts in helping people who truly are victims of this economic cancer.

I am a licensed private investigator that would love to help you in any way I can and if I have the time. (My time would be free of charge) Please let me know if there is anything I can do to help further your cause. I will do anything to help the public see these for what they are, because in one way or another they affect all of us. – Jake A.

The DSA Versus Consumers

The DSA (Direct Selling Association) was once an organization dedicated to advancing the interests of what were then legitimate direct selling companies like Fuller Brush, World Book Encyclopedia, Tupperware, Cutco Cutlery, etc. But what has happened in recent decades could be illustrated by a farmer who has pigs and horses for sale. He gets more money for horses, so he attaches horse hairs on the buttocks of the pigs and marches them into the horse corral. Then he  proclaims, “There, you see, they are no longer pigs, but horses because they are in the horse corral.”

Similarly, since multi-level sounded too much like a pyramid scheme, they coined the term “network marketing.” Then, since it sounded even less pyramid-like, they sought to be called “direct selling” companies. So one-by-one they joined the Direct Selling Association and now boldly declare they are direct selling companies.

1. Through the DSA, MLM promoters are working hard to rebrand itself, defining MLM as a form of legitimate direct selling.

The MLM industry has virtually taken over the Direct Selling Association (DSA) and used it for intensive lobbying for anti-pyramid scheme laws which would exempt MLM’s from prosecution as pyramid schemes, at the local, national, and international level. However, research conducted by Dr. Jon Taylor demonstrates that the highest loss rates of all pyramid schemes are product-based pyramid schemes, or recruiting MLM’s. So the effect of the legislation is to make the worst pyramid schemes legal. What MLM promoters and the DSA fail to acknowledge is what legitimate direct selling is NOT – for example, an endless chain of recruiters recruiting recruiters, which they may call sellers, but are in fact their primary customers

The Direct Selling Association (DSA), which is now dominated by the MLM industry and therefore promotes MLM’s agenda, defines direct selling as “the sale of a consumer product or service, person-to-person, away from a fixed retail location.”  On the bases of this definition, MLM’s claim to be direct sales programs. But the definition fails to specify what legitimate direct sales programs are NOT.

2. What legitimate direct sales programs do NOT do:

  • Recruit participants in an endless chain of participants recruiting more participants (as primary customers),
  • Specify advancement by recruitment, rather than by appointment,
  • Require or use powerful incentives for ongoing purchases in order to qualify for commissions and to advance in the scheme,
  • Pay overrides on more levels of managers than are functionally justified (most corporations have found the entire country can be covered in four levels of sales managers), and–
  • Offer excessive incentive to recruit, combined with inadequate incentive to sell products to bona fide customers. In nearly all MLM’s, there are few legitimate customers outside the network of “distributors.”  

The Typical MLM is No More a Legitimate Direct Sales Opportunity than a Pig is a Horse. Read “Does MLM Qualify as a Form of Legitimate Direct Selling?” in Chapter 2 of the ebook The Case against Multi-level Marketing as an Unfair and Deceptive Practice, which can be downloaded from our web site. Anyone who has read the above reports with an open mind will agree that the typical MLM is no more legitimate direct selling than a pig is a horse – no matter how much money is spent positioning it as a horse (below). And just because an MLM is a member of the DSA does not make it a direct sales company any more than marching a pig into a horse corral makes it a horse.

Let’s put it another way. A pig is not a horse, no matter how much money is spent positioning a pig as a horse. And MLMs are not legitimate direct sellers – any more than a pig is a horse!

Let us suppose MLMs were selling primarily to non-participants. With the 15 million or so MLM “sales persons”, you would have someone calling on you every hour or so – and to sell products, not to recruit you!

The “5 Red Flags of a product-based pyramid scheme” which characterize all MLMs were selected on the basis of many years of experiential and comparative research, along with input from the top experts in the field. They were then validated with actual data from MLM company financials, court records, etc.. Serious researchers will want to carefully review the grid that was used for the final selection of the 5 Red Flags. Download “Comparative Analysis of Direct Sales and other Legitimate Distribution Models with No-Product Pyramid Schemes  and Recruiting MLMs, or Product-based Pyramid Schemes.” 

3. The DSA has succeeded in weakening statutes against pyramid schemes in several states.

They have done this to shield MLM’s from prosecution as pyramid schemes, even though recent evidence proves that the most virulent and harmful chain selling schemes are product-based pyramid schemes. Read how the DSA duped nearly everyone in the 2006 Utah legislature SB182 bill passed in Utah, which is a hotbed of MLM activity. See Chapter 11 of the aforementioned ebook.

4. Sales figures supplied by the World Federation of Direct Selling Associations (WFDSA) show increasing losses by participants as MLM grows world wide.

Karl-Heinz Kreiter has done an incredible job of showing how unprofitable direct selling is when the number of MLM participants is factored in – using statistics supplied by the WFDSA. They are condemned by their own numbers! Read the full report – “Outstanding unlimited growth potential for MLM?” at – http://www.mlm-beobachter.de/mlm/mlmwachstum_e.htm

5. Legitimate direct selling, naked pyramid schemes, and gambling all beat MLM!

You may not make much money, but you will lose little or no money in legitimate direct selling. Conversely, the rate of success for MLMs is abysmal. In fact, MLM makes gambling in Las Vegas look like a safe bet in comparison. Even clearly illegal no-product pyramid schemes do far better.  See our report Which Does the Greater Harm?”  for a comparison of loss rates of typical MLM’s with direct selling, no-product pyramid  schemes, and gambling.

 6. Are there no fair network marketing or “Retail MLM” programs?

Fair and equitable distribution of income in compensation plans is virtually non-existent in MLM/network marketing. If such an MLM programs did exist, I would call it a “retail MLM”. In a retail MLM, every participant can earn a decent income selling products without recruiting a large downline, and in fact the incentives would favor retailing over recruiting with no commissions paid on downline purchases. Based on review of compensation plans of approximately 500 MLM programs and their resultant effects, I can say that an MLM would be harmless only to the degree it is not at all like a typical MLM – but more like a standard retail sales model.

The most likely candidates for a legitimate MLM, if such existed, are party plans, which allow a host to actually earn money for a party he/she sponsors. However, most eventually change their compensation plans to reward recruitment over retailing – probably because direct selling is no longer as attractive or competitive in a society with big box chain stores and internet shopping options. So they turn to chain selling of participants as primary customers.

7. The DSA/MLM lobby fought meaningful disclosure in a “business opportunity rule” proposed by the FTC that would have limited any MLM’s ability to deceive the public.

The FTC recently invited public comments on a proposed business opportunity rule that would hopefully protect people from some of the worst business opportunity scams  people complain about – mostly “pyramid marketing schemes.” Since any honest and meaningful disclosure or other reasonable requirements would clip the wings of MLM recruiters, over 17,000 comment letters (including duplicates) were sent to the FTC protesting such rules.  Most of these were form letters supplied by the DSA or its member forms.

Through aggressive lobbying (and likely political contributions and implied large groups of voters), the DSA/MLM lobby got over 80 congressman to sign on to a letter objecting to including MLM in the Rule. The FTC complied and proposed a Revised Rule exempting MLM from having to make such disclosures. So the business opportunities that most typify the reason for the rule was exempted in the Revised Proposed Rule!

Our position is that transparency, including meaningful disclosure of critical information, is essential to protect consumers from MLM. Read Regulatory Capture: MLM as a Flawed Business Model, which can be downloaded free of charge from our web site.

Let me quote from a top legal expert in the field:

“Theoretically, MLM companies pay commissions and bonuses only upon the sale of  products and services by distributors to consumers; i.e., persons who are not part of the distributor scheme. Serious problems arise, however, when the ultimate consumers are in fact comprised mainly of distributors, and retail selling is secondary to recruitment. Such plans are profitable only for a tiny percentage of distributors at the top of the marketing chain. Most distributors in such plans will inevitably lose all or most of their investments. Dr. Taylor has coined the term ‘product-based pyramid schemes’ to describe [MLM] plans, and I believe his term to be dead-on accurate.” —Douglas M. Brooks, Boston attorney specializing in franchising and distribution law and certified class actions against MLM firms


To order printed copies
If you prefer to have us print and mail to you a coil-bound copy of the book, please send us your address and a check or money order in the amount of $65 ($85 for hardbound) to –

Consumer Awareness Institute
291 E. 1850 South
bountiful, UT 84010

For copies of the “Regulatory Capture” report, send $35. Shipment may take about two weeks.
For two-day priority shipment, send an extra $10. 

 

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Disclaimer: These reports are intended purely to communicate information in accordance with the right of free speech. They do not constitute legal or tax advice. Anyone seeking such advice should consult a competent professional who has expertise in endless chain or pyramid selling schemes. Readers are specifically advised to obey all applicable laws, whether or not enforced in their area. Neither the Consumer Awareness Institute nor the authors assume any responsibility for the consequences of anyone acting according to the information in these reports.

Sample Readers’ Comments

Congratulations for a great lifetime of research! Coming from a background of IT and Political Sciences, I like and appreciate the scientific way in which you present information.– Claire Zarb

__________________________

OMG, Dr. Taylor, your research is incredible and a direct hit. I’m trying [to counter this], but this cult is getting stronger as our economic down turn continues to plague us. . . It is sad in this case because this family will pull their son from his sophomore year at University of San Francisco to work full time in this MLM cult. I escorted my family members to this conference and felt like it was a version of the Jonestown revival act episode II. – Karen H., California

__________________________

“Thank you for your great insights and all the work you have put into researching this little-understood subject.  If every [person] interested in joining recruiting MLM’s would just take the time to read your [reports] and educate themselves, they could save a lot of grief.”  —Michael Rawlings

__________________________

“Thank you for your work on MLM!  It is exactly what I’ve been looking for to get a data-based picture of the opportunity I am currently pursuing.  Your logical questions and objective research are exactly what is needed in this industry.” —Donna Horowitz

 _________________

While I was looking for a little bit of information on MLMs, I found your page through Wikipedia. I also read your 44 page paper “The 5 Red Flags: Five Causal and Defining Characteristics of Product-based Pyramid Schemes, or Recruiting MLM’s.” It didn’t take me long to figure out that MLMs were much worse than I had thought. I thought about it from a business and an economic standpoint and I realized that this business model makes absolutely no sense. . . I can’t thank you enough for the information. It may have saved my mother from disaster. I am going to do what I can to spread the message to others. – Noah Abrams

__________________________

I found your paper on the internet – “the five red flags” to identifying product based pyramid schemes. Very informative. I forwarded it to my friends and tried to get them to understand that what they are involved in is unethical at a minimum . . but they just sent me back the published hype – all the typical things you referred to in your paper. These [MLM] companies seem to prey on housewives who don’t understand the basics of market supply and demand. They are so naïve that they cannot see the forest for the trees.


OMG, Dr. Taylor, your research is incredible and a direct hit. I’m trying [to counter this], but this cult is getting stronger as our economic down turn continues to plague us. . . It is sad in this case because this family will pull their son from his sophomore year at University of San Francisco to work full time in this MLM cult. I escorted my family members to this conference and felt like it was a version of the Jonestown revival act episode II. – Karen H., California


“Thank you for your great insights and all the work you have put into researching this little-understood subject. If every [person] interested in joining recruiting MLM’s would just take the time to read your [reports] and educate themselves, they could save a lot of grief.” —Michael Rawlings


“Thank you for your work on MLM! It is exactly what I’ve been looking for to get a data-based picture of the opportunity I am currently pursuing. Your logical questions and objective research are exactly what is needed in this industry.” —Donna Horowitz

The DSA Versus Consumers

The DSA (Direct Selling Association) was once an organization dedicated to advancing the interests of what were then legitimate direct selling companies like Fuller Brush, World Book Encyclopedia, Tupperware, Cutco Cutlery, etc. But what has happened in recent decades could be illustrated by a farmer who has pigs and horses for sale. He gets more money for horses, so he attaches horse hairs on the buttocks of the pigs and marches them into the horse corral. Then he  proclaims, “There, you see, they are no longer pigs, but horses because they are in the horse corral.”

Similarly, since multi-level sounded too much like a pyramid scheme, they coined the term “network marketing.” Then, since it sounded even less pyramid-like, they sought to be called “direct selling” companies. So one-by-one they joined the Direct Selling Association and now boldly declare they are direct selling companies.

1. Through the DSA, MLM promoters are working hard to rebrand itself, defining MLM as a form of legitimate direct selling.

The MLM industry has virtually taken over the Direct Selling Association (DSA) and used it for intensive lobbying for anti-pyramid scheme laws which would exempt MLM’s from prosecution as pyramid schemes, at the local, national, and international level. However, research conducted by Dr. Jon Taylor demonstrates that the highest loss rates of all pyramid schemes are product-based pyramid schemes, or recruiting MLM’s. So the effect of the legislation is to make the worst pyramid schemes legal. What MLM promoters and the DSA fail to acknowledge is what legitimate direct selling is NOT – for example, an endless chain of recruiters recruiting recruiters, which they may call sellers, but are in fact their primary customers

The Direct Selling Association (DSA), which is now dominated by the MLM industry and therefore promotes MLM’s agenda, defines direct selling as “the sale of a consumer product or service, person-to-person, away from a fixed retail location.”  On the bases of this definition, MLM’s claim to be direct sales programs. But the definition fails to specify what legitimate direct sales programs are NOT.

2. What legitimate direct sales programs do NOT do:

  • Recruit participants in an endless chain of participants recruiting more participants (as primary customers),
  • Specify advancement by recruitment, rather than by appointment,
  • Require or use powerful incentives for ongoing purchases in order to qualify for commissions and to advance in the scheme,
  • Pay overrides on more levels of managers than are functionally justified (most corporations have found the entire country can be covered in four levels of sales managers), and–
  • Offer excessive incentive to recruit, combined with inadequate incentive to sell products to bona fide customers. In nearly all MLM’s, there are few legitimate customers outside the network of “distributors.”  

The Typical MLM is No More a Legitimate Direct Sales Opportunity than a Pig is a Horse. Read “Does MLM Qualify as a Form of Legitimate Direct Selling?” in Chapter 2 of the ebook The Case against Multi-level Marketing as an Unfair and Deceptive Practice, which can be downloaded from our web site. Anyone who has read the above reports with an open mind will agree that the typical MLM is no more legitimate direct selling than a pig is a horse – no matter how much money is spent positioning it as a horse (below). And just because an MLM is a member of the DSA does not make it a direct sales company any more than marching a pig into a horse corral makes it a horse.

Let’s put it another way. A pig is not a horse, no matter how much money is spent positioning a pig as a horse. And MLMs are not legitimate direct sellers – any more than a pig is a horse!

Let us suppose MLMs were selling primarily to non-participants. With the 15 million or so MLM “sales persons”, you would have someone calling on you every hour or so – and to sell products, not to recruit you!

The “5 Red Flags of a product-based pyramid scheme” which characterize all MLMs were selected on the basis of many years of experiential and comparative research, along with input from the top experts in the field. They were then validated with actual data from MLM company financials, court records, etc.. Serious researchers will want to carefully review the grid that was used for the final selection of the 5 Red Flags. Download “Comparative Analysis of Direct Sales and other Legitimate Distribution Models with No-Product Pyramid Schemes  and Recruiting MLMs, or Product-based Pyramid Schemes.” 

3. The DSA has succeeded in weakening statutes against pyramid schemes in several states.

They have done this to shield MLM’s from prosecution as pyramid schemes, even though recent evidence proves that the most virulent and harmful chain selling schemes are product-based pyramid schemes. Read how the DSA duped nearly everyone in the 2006 Utah legislature SB182 bill passed in Utah, which is a hotbed of MLM activity. See Chapter 11 of the aforementioned ebook.

4. Sales figures supplied by the World Federation of Direct Selling Associations (WFDSA) show increasing losses by participants as MLM grows world wide.

Karl-Heinz Kreiter has done an incredible job of showing how unprofitable direct selling is when the number of MLM participants is factored in – using statistics supplied by the WFDSA. They are condemned by their own numbers! Read the full report – “Outstanding unlimited growth potential for MLM?” at – http://www.mlm-beobachter.de/mlm/mlmwachstum_e.htm

5. Legitimate direct selling, naked pyramid schemes, and gambling all beat MLM!

You may not make much money, but you will lose little or no money in legitimate direct selling. Conversely, the rate of success for MLMs is abysmal. In fact, MLM makes gambling in Las Vegas look like a safe bet in comparison. Even clearly illegal no-product pyramid schemes do far better.  See our report Which Does the Greater Harm?”  for a comparison of loss rates of typical MLM’s with direct selling, no-product pyramid  schemes, and gambling.

 6. Are there no fair network marketing or “Retail MLM” programs?

Fair and equitable distribution of income in compensation plans is virtually non-existent in MLM/network marketing. If such an MLM programs did exist, I would call it a “retail MLM”. In a retail MLM, every participant can earn a decent income selling products without recruiting a large downline, and in fact the incentives would favor retailing over recruiting with no commissions paid on downline purchases. Based on review of compensation plans of approximately 500 MLM programs and their resultant effects, I can say that an MLM would be hamless only to the degree it is not at all like a typical MLM – but more like a standard retail sales model.

The most likely candidates for a legitimate MLM, if such existed, are party plans, which allow a host to actually earn money for a party he/she sponsors. However, most eventually change their compensation plans to reward recruitment over retailing – probably because direct selling is no longer as attractive or competitive in a society with big box chain stores and internet shopping options. So they turn to chain selling of participants as primary customers.

7. The DSA/MLM lobby fought meaningful disclosure in a “business opportunity rule” proposed by the FTC that would have limited any MLM’sability to deceive the public.

The FTC recently invited public comments on a proposed business opportunity rule that would hopefully protect people from some of the worst business opportunity scams  people complain about – mostly “pyramid marketing schemes.” Since any honest and meaningful disclosure or other reasonable requirements would clip the wings of MLM recruiters, over 17,000 comment letters (including duplicates) were sent to the FTC protesting such rules.  Most of these were form letters supplied by the DSA or its member forms.

Through aggressive lobbying (and likely political contributions and implied large groups of voters), the DSA/MLM lobby got over 80 congressman to sign on to a letter objecting to including MLM in the Rule. The FTC complied and proposed a Revised Rule exempting MLM from having to make such disclosures. So the business opportunities that most typify the reason for the rule was exempted in the Revised Proposed Rule!

Our position is that transparency, including meaningful disclosure of critical information, is essential to protect consumers from MLM. Read Regulatory Capture: MLM as a Flawed Business Model, which can be downloaded free of charge from our web site.

Let me quote from a top legal expert in the field:

“Theoretically, MLM companies pay commissions and bonuses only upon the sale of  products and services by distributors to consumers; i.e., persons who are not part of the distributor scheme. Serious problems arise, however, when the ultimate consumers are in fact comprised mainly of distributors, and retail selling is secondary to recruitment. Such plans are profitable only for a tiny percentage of distributors at the top of the marketing chain. Most distributors in such plans will inevitably lose all or most of their investments. Dr. Taylor has coined the term ‘product-based pyramid schemes’ to describe [MLM] plans, and I believe his term to be dead-on accurate.” —Douglas M. Brooks, Boston attorney specializing in franchising and distribution law and certified class actions against MLM firms