Summary of Findings about MLM (Multi-level Marketing)
By Jon M. Taylor, MBA, Ph.D., Consumer Awareness Institute
After analyzing the compensation plans and claims of over 400 MLMs, summarizing thousands of pages of research, and reviewing applicable federal and state laws, I come to the conclusions listed below in answer to key questions about MLM – based on evidence as reported on our research-based web site – www.mlm-thetruth.com. For more details, see my e-book entitled: “The Case (for and) against Multi-level Marketing: The Complete Guide to Understanding and Countering the Effects of Endless Chain Selling and Product-based Pyramid Schemes.” (Download for free from the web site.)
What is the appeal of MLM? (See Introduction and Chapters 1 and 2 of my e-book.)
1. The “easy money” appeal of MLM is often couched in terms such as “time freedom” (to do what you want), perpetual or “residual income” (like author’s royalties or annuities), and “unlimited income possibilities,” with the success of recruits limited only by their efforts.
2. MLM programs (MLMs) typically sell “pills, potions, or lotions” or other products that are consumable, that have unique appeal, and that can be claimed to deliver benefits not available elsewhere.
3. One sees a strong sense of belonging, or an “us versus them” cultish mentality.
As a business model, is MLM legitimate? (See Chapters 2-11.)
1. MLMs depend on unlimited recruitment of a network of endless chains of participants, and advancement up the levels in the program is only possible through recruitment of a pyramidal organization of participants, or “downline.”
2. As endless entrepreneurial chains, MLMs assume infinite markets and virgin markets, neither of which exists in the real world. MLMs are therefore inherently flawed, deceptive, and unfair – profitable only for those at or near the top (top-level “upline”, or “TOPPs”, for top-of-the-pyramid promoters) – who are often the first ones to join.
3. Worldwide feedback suggests that MLMs are also extremely viral and predatory. MLMs quickly spread from state to state and often to vulnerable foreign markets.
4. MLMs typically finance their operations from purchases by participants who are incentivized to buy products to qualify for commissions and to advance to higher levels in the pyramid of participants. With the possible exception of some party plans, the majority of sales are typically to participants.
5. Most of the commissions are paid to those at or near the top levels in the hierarchy of participants (TOPPs). It is this extreme concentration of commissions paid to TOPPs that motivates them to work tirelessly to expand and maintain their downlines, thereby assuring the MLM’s survival and growth. MLMs become even more top-weighted with five or more layers in their compensation plans – more than are functionally justified.
6. It is true that some MLM founders have sought to design an MLM program that is honest and fair to all participants. The likelihood of accomplishing this depends on several factors, including primary incentives to retail products, excluding override commissions for sales to participants in the program, no minimum purchase requirements to qualify for commissions or advancement, and limitations on the number of levels on which commissions can be paid to three or four at most. (See "What would a good MLM look like" in Chapter 2)
7. I have challenged regulators to identify any “business opportunity” that is generally more unfair, deceptive, viral, and predatory than MLM. None have met the challenge.
8. Typically, MLM products are unique (making it difficult to compare with alternative products), consumable (to encourage repeat purchases), and priced higher than products sold elsewhere – to pay commissions on many levels of participants.
9. The villain in MLM abuse is not so much the leaders as a flawed system built on endless chains of recruitment of participants as primary customers. MLMs enable the transfer of money from a rapidly churning supply of new recruits to TOPPs, founders, and the company itself.
10. MLM typically promises what it cannot deliver. To be successful, MLM promoters depend on a litany of deceptions, including much self-deception. Misrepresentations regarding products, income potential, and legitimacy are commonplace in MLM.
What are the effects of MLM on participants and on society? (See Chapters 3-9.)
1. Based on available company data, approximately 99.6% of MLM participants lose money – spending more on company purchases and minimal operating expenses than they receive in commissions from the company.
2. Those who lose the most are those who invest the most, having accepted deceptive claims that the MLM is a legitimate income or business opportunity, and having continued to invest in the vain hope of eventually profiting handsomely.
3. Based on statistics from the Direct Selling Association, the chief MLM lobbying organization, aggregate losses (which the DSA calls “sales”) suffered by tens of millions of victims exceed tens of billions of dollars a year in the U.S., with far greater losses worldwide. MLMs often plunder vulnerable populations overseas.
4. Some MLM participants lose more than money. Divorces, rifts among extended families, and even addiction to MLM can result from excessive commitment to MLM – which can become a lifestyle. “MLM junkies” – who have internalized its “easy money” appeal – may find it difficult to work again in a normal work setting.
5. MLM is an unfair practice that siphons money away from legitimate businesses.
Is MLM legal? If not, what explains the inaction by law enforcement, and what actions can be taken by and for consumers to protect them? (See Chapters 9-12.)
1. The case can easily be made that virtually all MLMs are violating some federal and state laws, although law enforcement seldom acts against them – partly because victims of endless chains rarely file complaints. For the same reason (as well as financial support from MLMs and the DSA), the Better Business Bureau seldom issues a negative report on major MLMs. The media are also largely silent.
2. Most MLM participants spend no more than a few hundred dollars in products and services and then drop out. In spite of having spent more than they received, few blame the company for their losses – even large losses. They have been taught that they (not the company) are responsible for any failures.
3. The silence of victims of MLMs is also explained by the fact that in every endless chain, major victims are also perpetrators, having recruited friends, relatives, and others in a vain effort to recover costs of participation. So they fear self-incrimination if they file a formal complaint, and they fear consequences from or to those they recruited – which could include close friends or family members.
4. Consumers must get informed, and regulators should insist that crucial information be made available to prospects to make informed decisions about participation, such as average commissions from – and payments to – the company for all participants.
5. To get the attention of law enforcement, victims must complain to authorities.
Defining MLM (Chapter 2):
Recruitment-driven MLMs (which is virtually all MLMs) can be distinguished from legitimate businesses by the following characteristics in their compensation plans:
- They assume unlimited recruitment of endless chains of participants.
- Participants advance by recruitment, rather than by appointment like other businesses.
- In prder to qualify for commissions or advancement, participant must make minimum incentivized or “pay to play” purchases of products or services.
- Most of the override commissions paid by the company are paid to founders and those at or near the top of a pyramid of participants.
- For most MLMs, company payout is to five of more levels of participants.
I conclude with likely the only accurate, research-based, and consumer-friendly definition of the business model labeled “multi-level marketing”:
Multi-level marketing (MLM) is a purported income opportunity, in which persons recruited into a network of participants make ongoing purchases of products and services, and recruit others to do the same, and they still others, etc. – in endless chains of recruitment and personal consumption, in order to qualify for commissions and bonuses and to advance upward in the hierarchy of levels in a pyramid of participants. Product purchases become the means of disguising or laundering investments in a sophisticated pyramid scheme.
Typically, prospects are lured into an MLM with exaggerated product and income claims. And because the pay plan is heavily stacked in favor of those at the highest levels in the pyramid, the vast majority of participants spend more than they receive and eventually drop out, only to be replaced by a stream of similarly misled recruits, approximately 99% of whom are likewise destined to experience loss and disappointment.