Centurion Entrepreneurs: February 2010

10 Big Myths of Multi-Level Marketing
by Robert L. FitzPatrick
The multi-level marketing (MLM) field grows and its member companies multiply.
Solicitations to join the movement seem to be everywhere. The impression accordingly
grows that it is indeed the "wave of the future", a business model that is gaining
momentum, growing in acceptance and legitimacy and, as its promoters claim, will
eventually replace most other forms of marketing and sales. Many are led to believe the
assertions that success can be found by anyone who faithfully believes in the system and
steadfastly adheres to its methods and that, eventually, all of us will become MLM
distributors.
My analysis of the MLM business is based upon fourteen years experience in corporate
consulting specifically in the distribution field and more than 12 years of research and
writing about the MLM model. This has included serving as expert witness in state and
federal court cases, speaking before national associations of state and federal
investigators, corresponding directly with more than 1,000 participants a year, writing a
book, being interviewed for local and national radio, television, newspapers and
magazines, and carefully studying numerous MLM marketing and pay plans.
This research has shown that the MLM business model, as it is practiced by most
companies, is a marketplace hoax. In those cases, the business is primarily a scheme to
continuously enroll distributors and little product is ever retailed to consumers who are not
also enrolled as distributors. The most fundamental of all of MLM's deceptions is its basic
identity. Multi-level marketing is not "direct selling." Rather, it is an investment scheme
posing as a sales business.
As a pyramid investment scheme, MLM industry claims of distributor income potential, its
descriptions of the 'network' business model and its prophecies of a reigning destiny in
product distribution have as much validity in business as UFO sightings do in the realm of
science. Financially, the odds for an individual to achieve financial success under those
circumstances rival - literally - the odds of winning at the tables in Las Vegas.
The very legality of the MLM system rests tenuously upon a single 1979 ruling on one
company. The guidelines for legality that are set forth in that ruling are routinely ignored by
the industry. Lack of governing legislation or oversight by any designated authority also
enables the industry to endure despite occasional prosecutions by state Attorneys
General or the FTC.
MLM is not defined and regulated in the way, for instance, franchising is. MLMs can be
established without federal or state approval. There is no federal law specifically against
pyramid schemes. Many state anti-pyramid statutes are vague or weak. State or federal
regulation of MLM, when it does occur, usually involves, first, proving that the company is
a pyramid scheme. This process can take years and, by then, the damage to consumers
is done. Indeed, even when MLM pyramids are shut down, often the promoters
immediately set up new companies under new names and resume scamming the public.
10 Big Myths of Multi-level Marketing
© 2009 Pyramid Scheme Alert
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Internationally, most countries have followed the lead of the United States and allow the
same unregulated and unmonitored business practices that are prevalent among MLMs in
the US. China, the world’s largest market has banned the MLM model. This may serve as
a future model for other countries as the truth about MLM becomes better understood.
MLM's structure in which positions on an endless sales chain are purchased by selling or
buying goods is mathematically unsustainable. Its system of allowing unlimited numbers of
distributors in any market area is inherently unstable as a distribution system and
financially untenable for the distributors.
MLM's espoused core business - personal retailing - is contrary to trends in
communication technology, cost-effective distribution, and consumer buying preferences.
The retailing activity is, in reality, only a pretext for the actual core business - enrolling
investors in pyramid organizations that promise exponential income growth.
As in all pyramid schemes, the incomes of those distributors at the top and the profits to
the sponsoring corporations come from a continuous influx of new investors at the bottom
who will lose. Viewed superficially in terms of company profits and the wealth of an elite
group at the pinnacle of the MLM industry, the model can appear viable to the uninformed.
Deceptive marketing that ably plays upon treasured cultural beliefs, social and personal
needs, and some economic trends account for MLM's growth, rather than its ability to
meet any consumer needs. The deceptive marketing is nurtured by a general lack of
professional evaluation or investigation by reputable business media. Consequently, a
popular delusion is supported that MLM is a viable business investment or career choice
for nearly everyone and the odds of financial success in the venture are comparable or
better than other trades, professions, employment or business ventures.
MLM's actual economic scorecard is characterized by massive failure rates and financial
losses for millions of consumers, but these brutal financial realities are not known to most
consumers. Since MLM companies do no media advertising, few consumers are even
aware of how MLM schemes operate. The harsh lessons are learned only after being
solicited to become a "distributor."
MLM's true constituency is not the consuming public but rather hopeful investors who sign
on as the distributors or marketing agents. The market for these investors grows
significantly in times of economic transition, globalization and employee displacement.
Promises of quick and easy financial deliverance and the beguiling association of wealth
with ultimate happiness also play well in this market setting.
The marketing thrust of MLM is accordingly directed to prospective distributors, rather
than product promotions to purchasers. Its true products are not long distance phone
services, vitamin pills, fruit juices, health potions or skin lotions, but rather the investment
propositions for distributorships, which are deceptively portrayed with images of high
income, minimal time requirements, small capital investments and early success.
10 Big Myths of Multi-level Marketing
© 2009 Pyramid Scheme Alert
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The word, myth, is provociative and it is used here for provocative purposes. In this
context, it means a cultural deception, a lie. At some level, everyone who participates in
MLM in which little retailing is occurring is unconsciously lying to himself or herself. Many
at the top of these organizations are consciously lying to everyone else. Deception is
inherent in this type of MLM scheme and is pervasive in its marketing. Here are 10 of the
biggest myths I have found to be present in almost every MLM I have encountered.
Myth #1: MLM is a business offering better opportunities for making large sums of
money than all other conventional business and professional models.
Truth: For almost everyone who invests MLM turns out to be a losing financial
proposition. This is not an opinion, but a historical fact. Consider some notable examples
from among the largest MLMs.
In the largest of all MLMs, Amway, only 1/2 of one percent of all distributors make it to the
basic level of "direct" distributor, and the average income of all Amway distributors is
about $40 a month. That is gross income before taxes and expenses. When costs are
factored, it is obvious that nearly all suffer a loss. Making it to "direct", however, is not a
ticket to profitability, but to greater losses. When the Wisconsin Attorney General filed
charges against Amway, tax returns from all distributors in the state revealed an average
net loss of $918 for that state's "direct" distributors.
Extraordinary sales and marketing obstacles account for much of this failure, but even if
the business were more feasible, sheer mathematics would severely limit the opportunity.
The MLM type of business structure can support only a small number of financial winners.
If a 1,000-person downline is needed to earn a sustainable income, those 1,000 will need
one million more to duplicate the success. How many people can realistically be enrolled?
Much of what appears as growth is in fact only the continuous churning of new enrollees.
The money for the rare winners comes from the constant enrollment of armies of losers.
The vast majority of the losers in MLM drop out within a year. In a 1999 court case
brought against Melaleuca, one of the country's larger MLMs, the company claimed it has
the highest "retention" rate among distributors in the entire MLM industry. Melaleuca
boasted a dropout rate of "only" 5.5% per month. What was unknown to many recruits was
that this figure was "month-to-month", not annual. A monthly 5.5% dropout rate equates to
about 60% per year, if the dropouts are replaced each month.
In 2001, the MLM company, Nikken, offered a statistical overview of the incomes of its
"active" distributors. This report omitted the fates of those that had dropped out and were
classified as "inactive." Yet, upon closer inspection even this slanted portrayal revealed a
devastating impact on investors. 60% of total company payout went to just 3/4th of onepercent
of the distributors. In real numbers this meant that out of each 10,000 distributors,
just 75 people - those at the very top – gained that money. The average tenure of the
"active" distributors in the lower levels – who make up 81% of the total sales force – was
less than less than $100 a year.
10 Big Myths of Multi-level Marketing
© 2009 Pyramid Scheme Alert
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In its annual report to the SEC, Pre-Paid Legal, another large MLM, revealed that 1/2 of all
its customers and distributors quit each year and are replaced by another group of hopeful
investors. Over a five-year period, the mean average income of Pre-Paid Legal's
distributors was less than $300 per sales rep, per year, or $5.70 per week before taxes,
training and other expenses are deducted.
The pattern of 50-70% of all distributors quitting within one year holds true also for
NuSkin, the industry's second largest MLM. NuSkin also exemplifies the accompanying
pattern in which a tiny percent of the distributors gain the majority of all company rebates.
In 1998, NuSkin paid out 2/3rds of its entire rebate to just 200 upliners out of more than
63,000 "active" distributors. The money they received came directly from the investments
of the 99.7% of the others.
Myth #2: Network marketing is the most popular and effective new way to bring
products to market. Consumers like to buy products on a one-to-one basis in the
MLM model.
Truth: If you strip MLM of its hallmark activity of continuously reselling distributorships and
examine its foundation, the one-to-one retailing of products to customers, you encounter
an unproductive and impractical system of sales upon which the entire structure is
supposed to rest. Personal retailing is a thing of the past, not the wave of the future.
Retailing directly to friends on a one-to-one basis requires people to drastically change
their buying habits. They must restrict their choices, often pay more for goods, buy
inconveniently, and awkwardly engage in business transactions with close friends and
relatives. The unfeasibility of door-to-door retailing is why MLM is, in reality, a business
that just keeps reselling the opportunity to sign up more distributors.
Myth #3: Eventually all products will be sold by MLM, a new form of marketing.
Retail stores, shopping malls, catalogues and most forms of advertising will soon
be rendered obsolete by MLM.
Truth: MLM is not new. It has been around since the late 1960's. Yet, today it still
represents less than one percent of US retail sales. In year 2000, total US retail sales
were $3.232 trillion, according to the Dept. of Commerce. In that time, MLM's total sales
were about $10 billion. That is about 1/3rd of one percent to annual retail sales, and most
of this sales volume is accounted for by the purchases of hopeful new distributors who are
actually paying the price of admission to a business they will soon abandon. Not only are
MLM sales insignificant in the marketplace, but MLM fails as a sales model also on the
other key factor – maintaining customers. Most MLM customers quit buying the goods as
soon as they quit seeking the "business opportunity." There is no brand loyalty.
These basic facts show that, as a marketing model, MLM is not replacing existing forms of
marketing. It does not legitimately compete with other marketing approaches at all.
Rather, MLM represents a new investment scheme that uses the language of marketing
and sales of products. Its real products are distributorships which are sold with
misrepresentation and exaggerated promises of income. People are buying products in
10 Big Myths of Multi-level Marketing
© 2009 Pyramid Scheme Alert
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order to secure positions on the sales pyramid. The possibility is always held out that you
may become rich if not from your own efforts then from some unknown person who might
join your 'downline,' the 'big fish' as they are called.
MLM's growth is a manifestation not of its value to the economy, customers or distributors
but of the recently high levels of economic fear and insecurity and rising expectations of
quick and easy wealth. It is growing in the same way day trading on the stock market,
legalized gambling and lotteries are.
Myth #4: MLM is a new way of life that offers happiness and fulfillment. It is a means
to attain all the good things in life.
Truth: The most prominent motivating appeal of the MLM industry as shown in industry
literature and presented at recruitment meetings is the crassest form of materialism.
Fortune 100 companies would blush at the excess of promises of wealth and luxury put
forth by MLM solicitors. These promises are presented as the ticket to personal fulfillment.
MLM's overreaching appeal to wealth and luxury conflicts with most people's true desire
for meaningful and fulfilling work in something in which they have special talent or interest.
In short, the culture of this business side tracks many people from their personal values
and desires to express their unique talents and aspirations.
Myth #5: MLM is a spiritual movement.
Truth: The use of spiritual concepts like prosperity consciousness and creative
visualization to promote MLM enrollment, the use of words like 'communion' to describe a
sales organization, and claims that MLM is a fulfillment of Christian principles or Scriptural
prophecies are great distortions of these spiritual practices. Those who focus their hopes
and dreams upon wealth as the answer to their prayers lose sight of genuine spirituality as
taught by all the great religions and faiths of humankind. The misuse of these spiritual
principles should be a signal that the investment opportunity is deceptive. When a product
is wrapped in the flag or in religion, buyer beware! The 'community' and 'support' offered
by MLM organizations to new recruits are based entirely upon their purchases. If the
purchases and enrollment decline, so does the 'communion.'
Myth #6: Success in MLM is easy. Friends and relatives are the natural prospects.
Those who love and support you will become your lifetime customers.
Truth: The commercialization of family and friendship relations or the use of 'warm leads',
which is required in the MLM marketing program, is a destructive element in the
community and very unhealthy for individuals involved. Capitalizing upon family ties and
loyalties of friendships in order to build a business can destroy ones social foundation. It
places stress on relationships that may never return to their original bases of love, loyalty
and support. Beyond its destructive social aspects, experience shows that few people
enjoy or appreciate being solicited by friends and relatives to buy products.
10 Big Myths of Multi-level Marketing
© 2009 Pyramid Scheme Alert
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Myth #7: You can do MLM in your spare time. As a business, it offers the greatest
flexibility and personal freedom of time. A few hours a week can earn a significant
supplemental income and may grow to a very large income making other work
unnecessary.
Truth: Decades of experience involving millions of people have proven that making
money in MLM requires extraordinary time commitment as well as considerable personal
wiliness, persistence and deception. Beyond the sheer hard work and special aptitude
required, the business model inherently consumes more areas of one’s life and greater
segments of time. In MLM, everyone is a prospect. Every waking moment is a potential
time for marketing. There are no off-limit places, people or times for selling. Consequently,
there is no free space or free time once a person enrolls in MLM system.
Under the guise of creating money independently and in your free time, the system gains
control and dominance over people's entire lives and requires rigid conformity to the
program. This accounts for why so many people who become deeply involved end up
needing and relying upon MLM desperately. They alienate or abandon other sustaining
relationships.
Myth #8. MLM is a positive, supportive new business that affirms the human spirit
and personal freedom.
Truth: MLM marketing materials reveal that much of the message is fear-driven and
based upon outright deception about income potential. Solicitations frequently include dire
predictions about the impending collapse of other forms of distribution, the disintegration
or insensitivity of corporate America, and the lack of opportunity in other professions or
services. Conventional professions, trades and business are routinely demeaned and
ridiculed for not offering 'unlimited income.' Employment is cast as wage enslavement for
'losers.' MLM is presented as the last best hope for many people. This approach, in
addition to being deceptive, frequently has a discouraging effect on people who otherwise
would pursue their own unique visions of success and happiness. A sound business
opportunity does not have to base its worth on negative predictions and warnings.
Myth #9. MLM is the best option for owning your own business and attaining real
economic independence.
Truth: MLM is not self-employment. 'Owning' an MLM distributorship is an illusion. Some
MLM companies forbid distributors from carrying additional lines. Most MLM contracts
make termination of the distributorship easy and immediate for the company. Short of
termination, downlines can be taken away with a variety of means. Participation requires
rigid adherence to the 'duplication' model, not independence and individuality. MLM
distributors are not entrepreneurs but joiners in a complex hierarchical system over which
they have little control.
Myth #10: MLM is not a pyramid scheme because products are sold.
10 Big Myths of Multi-level Marketing
© 2009 Pyramid Scheme Alert
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Truth: The sale of products is in no way a protection from anti-pyramid scheme statutes or
unfair trade practices set forth in federal and state law. MLMs that sell useful, quality
products have been successfully prosecuted under anti-pyramid scheme laws by state
and federal officials. MLM is a legal form of business only under certain rigid conditions
set forth by the FTC and state Attorneys General. Many MLMs are currently in gross
violation of these guidelines and operate only because they have not been prosecuted.
Federal regulators have used a 70% rule to determine an MLM's legality. At least 70% of
all goods sold by the MLM company must be purchased by non-distributors. This standard
would place most MLM companies outside the law. The largest of all MLMs acknowledges
that only 18% of its sales are made to non-distributors.
Robert Fitzpatrick is president of Pyramid Scheme Alert and co-author of the book, False
Profits: Seeking Financial and Spiritual Deliverance in Multi-level Marketing and Pyramid
Schemes. He is an author of numerous articles and monographs on distributor marketing
in mature industries and he has provided direct consulting services to major
manufacturers and distributors including DuPont, Fuji Film USA, Epson, and many others.
He is a featured speaker at corporate and trade association conferences in the US and
abroad. He occasionally serves as expert witness in cases brought by state Attorneys
General or by distributors against multi-level marketing companies charged with operating
as pyramid schemes. Robert Fitzpatrick can be reached at (704) 334-2047, email:
RFitzPatrick@pyramidschemealert.org, websites: http://www.pyramidschemealert.org and
http://www.falseprofits.com

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