Multi-Level marketing has spread like wild fire across social media. The target market, young adults, are being enticed through the potential of large cash earnings with little to no education required before joining the programs. Through this article I will take an objective approach to these corporations in an attempt to shed light on whether it is a legitimate business opportunity or a new age scam.
The Michigan state government provides a great online resource for a more comprehensive understanding on the dark side of multi-level marketing. Often the criticism of multi-level marketing revolves around the claim that these distributors function similarly to a pyramid scam. Bill Schulte, Attorney General of Michigan explains:
“Pyramid schemes claim to be in the business of selling products to consumers in order to look like a multi-level marketing company. However, little or no effort is made to actually market the product. Instead, money is made in typical pyramid fashion…from recruiting other people to market the program. Sometimes, new “distributors” are persuaded to purchase inventory or overpriced products/services when they sign up.”
Attorney General Schulte continues to explain the warning signs of a scam:
“Pyramid promoters are masters of group psychology. Recruitment meetings create a frenzied, enthusiastic atmosphere where group pressure and promises of a large sum of money play upon people’s greed and fear of missing a good deal. Promoters also openly discourage thoughtful consideration and questioning of the scheme. Victims often find themselves tricked into participating. At a recruitment meeting, you might hear phrases like “this is a ground floor opportunity which will change your life”, “opportunities don’t go away, they go to other people”, and “if you act now and work hard for three to five years, you can retire and live off of the residual income.” Another warning sign is a confusing compensation plan. Claims by a company that their plan has been “approved” by the Michigan Attorney General should be bright red flags and you should report such a claim immediately to our office.”
The explanation and bright line between a legal business opportunity and being recruited to a program that is operating against the law is relatively easy to define. If the company recruits or uses any sort of enticing offer to get individuals to join it is a pyramid scam. The simplicity of this claim is also embedded in basic economics. If distributor “A” is the only local supply of “X” product, why would that distributor seek out others to also buy “X” product and cut in to their individual market share? Simply put, people in the business world are not charitable nor willing to give away market share supremacy. As an example, pretend you the reader and I live in the same suburb. In our suburb I am the only person that can fix windows and because of this I have a lot of business. Why would I want to willingly help you learn to fix windows, knowing you would provide the window fixing service in the same area I currently have control over? The answer to that rhetorical question is, I would not train you. There is no justification as a person in business to make money. Because then if you train someone else and the cycle continues the market eventually evaporates. Therein lies the issue with multi-level marketing.
But that explanation is far too simple. Many multi-level marketing companies are incredibly confusing. CNBC recently published a report outlying the confusion these companies create to throw off federal investigations and appear legitimate. Because of this the Federal Trade Commission recently revised its stance of multi-level marketing community and made it easier for individuals to detect and report an illegal scam.
The Federal Trade Commission stated, “If the money you make is based on the number of people you recruit and your sales to them, it’s not [legitimate]. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”
Note under this definition, it includes corporations that both sell to individuals and rely on recruitment. A common tactic used by multi-level marketers is to claim that they have consumers who just buy the product. While this very well might be true, I encourage anyone who has been approached by such individuals to run a quick social media check on the person that approached you. If they appear to be selling individuals on an “opportunity” to make money it is likely to be a pyramid scam which is illegal to operate in the United States.
The independent distributor loop hole
Many of these multi-level marketing companies use individual distributors acting as a separate entity from the parent corporation. They normally take the fall, so the original investors are not liable for the actions of independent distributors. This should be a red flag to any potential investors right away. If the parent corporation is attempting to deflect liability something illegal is occurring in the independent distributor section.
So as we can see, while not all multi-level marketing corporations are inherently a scam by the definition provided by federal agencies. However, a large majority are scams that are operating outside the scope of the Federal Trade Commission.
The next part of our analysis will be in the profitability of multi-level marketing. In the status quo, many states make gambling illegal because of the huge loses individual participants can concur. By and large the state governments feel it is their duty to protect individual investors and their assets from catastrophic loss. Based on this interpretation, we can assume that if multi-level marketing companies put consumers through massive potential risks charging overhead with virtually no potential return we can close the book on multi-level marketing corporations being a scam.
Geometric expansion might seem like a confusing term but truthfully it’s a relatively easy to comprehend economic concept. Geometric expansion relies on you, the consumer, finding 10 other consumers who then find 10 more consumers. The expanding matrix is what is normally referred to as a pyramid scam. Now understanding geometric expansion, we can see the business model of multi-level marketing. In a perfect world, distributors will be able to make some profit and continually expand. However, this does not account for market saturation. As briefly mentioned earlier, when talking about the principles of capitalism (less competition equates to better profits), more competition means less potential sales. Major corporations usually do not allow franchise expansion within close geographic areas (or use population density as a metric of expansion). Mainly because expansion would not be profitable. If you had four Sonic’s on the same block within the same area three will fail. Why? Because after payroll, cost of operations, utilities, rent and supplies three if not all will go under due to lack of consumers in the given population. This same principle is something multi-level marketing ignores. Because when you attend a neighborhood information session at a local residence house, 20 other people from the same neighborhood will be there. If even 10 sign up, that is 10 potential competitors offering the same product to a market that will eventually become saturated and unprofitable in the future. As participation expands, the odds of breaking even decrease.
John Taylor, President of the Consumer Awareness Institute, found that 99.7% of people will not break even in network marketing. That means for every 1,000 people who join a network marketing “team”, 3 will earn more than their initial investment. On a spread, that means 1 of those people probably makes profit between $1-50. Even if massive profits are possible, the odds are far greater than 99.7% working against you. If we calculate using Taylor’s formula, we find that the odds of making enough commission to own a luxury car priced at $40,000 with a commission based program would be around .00045%. So out of 1000 people who participate literally not one of them will make that money back. So according to statistician William Briggs, you have better odds playing the scratch of lotto and breaking even than you do being part of a multi-level marketing corporation.
After evaluating the above facts, visiting websites, social media accounts and other marketing resources utilized by these corporations I believe the case is closed. Multi-level marketing is a scam. These corporations exploit desperate individuals and the greed of potential participants to make massive profits that only a very few at the top see. Statistically, yes there is a chance you can win big and be the next sensation. But like the lotto, you can work hard, run the numbers and still lose. Multi-level marketing is portrayed through the lens of flexibility. Glitz, glamour, doctored and edited photos with hashtags saying, “work from home” or “no 9-5”. Yet to be successful in this field, you need a combination of extreme luck (winning-the-lotto type luck) and an extraordinary work ethic. Ask any marketing consultant and they quickly inform you on how hard creating a successful digital marketing campaign is.
The great thing about numbers is that, unlike lawyers, they cannot spin the truth. Two plus two does not on occasion equal five. It always equals four. Despite what a multi-level marketing recruiter says, you do not need a Doctorate in Economics to understand the far more intelligent financial decision is to put your money away in savings rather than invest in multi-level marketing distribution. I hope this article sheds light on the multi-level marketing industry and helps those on the fence about investing.
Briggs, W. M. (2016). Scratch-off Lottery Tickets: Expected Payouts, A Hidden Benefit? Retrieved from http://wmbriggs.com/post/5285/
New Media Bureau. (2013, November 26). The Young People Revolution. Retrieved from http://www.ucjournalism.org/archives/3783
Schuettte, B. (2016). Multi-Level Marketing or Illegal Pyramid Scheme? Retrieved from http://www.michigan.gov/ag/0,4534,7-164-17337_20942-208400–,00.html
Greenberg, H. (2013). Why Spotting a Pyramid Scheme Isn’t So Easy. Retrieved from http://www.cnbc.com/id/100364484
Taylor, J. (2016). MULTI-LEVEL MARKETING UNMASKED, etc. Retrieved from http://mlm-thetruth.com/multi-level-marketing-unmasked/