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Economics, Politics, Legalities, Ethics and Sociology of Pyramid Schemes / Multi-level Marketing.
The False Profits Blog, published by PSA President, Robert FitzPatrick, is a sane, rational and fact-based forum. Read, get podcasts, make comments, subscribe.

You Aren't Told
when You Get Recruited
by a Multi-level Marketing Scheme

Consumers often ask:
Even if multi-level marketing companies are pseudo-businesses, pyramid schemes and financial traps, couldn’t they run legally if they just disclosed how they are structured and operate, the actual financial loss rates, the quitting/turnover rates, the costs, the absence of retailing, the endless chain recruiting requirements and the risks in joining?
In other words, like the tobacco industry that sells a lethal and addictive product, couldn’t MLMs, which promote an “endless chain” income plan that dooms nearly all to failure, be lawful if they just printed the whole truth on the package?

Click here to see the proposed disclosures (with explanatory notes) that a MLM would have to provide to each new consumer prospect if it were to tell the truth.

Click here to see the proposed disclosures (without explanatory notes) that a MLM would have to provide to each new consumer prospect if it were to tell the truth.

Full disclosure means ending the 10 Big Lies that MLMs routinely perpetrate. It would require spelling out the facts that MLMs commonly conceal. These 10 areas of deception and cover-up include:

1. Huge Consumer Losses:
That almost no one ever makes a profit in MLMs. In fact , after costs (including the costs of the pproducts) are factored, the odds of success are better at the Roulette tables in Las Vegas than they are at the bottom of a MLM.

2. False Identity: Little or No Profit from Retailing/No Direct Selling:
That consumers really don’t make the advertised incomes in MLM from “direct selling” but only by recruiting other “salespeople.” In fact, few MLM salespeople ever make any retail sales at all or even try to. MLM products are not suited for retailing due to their high price, lack of advertising, no market support for the salespeople, low retail margin and very high selling costs. Even the salespeople themselves usually stop buying the MLM products after they quit the business, usually within a year.

3. Recruitment Requirements and Realities:
That continuous recruiting is the primary means to gain the advertised incomes and is required for those pursuing the income opportunity. The reliance on recruiting rather than direct selling and the structure with multiple, ever-widening levels place the vast majority always at the bottom, where they cannot make the advertised profits. Therefore, most people will always be losers in a MLM, no matter how much they try or how talented they are. This disclosure must also explain that if the number of “winners” at the top were to increase, the number of losers at the bottom must multiply by many factors. Therefore, there is a severe limit on how many people can ever be profitable, due to this ratio. Any success that a few do gain must be based on increasing the number of losers. To make this disclosure, MLMs would also have to stop calling people “quitters and losers” and making the claim that the main reason people join MLMs is to buy products not to make money. Few people ever buy MLM products who are not current salespeople or their friends and family. After quitting the “business” few people ever buy the MLM’s products again. Neither do their friends and family.

4. Limits and Saturation:
That the recruitment opportunity is not “unlimited” at all. It is the opposite. Every time a new person is recruited, the opportunity for everyone else is reduced. Markets do saturate There is only a limited number of people in any given area who will ever sign up for a MLM.

5. Top-Loaded Pay Plan and Money Transfer:
That MLMs pay the highest commissions -- per sale/recruitment -- to those at the top levels of the chain, not to the ones actually making the sale/recruitment at the bottom. So, the higher you are on the pyramid, and the more you have others recruiting, the more money you make on each new sale/recruitment made by others. Only a few can ever be in the top positions where most of the money flows. Newcomers are “doomed by design” since most of the commissions they generate are transferred to those few promoters at the top.

6. Weighted, Misleading Income Averages:
That the income averages published by most MLMs are misleading because they include the money gained by those few at the top. A truer average calculates only those in the bottom levels. Most people never rise above these levels. Also, most averages that MLMs publish exclude all those that earn zero. A true average includes everyone who signs up.

7. Continuous and Extreme Quitting/Churning Rates:
That the majority of all consumers that join a MLM in a year’s time quit in the first year and by the third year, nearly every one of those consumers has quit and been replaced. Those who are recruiting must therefore expect to recruit constantly to replace the quitters. This quitting rate is necessary. Otherwise, if recruiting chain continued to expand unbroken, the whole world would be full of MLM recruiters in a very short time. MLMs, like all pyramid recruitment programs must “collapse.” They do this continuously. The bottom levels face market saturation making it impossible for nearly all of them to find enough new recruits. Nearly all quit within a year or so and are replaced. Over time, the MLM must expand to vast new territories, change names or otherwise find new ways to lure in new losers.

8. Business Costs and Time Requirements
That costs to run a MLM business can be very high. All published “income” averages in MLM omit the costs. Full disclosure would offer an average cost of doing business and would inform the new recruit about the types of costs they will likely incur.
Additionally, MLMs would have to stop claiming that making “extra money” takes only a few hours a week or you can “make money as you sleep” and that MLM income is “residual.” Overwhelming evidence shows that anyone who recruits enough new people in a MLM to make a profit is working extraordinary hours, must relentlessly recruit in order to replace the dropouts, and is converting all social activities into prospecting opportunities.

9. Dangers to Family/Friendships:
That recruiting friends and family is a high risk, high pressure and socially damaging activity. Leveraging trust and love for prospecting and recruiting can ruin friendships, alienate families and lead to divorce. Recruiters of “warm lists” should be warned that even if they make any money, they may alienate neighbors, colleagues, family, even spouses.

10. Legal Liabilities and Loss of Rights: That once a consumer signs a MLM contract, he/she forfeits many rights as a consumer. Now, in the status of “independent contractor,”the consumer incurs signifiant legal liability including for statements made about the income opportunity or the product. Many MLM people are contractually prohibited from joining other MLMs even after quitting the current one for a set period of time, and cannot seek justice in a court, but only in an arbitration system, which is very costly and favors the MLM company against the lone consumer.

Conclusion: If MLMs fully disclosed the true nature of the business and the harmful consequences to those who join, they would begin to disappear, just as cigarette smoking is steadily declining. Like the cigarette industry, MLMs are lobbying against disclosure rules. They are influencing regulators against anti-fraud laws and they are suing critics. Like Big Tobacco that tried to coverup nicotine addiction and tobacco-related heart disease and cancer, MLMs engage in a relentless PR campaign to cover over the massive financial losses of consumers who invest in them. These losses far exceed those caused by Bernard Madoff’s Ponzi scheme.

Even without full disclosures, the truth about MLM is getting out, and the saturation of losers is occurring in the USA. This may be why the oldest of the MLMs now get nearly all their revenue from people in very poor countries where there is less regulation and less information and there are many more people driven by financial desperation to fall for MLM’s claim to be the “greatest opportunity in the world.”

Click here to see the proposed disclosures (with explanatory notes) that a MLM would have to provide to each new consumer prospect if it were to tell the truth.

Click here to see the proposed disclosures (without explanatory notes) that a MLM would have to provide to each new consumer prospect if it were to tell the truth.

This page last updated on 3/7/10