by Robert L. FitzPatrick, author of PONZINOMICS
The most common belief about “multi-level marketing” – spread by MLM promoters – is that “MLM” is just a modern adaptation of “direct selling,” a centuries-old business model. The identity as the direct descendant of the “Yankee Peddler” is the primary basis for MLM claims to commercial validity and membership in the Chamber of Commerce. Even MLM opponents who call for regulation often refer to MLM as “business” and describe it as “direct selling,” aligning themselves with MLM’s own deceptive propaganda.
MLM’s official invention and launch in 1945 as a new “sales and marketing plan” for the tiny southern California vitamin company, Nutrilite, was not born of door-to-door selling parentage. It was the creation and inheritance of something new and different that had spread throughout the American landscape in years leading up to and including the time it was launched. This was a wave of financial fantasies, frauds and follies that captured popular imagination and exposed a vulnerable blind spot in the public’s financial awareness. This blind spot, which became the tool of charlatans and their dupes, is exponential expansion (5X5X5X…). MLM’s structural basis for false claims to provide “unlimited income opportunity” and “infinite” expansion is its “endless” recruiting chain, an inherently deceptive and harmful proposition, a deadly financial trap.
Don’t Ask, Don’t Act
The consequences of unquestioningly accepting false “direct selling” identity are far reaching and destructive to individuals and the public. When investigations uncover repeated patterns of harm to hundreds of thousands of people, indisputably false income claims, absurdly overpriced products, no “customers”, and the promotion of dangerous medical hoaxes, regulators, some academics and journalists still approach the MLM deferentially as a real business with iconic pedigree. Prosecutions or consumer lawsuits can take years to litigate, while the MLMs are granted a respected “business” status. The deceptive and harmful actions of MLM schemes that are exposed are treated as anomalous and subject only to “civil”, not criminal, prosecution. In each warning or prosecution, the Federal Trade Commission baselessly repeats, “MLM is legitimate”, leading millions more people into harm’s way. Individual consumers can spend years losing in one MLM after another, all in the misguided belief that “MLM” is direct selling, a valid business, and that its promises and claims must be real.
MLM’s defining traits, financial proposition, activities and economic impact are presumed to be those of legitimate business – an offering of products or services, an understandable commercial proposition, a voluntary contract between informed parties, transactions based on market forces such as supply and demand, resulting in a reasonably fair exchange of value for the buying public and a viable income opportunity for those that pursue the “business.”
Illusion of “Products”
If regulators or journalists ever do look, they will see that MLMs – all of them – do not have the defining characteristics of legitimate business. Even what may seem to be tangible evidence of commerce, consumer products, turns out to be only stardust, smoke and mirrors. The economic activity on which “business” is based, the engine of the MLM enterprise, is recruiting, which has nothing to do with products directly. The top income gainers in MLM do not sell products. They spend 100% of their time and effort to enroll other people into the “income opportunity”. The income opportunity is not the opportunity to sell products but only the opportunity to recruit.
Some MLMs have virtually no discernible product, and those with seemingly tangible, usable products, place no or almost no emphasis on the product in their recruiting campaigns. MLMs have no known product brands and do not engage in product advertising. Despite medical mumbo-jumbo, MLM “health” products are not FDA approved. Regardless of hype about “unique” and patented, MLM products are commodities, available other places at far lower cost. MLMs have no stable sales force that could learn and promote the products. The sales and “customer” base churns almost 100% within a few years. The contracts and compensation plan are incomprehensible. The risk and the history of near total losses of previous consumer-investors are not disclosed. Product pricing is far outside the bounds of the competitive markets. Almost none of the “salespeople” ever gains a net profit. These are not the traits of a “business” and bear no resemblance to “direct selling.”
When the first MLM “plan” was being formulated in the early 1940s, the direct selling industry already showed signs of severe obsolescence. National brands, mass marketing, advertising and widely available retail outlets were rendering the skills of the person-to-person peddler unneeded and unwanted. However, though they were disappearing, the peddler as symbol of a market-based economy and entrepreneurial spirit remained deeply imbedded in the national narrative. MLM’s ploy in hijacking this identity for a scheme unrelated to direct selling provided formidable protection. Regulators did not seriously address the “business model” until almost 20 years after MLM’s inception.
The wave of social and economic delusion and fraud, which was the true progenitor of the MLM “model”, consisted of the first large-scale, populist Ponzi scheme in the 1920s, followed by the national mania of money chain letters in the 1930s and the outbreak of thousands of “pyramid clubs” of the late 1940s. To this surge of folly and delusion was added the emerging ideology of “prosperity thinking”, a magical mind training that taught that reality is not objective but only what you say it is, and that financial success is determined not by markets, resources, skills, chance, or timing but only by personal confidence, belief and vision. Prosperity thinking taught that the American Dream is always available to everyone as long as they adopt the proper mind-set. All failure is therefore only and always of one’s own making.
An enormous industry of preachers, teachers, speakers, gurus, trainers and pop psychologists quickly developed to spread these glad tidings. In some churches, the faithful were told that they would become prosperous, after showing commitment by giving money to the preachers. Sales trainers promised financial breakthroughs to struggling sales agents after paying for costly “courses.” In all these training and promotions were the notions that a “secret” knowledge exists for developing the magical mentality that leads to success and happiness, and that the promoters know that secret and can give it to you – for a price.
MLM’s invention was a fusion of financial hysteria, math trickery and prosperity delusion. The mixture produced a new form of business fraud with a utopian mission, manipulated finance and mind control methods. Getting recruits to focus on their own dreams and hopes distracted from recognizing the impossible and un-economic recruiting scheme. It enabled the fraud of an “endless chain” income promise to pass for an “incentive” and the swindle of a pyramid scheme as a “business model.”
The sales of products served as protective coloring and a bait to lure victims into a money-transfer trap. An absurd parody of direct selling with theatrical titles, garish “motivation” events and phony awards became the platform for a pyramid scheme, in the way that “hedge fund” and “financial advisor” were for Bernard Madoff’s Ponzi. The language of business was appropriated, calling money transfers “commissions” and recruiting “sales.” An elaborate pretense of “retail” sales was constructed to cover up that the “salespeople’s” own inventory purchases constituted the scheme’s chief source of revenue.
Smiling and Lying
Of the two inventors of MLM, Lee Mytinger and William Casselbery, one was a seasoned manager of teams of door-to-door peddlers of cemetery plots, a field notorious for deceiving and abusing both the salespeople and the consumer. The other was a pop psychologist, with an advice-giving radio show, and a graduate of the sales training program of Dale Carnegie, the most influential promoter of prosperity thinking. Carnegie taught prosperity-thinking as far more than a technique. It was a pathway to happiness and a “way of life,” famously characterized by false smiles and manipulations of “friends.”
The MLM “model” that these two invented was akin to an elaborate magic act, a commercial religion, financial alchemy, pseudo-economics. It used the vocabulary of business to weave a fairy tale of wealth and fulfillment. Manipulating “exponential” math to promise “unlimited” opportunity and “infinite” expansion, they contrived a scam that could be conducted on a scale as vast as the human needs and economic longings it would exploit. It could be promoted as both a franchise-like business, called “direct selling” and later “multi-level marketing,” and a social movement for personal development. It would offer its own worldview and belief system with rules, doctrines, and hierarchy designed to stop rational thinking and dominate the followers. It claimed miraculous powers and secret wisdom. As it evolved, its leaders would assume moral authority, exalted status and political power to stop law enforcement.
PONZINOMICS: Ponzis, Chain Letters, Pyramid Clubs, MLMs
As I chronicle in my book PONZINOMICS, the spark that ignited the financial manias that morphed into several lineages of trickery – ponzi schemes, chain letters, pyramid clubs, gifting schemes and MLM – is attributed to Charles Ponzi’s namesake investment scheme, the Ponzi Plan. The two inventors of MLM who met each other about 1940 would surely also have known of Ponzi and the subsequent frauds and manias.
Ponzi’s 1920 fraud led to new and more virulent variants but also continued in original from, as manifested in Bernard Madoff’s notorious hedge fund, almost an exact copy of the original Ponzi. In the Ponzi model, a promise of lucrative return is made to financial investors, based on a mysterious, proprietary source of “returns”. Word spreads and more hopeful investors are drawn into the plan. After the scheme collapses for lack of new investors or is legally prosecuted, investors discover that the “returns” are only their own funds transferred from later to earlier participants.
Ponzi’s scheme captivated the public spirit. Faith that it was a deliverance for the common man persisted even when he was arrested and deported. When Ponzi’s scheme was explained as a deceptive money transfer, and that it was mathematically impossible for an “infinite” number of people to benefit, many dismissed or failed to understand the math trickery. A populist economic fantasy was born, based on the “endless chain”.
A decade or so later the fantasy mutated and expanded to a mass-based delusion spread anonymously and on a national scale. This was the “money chain letter” mania that burst forth in the mid-1930s, just a few years before Mytinger and Casselberry met and formulated their “plan” that would become “multi-level marketing.”
Chain letters still exist, but evolved into “clubs” and similar programs often presented as “social” movements. Each level of investors must be paid from future levels, which must become larger than preceding ones in order to cover the ever-growing liability. The source of the rewards – later participants – is not concealed as it is in Ponzis. It is fully disclosed but few people see the impossible “exponential” math of the proposition. The chain letter also opened the door to gaining money from “friends and family” as socially acceptable. Each participant was responsible for finding and enrolling new ones.
The pyramid club ”hysteria” that broke out across the country and widely publicized in 1949 occurred less than 4 years after MLM was officially invented. It began, as did MLM, in Southern California, and exactly the same year that the founders of Amway fatefully began recruiting at that first MLM, Nutrilite, where Mytinger and Casselberry managed sales and marketing. Life Magazine estimated “several million” Americans participated as the delusion spread coast to coast. The pyramid clubs of the 1940s may be seen as one of the generational steps in the genetic mutation which produced MLM.
The “pyramid clubs” continue in original form, now called “gifting clubs” in which payments to join the fraud are described as “giving” and promised rewards for recruiting are termed “gifts.” From the 1970s through the early 2000s, the gifting clubs enrolled millions of people, using the “pyramid club” format of happy gatherings in homes with food and beverages. Most have four levels with eight participants in the bottom level who pay the one at the top. One gifting club, called “Women Helping Women” became so large it was featured on the Oprah Winfrey show.
It is these social and economic forces that are the wellspring and family of “multi-level marketing,” not the earlier era of “direct selling”. Direct selling never involved a large number of participants, never promised “wealth beyond imagination”, never claimed to be “way of life” or the fullest expression of human potential or the path to ultimate happiness.
Structurally, MLM shares the key genetic ingredients of these related frauds of Ponzis and pyramids – the requirement for constant “duplication” and the internal money transfer from bottom to top, all driven by deception and diversion. All the formats from Ponzi to MLM are formulated so that later participants will lose their money to the few top perpetrators and recruiters.
What Any Salesperson Can See: MLM Is Not Direct Selling
In doing the historical and genealogical research of MLM I have one great advantage over many journalists or academics or government regulators. I have personally faced the merciless mandate of making a sale or not being able to pay rent. This is just to say that I had direct, personal life experience with true direct selling. Anyone who has done real sales work knows, without need of historical analysis or data gathering, that MLM is nothing at all like “direct selling.” Two obvious characteristics of MLM define it as fraud in plain sight
1. No Connection between Demand (none) and Supply (“infinite”)
The first is the compensation based on recruiting. The net effect of the recruiting “incentive” is that it creates a sales force that is unrelated to the market demand or need for product. The “duplication” incentive and “unlimited” rewards produce far more salespeople than the market could support. Add in the factor that the recruiter is paid from the newly recruited salesperson’s own purchases, rather than only from external purchases by end-users, the reality of a pyramid scheme becomes blatant and the connection to real sales is severed totally. Every area soon has too many “salespeople” selling exactly the same products. They all buy at the same price. The cost to find and reach “customers” is too high. Keeping loyal customers in the face of so many competitive “salespeople” is impossible. Every “customer” can get the product at the “salesperson’s” price just by signing up and paying a fee. Retailing, i.e., direct selling, becomes utterly impossible.
2. Upside Down Pay Plan
The second element is the classic MLM “compensation plan”, the one that is presented with incomprehensible charts with many “levels” and arrows pointing to varying commission rates and bonuses that are connected to varying structural (recruiting) and volume requirements.
Anyone who has ever been in true direct selling knows that one figure is crucial to viable sales – how much is paid to the salesperson on each transaction. A real salesperson can see immediately the MLM pay plan is turned upside down.
When the absurdly complicated “compensation” scheme is dissected, it reveals that the majority of “commissions” paid on each transaction goes straight to the top of the recruiting chain. The amount allocated to the “sales” person that actually makes the “sale” is pitifully insufficient to sustain the work. The net result is that over half of all commissions, sometimes as much as 80%, on all “sales transactions” are allocated to those farthest away from the “sale”, the top 1%. The only “sales” the model facilitates are internal, among the recruits themselves, just as in a pyramid scheme, a closed system, an internal money transfer. The recruiting model and top-loaded pay plan dictate that less than 1% can ever be profitable. Their “profit” is derived from the funds lost from the other 99%, year by year.
To call this model “direct selling” is not just inaccurate. It is blind to what is actually going on – calculated deception, massive consumer harm, fraud that steals not just money but years of time, relationships, hopes and dreams. Exactly what to call MLM, if not “direct selling,” is less important than first to get rid of the false identity and open up an inquiry based on facts and consequences. The truth of MLM is not complex, just hidden behind years of mis-identification.