Shows Huge Consumer Losses and Pyramid Recruitment

June 2008

A statistical analysis of income disclosures made by 10 major multi-level marketing (MLM) companies and the largest of all MLMs, Amway/Quixtar, reveals that, on average, 99% of all participants received less than $10 a week in commissions, before all expenses. Additionally, the report shows that on average no net income is earned by MLM distributors from door to door “retail” sales. Total losses of the participants exceed $5 billion each year, if only the entry fees, basic business expenses, marketing “tool” purchases and the pyramid commission portion of their product purchases (about 40% of their purchase price) are totalled.

The data analyses prove that virtually all MLM participants never earn a profit and that MLM claims of a broad-based MLM “income opportunity” are false. The report reveals that the majority of all commission payments are awarded only to a small group of promoters at the top. More than 50% of all commission payments were transferred to the top one-percent in ten of the eleven companies. In several cases, more than 70% of all commissions were paid to the top one percent. The top-loaded pay plans of the MLM companies are based on “endless chain” recruiting in which the investments of the latest recruits are transferred to the earliest ones, and the vast majority of all participants are always situated at the bottom levels of the chain, where profit is impossible.

The MLMs sustain their operations by annually churning 60-90% of all participants who quit the schemes and stop purchasing the MLM products after suffering financial losses. The schemes maintain the myth of income opportunity partly by convincing the churned victims that their financial losses were their “own fault” thereby making it possible to replace them with new hopefuls, who are unaware of the loss rates and the flawed and untenable structure.

The companies studied include Arbonne, Cyberwize, Free Life, Herbalife, Melaleuca, Nikken, Nuskin, Reliv, Usana and Your Travel Business (YTB). All data analyzed were published by the MLMs themselves, though presented in difficult to decipher formats. The analysis organizes the data in a uniform format for each company that is easily understood and compared.

Five of the companies in the study are publicly traded on stock exchanges – Herbalife(HLF), Nuskin(NUS), Reliv(RELV), Usana(USNA) and Your Travel Business (YTBLA.OB). Total market capitalization of these five in June 2008 was $4.25 billion.

The total revenue of the eleven companies exceeds $12 billion. Approximately 9 million consumers worldwide invest in these schemes each year as “sales” representatives though little of the products are ever actually resold to end users. The newly recruited salespeople become the de facto and unwitting end-users. Their own direct purchases and fee payments represent nearly all the companies’ revenue.

With at least 60% churn rates, at least 6 million new people are enrolled in the schemes each year. The annual recruitment of these six million consumers is based largely on the companies; false offers of an “income opportunity.”

All nine million consumers sign legally binding contracts as independent contractors for the MLM companies, enabling them to participate in the schemes’ “business opportunities.” The contracts authorize them and provide incentives to potentially earn income from selling the companies’ products and from recruiting other sales representatives into the schemes.

The MLM companies are representative in type, business model, pay plan and recruitment tactics of the majority of most MLMs. The report concludes that the MLM “industry” is a significant contributor to the widening income and wealth gap in America and elsewhere. The business model and business practices of most multi-level marketing companies cause the financial losses, not normal competitive factors or the levels of efforts or talents of the participants.

MLM companies seek to obscure their devastating failure rates by disclosing the number only of “active” participants and limiting the income figures to a one-year or even shorter time frames, thus concealing the factor of the ongoing and mounting losses of new participants. If all the participants over a five-year period are included in the calculations, the failure rate rises even further. Less than one in one-thousand will be shown to have gained any profit at all. The so-called successes in MLM are in the same small group positioned, year after year, at the top of the recruitment organization.

The figures used in the analysis are from public documents of the companies themselves. The percentages and actual dollar figures have been extrapolated to a “per 10,000 sales representatives” in order to provide a more understandable picture and to match data of the companies analyzed. A larger sample is applied to the Amway/Quixtar data.

The copyrighted report is available in PDF format.