The multi-level marketing (MLM) company, Your Travel (YTB), is being prosecuted for fraud by the Attorney General of California. And now, a class action lawsuit has also been filed against YTB by some of its agents for operating a pyramid scheme.

Over 100,000 American households are in YTB as “travel agents.” Large numbers of others invest as shareholders. YTB is a member of the Direct Selling Association (DSA), the lobbying and trade group for multi-level marketing.

Is YTB all that different from other DSA/MLM members, like Herbalife, ACN and Pre-Paid Legal? YTB’s basic business model was approved last year by the DSA – after careful screening – when it was granted membership. So it obviously could not be fundamentally different.

In fact, YTB is essentially the same as hundreds of other DSA/MLMs. It sells a product or service as others do. Like the others, its main marketing tool for selling its product/service is to offer each and every new recruit an “endless chain income proposition.” Everyone is always told there is “no limit.” Each and every new distributor (called agents at YTB) is rewarded for recruiting more new distributors in an endless and ever-expanding chain – forever!

While YTB presents itself as a “travel service” company that markets hotel rooms, cruises and rental cars to the general public through “agents”, nearly all its “customers” turn out to be also its agents!. Salespeople recruit salespeople who recruit salespeople, etc. And nearly all the rewards it pays out to earlier salespeople come from money paid by the salespeople who are recruited later.

This “money-for-recruiting” model mirrors nearly all other MLMs that claim to be “direct selling” companies. They claim they have “distributors” who sell products to customers but, in fact, virtually no one buys the products except the “distributors” themselves. MLM has a term for this. They say each distributor “buys from himself.” Most MLMs even pay a “commission” to the distributors on the volume of products they “bought from themselves” and they call that payment “income” to the distributor.

Obviously, no one can buy from themselves. And money paid to those that make these purchases “from themselves” could not possibly be “income.” It is their own money being sent back to them!

A few MLMs may “require” each distributor to have 2-3 retail customers, but this would never be enough to make them profitable or make them into “direct sellers.” (And, anyway, why would a direct selling company need to require its salespeople to make sales?) The only real profit in the MLM model comes from recruiting other distributors. And the only profitable “distributors” in these DSA/MLMs sit at the top of large pyramid “downlines.”

There are some superficial differences between YTB and some other DSA/MLMs, mostly in pricing models. These arise only from differences in the types of products. There are no basic differences in model. Indeed, there are some DSA/MLMs – ACN, for example, and it also sells a “service” (telephone) – that use the very same model as YTB’s. They charge a significant upfront fee to become a distributor/agent and then pay bonuses from that pool of money as rewards for recruiting other distributor/agents.

Unlike some MLMs, YTB cannot arbitrarily mark up the prices of its products (travel services). Many other DSA/MLMs, however, can. Those products are only sold by the MLMs, not in stores, so there is nothing to directly compare them to. Often these MLM products – usually some form of pills, potions or lotions – are priced to the MLM distributors at three to ten times the price of similar products sold in stores! These schemes then imbed nearly all the pyramid money (money paid by new recruits and transferred to the upline recruiters) in the “product” purchases” by the recruits.

The MLM “salesperson” buys a quota of exorbitantly priced goods each month, as required by the MLM for the distributor to qualify for “rewards.”  Nearly half the inflated price they paid for their required monthly purchase is then transferred to the top recruiters. Each “distributor” can recruit an “endless chain” of other recruits who recruit other recruits, but everybody has to keep buying products – the pyramid money being built into the inflated price – in order to get paid. This is sometimes called “pay to play.”

YTB’s pyramid money, on the other hand, is mostly built into the initial fees it charges each new recruit to become one of its agents (about $500) and the monthly charge (about $50) to use its travel software. As noted, this upfront fee is not unique in DSA/MLMs. ACN, which sells telephone services, charges $499 to join that scheme and then pays bonuses when the salesperson recruits another salespersons that also pay $499. Herbalife charges about $3,000 in “product purchases” to qualify for downline commissions.

Interestingly, the basic amount that YTB tries to get from its recruits in a year’s time turns to be the same amount as most other DSA/MLMs aim to get from their recruits, about $1,200 a year. Some get much more, but that is the target. Each MLM scheme has its own formula for getting that thousand bucks or so from the recruits and transferring about half of it (the pyramid money) up to the recruiters. The MLM scheme itself takes its cut off the top.

YTB charges recruits for their “agency and website”. It pays a commission if a recruit sells an agency/website to a new recruit. It also pays a commission on any “travel sales” they or their downline make. Most “agents” will never sell any travel services but some will buy some services for themselves at a discount which is part of the value of having an “agency.”

Other DSA/MLMs charge very little for the “distributorship and sales kit” but they then require a costly purchase of “inventory” each month, automatically charged to the recruit’s credit card. The “distributors” can sell the inventory at retail price and earn a retail profit (equivalent to YTB’s travel service sales.) They also can get commissions from the MLM if they recruit another distributor who also buys the inventory (equivalent to YTB’s commissions for selling the agency/website). Most MLM “distributors” will never make a retail sale to anyone, but some may use some of the inventory for themselves. The DSA model is a mirror image of YTB in which the salespeople and the customers are one and the same, each “buying from himself” and everybody paying the MLM for the chance to gain rewards from a “downline.”

In YTB’s formula, the upfront investment allows the YTB agent to obtain travel agency credentials through YTB, earn travel sales commissions through YTB, and to gain discounts and other benefits available to YTB travel agents. YTB’s credentials, (potential) commissions, discounts and the benefits are as real as other DSA/MLMs’ products and potential retail profits and recruiting commissions are.

It is their actual worth and the legality of how the purchases were induced that are in question. In other words, the fraud is in the marketing plan and the income offer, not in the product itself.

Here is a crucial question:
Would many people buy the generally unknown MLM products at those inflated prices if there was not an “endless chain income proposition” attached? Would many consumers pay YTB $500 and $50 a month more to become affiliate travel agents, if there was not an offer to make money from an endless chain of new “agents”?

The answer in both cases is NO.

All the DSA/MLMs, just like YTB, are driven by the endless chain pay plan. That is the main incentive to the get recruits, and it is the recruits that buy the products or services. So the “sales” are based on the income offer.

But what is this offer of an “unlimited” income? Could it be real?

The income is claimed to be “unlimited” because the chain is claimed to be “endless.”

Of course, this must be a false and fraudulent claim and the model itself – that relies on the claim to gain customers and sell goods – must similarly be fraudulent and false. No income – on the planet earth at least – is unlimited and no chain is “endless.”

One of the main issues highlighted by the California AG is that 99% of YTB participants never earn a profit and virtually all the commissions go to the top 1%. This outcome obviously makes all claims about a YTB “income opportunity” false.

But, this outcome is the same for nearly all DSA/MLMs!
A study of eleven (11) MLMs, including YTB, showed the 99% loss rate was true for every one of the MLMs. And in 10 out of the 11, the majority of all commissions wound up in the hands of the top 1%. For some as much as 85% (Herbalife) went to the top 1%. Those 11 are representative of hundreds of other MLMs. All are members of DSA.

The massive losses among the MLM recruits are calculated and pre-determined. The losses are built into the MLM model and are the inevitable result of the “endless chain” offer. According to the laws of mathematics only a tiny fraction of all the participants could possibly be at the top of a large downline. Most have to be losers for there to be any “winners.” After all, it is the lost money from the downline that becomes the “profit” to the upline!

When all the people invest in an “unlimited opportunity” based on an “endlessly expanding” chain something has to give. Won’t the scheme totally collapse? Yes, in a way. What occurs is that the bottom of the pyramid, composed of the lastest recruits,collapses continuously, and the scheme itself rebuilds continuously.

What gives is that “collapse” is borne by the last ones in. Massive losses are suffered by the recruits who pursued the impossible mission of building “unlimited” downlines when they were enrolled at the bottom of the recruiters’ downlines. They were doomed to lose from the day they signed up.

Their losses and the scheme’s “rebuilding” process take the form of “churning.”

At YTB, 50-80% of the recruits churn (quit and are replaced) within one year! At the start of 2007 YTB reported that it had 59,736 “registered travel agents.” During the year, it recruited another 139,237, but lost 67,908. About 50% of the number that joined had quit during the same time period. This is exactly the same with most other DSA/MLM members. The “quitters and losers” leave the MLM, and nearly all of them stop buying or using the products or service.

50-80% annual churn rates occur in ALL MLMs because the “endless chain” model causes a 99% “failure” rate. So, most quit the scheme in less than a year, after they suffer punishing financial losses. The scheme continues only if it can replace the “losers.” It uses the same claims about “unlimited income” to fill the slots each year vacated by the previous year’s “quitters.”

Could it be that all these MLM recruits did not care to make money? They signed sales contracts. They surrendered rights as consumers to become “contractors”. They took on risky legal obligations. They paid fees. They bought sales kits. But could it be that they only wanted the products or travel services at a discount? They never intended to make any income?

Well, could be, except, why would so many such avid and loyal consumers quit the MLM schemes so quickly and never use those products ever again? Herbalife, for example, reported that 80% of all its distributors quit the scheme each year. They don’t come back. Strange behavior for people who “loved the product”! Their “strange” behavior is evidence that what really motivated them to sign up and buy the goods in the first place was the lure of the endless chain, the impossible dream.

In the end, YTB’s sales model, marketing scheme, income promises, loss rates for its agents, concentration of commissions to its top recruiters, and churn rates of “quitters” are the mirror image of nearly all other MLMs in the DSA.

Whether the MLM recruits pay for an “agency and website” so they can get travel discounts, hotel freebies and downline commissions, or they pay for a “sales kit and monthly auto-order of inventory” so they can gain product discounts, retail profit and downline commissions, the difference is without a distinction.

The common trait that links YTB to most other DSA/MLMs and makes it “typical” is the endless chain income lure. This is the fraudulent marketing practice, cited in the California case against YTB. This is the “unfair and deceptive trade practice” referenced in the Federal Trade Commission Act to prosecute other DSA members. And, this is what the DSA and its members employ every day to ensnare millions of consumers.