Jul 16 2019

Multi-Level Marketing Is Still a Scam

Multi-Level Marketing (MLM) companies are inherently, in my opinion, exploitative. The MLM model is that the sales force is hierarchical – you are hired by someone who takes a cut of what you earn. You, in turn, can make money by recruiting your own sellers, who each pay you a cut of what they earn, and what everyone below them earns. In other words – it’s a pyramid scheme.

A raw pyramid scheme is just a transfer of money – I give you $10, and recruit five people to give me $10, and so on. Everyone makes money, except for those who get stuck at the bottom of the pyramid. Pyramid schemes are generally illegal because only the people at the top really make money. The math of the situation guarantees that even in a few generations the pyramid will burn itself out. (1-5-25-125-625-3,125-15,625-78,125-390,625-1,953,125-9,765,625-48,828,125-244,140,625) In 13 levels you get close to the entire population of the US, in 2 more, close to the population of the Earth.

An MLM is basically a pyramid scheme in which a product is used as cover for the transfer of money. Sellers need to buy product from the company, which they may use themselves but are also meant to sell. Some MLMs require a minimum purchase each month, whether you sell it or not. In this way also the salespeople are also customers. It amazes me that this is at all legal. Most states and the federal government regulate MLMs rather than outlaw them completely For example, sellers need to demonstrate that they make most of their income from actually selling products, not just getting paid by those under them. Certain practices, such as requiring a minimum product purchase, can be outlawed as well.

The numbers tell the story. An analysis by the FTC found that 100% of the 350 MLMs they looked at were top heavy, meaning that the vast majority of the profit went to the very top promoters, while everyone else lost money. A staggering 99% of those involved lost money. In fact, it’s worse than a no-product straight pyramid scheme, in which 90% of participants lose money. There, of course, will be exceptions – that seller who is 2-3 standard deviations from the mean, who was in the perfect situation, or just has exceptional business and marketing skills. They make money, and then they become the poster child for that MLM. If they can do it, you can do it.

It’s also worse in that those who get suckered into the MLM scheme are often sold on the idea that this is an easy part-time way to make money out of their home. Then, in reality, they have to go to conferences to learn about the product, and how to build their business (which also costs money), they have to maintain inventory, and they have to spend lots of time not just selling but recruiting and maintaining their “downline.” It’s a full time job, with nothing to show for it at the end.

As a result, most people who get involved with MLMs eventually bail. So there is a revolving door of suckers at the bottom paying money to the top promoters, who are the only one’s making money.

In addition, often the products themselves are a scam. They may be just ordinary products, no different than what you can get at the store, but packaged as if they are somehow superior. Why would people bother buying through the MLM then? The short answer is that they don’t. Or, the product is some kind of bogus service or snake oil.

For the average person getting involved with an MLM this means they invest time and money in the hopes of making a better life for themselves, only to sacrifice for nothing, and often are themselves scammed into using a bogus product.

Even worse, as a recent HuffPo article discusses, many MLMs are targeted at women. About 75% of MLM sellers are women. They are told this is a means of empowerment and independence. This is the perfect side job for a stay-at-home mom. This is a good way to build community and a circle of friends. In fact, the opposite is often the case.

The interviews in the article are revealing.

“After a long while of getting nowhere, Sandra saw an ad for a customer relationship management system and decided to put the $4,000 on a credit card to get a pool of leads. It only resulted in 20.

She also spent about $1,000 in Facebook ads to get people to like her page and build a community of people who would buy from her. “That didn’t happen,” she said. She stuck with it for about two years, working 60 to 80 hours per week, and the most she ever earned in a year was $600. “I was working my ass off,” she said.”

Many burn through relationships, alienating friends, neighbors, and coworkers. They also often quickly find that their social networks are already saturated. Think about it – who recruited you? Who else did they recruit, and who did they recruit? There is no coordination of sales territory. There is just recruitment to the saturation point. Anyone not recruited has probably already had the sales pitch from someone else. The structure of MLMs are almost a guarantee of failure (again, unless you are at the tippy top).

Another story illustrates this:

“When she started selling in August 2016, there were only a couple of other LuLaRoe consultants in the surrounding area. And Traci was killing it. In fact, she earned about $1,500 after her launch and an additional $20,000 that year. But once Thanksgiving rolled around, “it died,” she said. The number of sellers in her community grew to 40 and the market became oversaturated. By December, she could barely pull in $500.”

The company Goop fits many of the same properties – their products are marketed toward women with the idea of self-empowerment, but they are largely just snake oil. It’s a shame. These companies exploit an already exploited population, selling them a fake solution which just further perpetuates the exploitation.

It seems we need more effective regulation of MLMs, but in the meantime anyone considering joining an MLM should really know the numbers. You are overwhelmingly likely to work hard and lose money. It’s worse than gambling.

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