Tuesday, 5 December 2017

10 Big Truths about Multi-Level Marketing

Truth #1: Multi-level marketing has little or nothing to do with “direct selling.”

Virtually no MLM participants gain a net profit from personal, direct selling on a retail basis. There is no record of consumers gaining sustainable profit just from reselling MLM products in the open market. The FTC verified this reality in Herbalife when it conducted a two-year investigation of that MLM, one of the oldest and largest. It determined that Herbalife “distributors” did not and could not gain a “retail profit” income. The only possible income came from recruiting more investor-participants. Common sense alone reveals that no one, today, could earn a sustainable income selling MLM commodity products on their own, from their home. MLM-type products are already in stores or online at lower prices. No one needs a personal salesperson to buy such goods or has the time to listen to sales pitches. The costs of personal marketing and individual selling are too high to gain a profit or make it worth the time. The MLM model produces more and more competitive “retailers” in every location and every potential retail customer is offered the chance to buy at wholesale pricing, making profitable retail selling not feasible. MLM is disguised to look like direct selling, with the use of products and words and names taken from the real business of direct selling, such as “commissions, bonuses, retail, and distributor.” This is only disguise. The “direct sellers” in MLM have few or no customers. “Downlines”are just other “direct sellers.” MLM participants don’t “sell.” They buy and recruit others to the same.

Truth #2: Multi-level marketing’s structure is based on an audacious and obvious impossibility.

The main fraud of multi-level marketing is in plain sight. It is the model of the “endless chain” of recruits, misnamed “salespeople, associates, distributors, coaches,” etc. How could any sales organization have an “unlimited” number of sellers operating in the same areas? How could a sales chain extend to “infinity?” The MLM model actually is two-lies-in-one. First, obviously, as the number of participants increases, the chance to recruit a large downline diminishes for those at the end of the chain. The “opportunity” is not “unlimited.” It is finite and diminishing. The thousands at the bottom of the pyramid cannot possibly enroll as many recruits as those few at the top already have. Saturation prevents virtually all from finding enough new people. Second, saturation aside, the recruiting chain pay-plan requires each participant to enroll a number of recruits before profit is possible. Therefore, a ratio of “winners” to “losers” is baked in right from the start. If 25 are needed, then only one in 25 could ever be profitable. This would be true the day the scheme is launched and would never change. The “income opportunity” is therefore – by design – limited to one in 25, or 4%. Based on the proposition of gaining profit from recruiting, about 96% would always lose for as long as the scheme operated. In practice, the actual ratio is far worse.

Truth #3: Almost no one – far less than one in a hundred – has ever gained any net profit in multi-level marketing.

Of all the people who have ever paid an MLM sign-up fee, signed an MLM “sales” contract, and hoped to make some money – millions and millions of people – the percentage that ever succeeded is too small to graphically illustrate. This reality of the absence of “income opportunity” in a proposition sold as “the best income opportunity in the world” is perhaps the biggest deception that has been sown. Millions of people have been misled to believe that MLM is a viable “business opportunity,”, maybe their best hope to make money, better than their current job, superior to other businesses, more lucrative than the potential from higher education or the corporate ladder or even professions. The contrary and brutal reality – that it is a swindle – is verified in all MLM “income disclosures” when they are deciphered, and it is revealed every time an MLM is prosecuted. The most shocking figure is the percentage of people who made a profit, among the total that ever joined the MLM scheme since it began. Since MLMs churn 50-80% of recruits every year, new recruits should calculate their odds of success against all that ever joined. That calculation shows the percentage of “winners” to be a micro-percentage of one-percent, effectively, no chance at all.
All statements or claims about “average incomes” in multi-level marketing are, therefore, false on their face. There is no income “on average.” The median (half make more and half less) is Zero (it would be a negative figure if costs were factored.) MLM promoters spread contrived statistics about income averages – restricting data to a one-year or even one-month time frame, and limiting data only to a small minority of the total participants, sometimes called “actives” or “active with a downline” or those that “received a check.” They often combine the incomes of the few top recruiters with a selected, limited group, excluding the great majority, to produce a false “average.” They take manipulated data for a single month and then create a fictional “annualized” average, even though most quit in less than one year of participation. MLMs also misuse and manipulate “testimonials,” most of which are actually false or absurdly exaggerated, to create the misleading impression that making money in MLM is feasible for most recruits, and that that “anyone can do it.” The shocking truth, revealed in research of disclosures, filings with the government, in court cases, or from government prosecutions is near universal losses. The net losses of virtually all participants are not due to individual ambition, work habits or time commitments. They are caused by the model itself (see Truth #2).

Truth #4: Most, nearly all, product purchases by MLM participants are driven by MLM rules, purchase-requirements and reward-promises.

Without the connection of promises-of-rewards to purchasing-of-products and without purchasequotas and purchaserequirements few people would ever MLM products. The products, typically, are higher priced than similar products in stores. Without the pot-of-gold “incentives,” many people would simply never buy MLM products at all because they never heard of them or did not want or need them in the first place. Most MLM participants begin to purchase MLM products only after being solicited to the join the “business opportunity” and signing a lengthy and restrictive commercial contract that redefines them as “independent distributors.” In signing, they relinquish normal consumer rights such as easy return of products, freedom to criticize or do what they want with the product or resell it as they wish. After signing up, to become or to remain qualified for promised rewards tied to recruiting MLM participants must then meet volume quotasthat can be fulfilled, partly or fully, by making personal purchases every month. Many MLMs persuade participants when they sign up to commit to automatic monthly purchases charged to their credit cards to ensure continued “qualification.” Failure to meet the quotas results in loss of status or disqualification for promised rewards. Overall, most MLM participants stop buying MLM products within one year or less and never purchase them ever again.
In total dollars, all MLM products amount each year to less than 1% of all retail sales, however, even apart from the income scheme requirements that deceptively induce purchases, very little of these MLM transactions can be classified as “retail sales.” They are legally classified as wholesaletransactions. Most MLMs even charge the participants sales tax based on a mythical (and much higher) retail price, confirming the pretense that the goods are to be re-sold to end-users, though they almost never are.

Truth #5: MLMs are dependent on constantly recruiting new people to replace all those that quit.

Most MLM participants quit within one year.  Almost all gain no net profit, and lose significant time and money from the scheme. Annual quitting rates among MLM participants are between 50% and 90%. If the MLM does not replace the quitters, it will soon collapse. To continue, MLMs keep expanding to new areas; they concealing the quitting and loss rates and aggressively promote the false claim to new, uninformed people that the schemes offer a “unique” and “extraordinary” income opportunity for all. As MLMs expand to new areas, revenue “pops,” and as the inevitable losses among the new participants occur, revenue “drops,” triggering the need for more geographic expansion or the targeting of new groups. There is no stable or sustainable “sales force” and no stable or sustainable “customer base.” There is only constant recruiting based on a false income promise. MLMs are in a constant state of continual collapse, but the cost of the collapse is borne only by the newest recruits who join the scam, lose their money and then quit; meanwhile the scheme itself can continue operating if enough replacement-recruits are found.

Truth #6: “Multi-level marketing” is undefined; its identity is a fiction.

The U.S. government defines “legitimate multi-level marketing” as a type of enterprise in which participants can earn money from their own retail sales and from commission overrides based on the retail sales of other participants they recruit in a genealogical chain. Yet, the FTC has never identified a single MLM company that meets this definition! Since no one in MLM actually does gain or could gain sustainable profit from retailing, (see Truth #1), no one also gains income from retail sales of those recruited. The legitimate, retail-based MLM is as real as a Unicorn. Unicorns are depicted in art and literature and some people may even believe they exist. In reality, retail-based MLM enterprises, like Unicorns, do not exist. The very term, “multi-level marketing” means nothing. MLMs are not “multi-level.” They have “endless” levels. MLMs do not operate in the “market” but within a closed and controlled network with fixed prices and purchasing induced by promises of financial reward, unrelated to the products and consumer market factors.

 Truth #7: MLM is unregulated; according to the FTC, there is no way for a consumer to know if an MLM is a fraud.

Consumers are on their own for evaluating MLM solicitations, and avoiding pyramid fraud by MLMs. There is no “consumer protection” from deception and harm at the hands of MLM recruiters. MLMs operate without regulation. There is no federal law that includes the terms, “multi-level marketing” or “pyramid scheme.” The Federal Trade Commission (FTC) has become the primary law enforcement agency that prosecutes MLMs as “pyramid schemes” but the FTC has never conducted a survey of the “industry” to see whether fraud is predominant. In the past 35 years, FTC has prosecuted less than 30 MLMs for pyramid fraud; all have been small MLM companies. The FTC advises consumers that “MLM is legitimate” but also warns that “some” MLMs are pyramid frauds. Yet, the FTC also states that it is not possible for ordinary consumers to distinguish what it defines as “legitimate MLM” from a pyramid fraud, claiming it would require “complex economic analysis.” Meanwhile, there is not even a FTC requirement for MLMs to make financial disclosures in solicitations, as there is for franchising, which is a legitimate and sustainable business model. The FTC actually exempts MLMs from disclosing any financial information at all – e.g., loss rates, average incomes, saturation, operating costs, etc. – to consumers when they solicit money.
Even when MLMs are prosecuted as pyramid schemes, the offense is treated only as “unfair and deceptive business practice,” not criminal fraud, even though thousands of people are harmed and consumer losses may involve billions of dollars. By defining a “pyramid scheme” as only a civil offense or at most a misdemeanor, some “anti-pyramid scheme” state statutes and occasional FTC prosecutions effectively protect MLM leaders from doing jail time and allow the schemes to continue and multiply.

Truth #8: Multi-level marketing stresses, harms and sometimes destroys social and professional relationships, families and marriages.

By violating the common-sense, practical and proven custom to keep
personal and business relationships separate, MLMs cause disruption and harm. Since the MLM “business opportunity” inevitably results in financial losses for nearly all and requires deception, recruiting friends and family into MLMs obviously creates mistrust and resentment. When trust, affection, family ties and professional connections are misused for MLM recruiting, relationships are weakened or even ruined. The results are frequent disputes, divorces, alienation and blame.Those that become immersed in MLM deception will try to manipulate and deceive the people closest to them for recruiting purposes, often destroying those nurturing relationships. When the MLM recruiters later quit the schemes themselves, they often discover they have lost the support of their family, close friends and social network. Some people remain in MLM because they have harmed or neglected their life-long connections.

Truth #9: The characteristics of “multi-level marketing” are the defining characteristics of a pyramid scheme.

A pyramid scheme is a fraud in which a financial investment is solicited based on a promise of profit that will be derived 
primarily from the new participants who are solicited by earlier participants. Unless new participant-investors are successfully recruited, there is no feasible profit. A pyramid scheme is inherently deceptive and is illegal because the promised rewards cannot continue to be fulfilled. The continued expansion that the promise requires cannot occur. The majority of all who invest must lose. Solicitations are therefore inherently deceptive and pyramid schemes always cause financial harm.
The defining elements of MLM perfectly match this description. These include:
  • An impossible “endless chain” structure, with no limit based on geography or market size, creating the false promise of “unlimited” income opportunity for all participants based on the illusion of perpetual expansion capacity.
  • A requirement to make a payment (financial investment, also called “pay-to-play”) to join the recruiting chain, usually in the forms of entry fees, product purchases and related costs (start up “sales” kits, monthly purchase quotas, fees for websites, “back office”, leads, seminars, etc.)
  • The effective requirement to recruit other investor-participants in order to gain the promised rewards. The claim that income can be gained from retail sales is only a sham invented for disguising the recruiting scheme as “direct selling.” (see Truth #1). Net profit is available only to a tiny few and only from recruiting.
  • A closed, money transfer in which rewards come primarily from the investments of newly recruited participants, not from the external open market, based on retail sales. The “reward” payments are merely the chain of recruits’ own money moved from later recruits to earlier ones inside a closed network, unrelated to the true marketplace. Making the losses even greater and harming even more people, MLM pay-formulas (“compensation” plans) – as all pyramid schemes do – transfer most of all the money gained from later investor-participants directly to the earliest promoters situated at the very top of the pyramid. At least half of all “commissions” paid out to all levels of the entire chain are transferred directly to 1-4% of participants positioned at the top of the pyramid each year.

Truth #10: Multi-level marketing employs cult persuasion techniques to deceive and control.

All cults promise some kind of utopia or unique status to followers, and they also create fear among the followers that failure to follow the cult’s program and to remain in the cult will result in terrible consequences. Cults use well-known methods to shut down critical judgment and induce 
self-destructive and irrational actions from large numbers of people. MLMs qualify as cultic due to their claim, unique in the business world, to be able to expand to “infinity” and to have the power to provide “unlimited” income to all that follow the program. MLMs promote “financial success” and “wealth beyond imagination” as a form of heaven-on-earth, the ultimate goal of living. MLM leaders claim to have esoteric knowledge of the “secrets” of success. The cultic tools of mind control used by MLMs and the hallmark characteristics of cults exhibited by MLMs include:
  • Deception – The greatest of the deceptions is the MLM claim of a “direct selling” identity, when the reality is endless-chain-recruiting. Hence, all recruits enter MLM schemes without full consent of participating in its actual operation, which is based on deceptive recruiting. All cults maintain a false identity disguising their true operations and motives from those they recruit.
  • Self-anointed god-like leadership – Unlike traditional business with accountable boards or professional management standards, MLM leaders are self-portrayed as enlightened masters, god-like figures. To question them is considered self-defeating and a road to failure and shame.
  • Manipulation – Recruits are required to make purchases, led to believe they will gain “unlimited income” and cunningly sent on a fool’s mission to extend the “endless chain.” They are denied information on massive attrition rates, the limits of saturation or the built-in ratio of losers to “winners.” Family and friendship are manipulated for commercial ends. Participants are told to keep buying and recruiting, to “never quit.” The inevitable failure is then callously blamed on the recruit.
  • Sudden and significant changes in personality and behavior among followers – MLM recruits are constantly subjected to what cult-expert, Robert Lifton termed thought-terminating clich├ęs. Recruits are taught to assume a superficial and constant upbeat attitude making them unable to look at their own circumstances factually. Constant exposure to specialized, manipulative language and visions of future wealth leads to recruits mimicking the terms and phrases and becoming disinterested in their existing jobs, or family relationships. Family and friends ask, “What happened to our son/friend/spouse?”
  • Pseudo-science or pseudo-economics  – MLM schemes claim to have the “secret to wealth and happiness” which MLM leaders often claim to have learned from “masters” or due to a spontaneous inspiration. Many MLMs claim to sell products that provide “perfect health,” alter genes, boost immunity, or even cure terrible diseases. The MLM “system” is said to be the “greatest opportunity in the world” and to be last bastion of the American Dream. The secrets to success and happiness, the miracle products, and pathway to wealth are promised – for a price – and offered only to those who unquestionably believe and follow the direction of the leaders perfectly.
  • Control of information – Recruits are told to shun anyone who questions the MLM “plan,” to associate only with “positive” people (other MLMers), to constantly study the words and thoughts only of the “leaders” in their writings and speeches, even to avoid using a calculator or researching on the web for independent analysis purposes.
  • False or fearsome  justification – Attend any MLM and you will hear the oddly similar message of looming economic disaster facing recruits, unless they join the MLM. Career opportunities in corporations are dismissed as worthless and foolish pursuits; professions such as teaching and nursing are defiled as work for “losers;” jobs are demeaned as “wage slavery.” Only MLM can provide wealth, security and happiness, recruits are told.
  • Extreme structural complexity – MLMs are corporate and organizational labyrinths, with subsidiaries in numerous countries. The MLM pay-plans include so many qualifiers, ranks and requirements, they are beyond understanding. Whistle-blowers and analysts that critique the MLM “model” and investigative journalists are routinely dismissed by MLM promoters as “not understanding” how MLM operates.
  • Repression of all dissent – MLMs, like destructive cults, are rigidly authoritarian, stifle critical thinking and suppress individual freedom. Inside the MLM, leaders are above criticism. Dissent and questions are viewed only as negative and signs of lack of faith, loss of confidence or ignorance. Some MLM “sales” contracts legally forbid disparagement of the product, the company or the leaders under pain of dismissal. Downlines lists developed by the participants become the property of the MLM company, not the participants who recruited them. Joining or associating with other MLMs, even those with different products, is not allowed, and the “non-compete” restrictions continue sometimes for months or a year after quitting. MLM critics are regularly depicted as deranged, misguided, or mal-intentioned. Quitters are vilified as lacking character or ambition.

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