The Myths and Facts of MLM (Multi-Level Marketing)

MLM is the direct descendent of classic, no-product pyramid schemes. With expansive pay plans and an endless chain of recruitment, MLM assumes both infinite and virgin markets – neither of which exist. MLM is therefore inherently flawed, uneconomic and fraudulent. In a 1974 ruling, the FTC found in the very structure of “multi-leveling” or “pyramid selling” (now called multi-level marketing, or MLM) “an intolerable potential to deceive.”

Unfortunately, the FTC backed off from that observation in the 1979 Amway case, which opened a Pandora’s box of pyramid selling. It is hard to imagine any business model that is more deceptive than MLM.

However, my observation is that even top-of-the-pyramid participants are not usually engaging in theft by deception deliberately. They are victims of their own self-deception and must of necessity justify their flawed programs. Below are typical misrepresentations used to lure new recruits into joining an MLM.

1. Myth: MLMs are often presented as a great “business opportunity,” with huge incomes reported for many

  • Fact: MLM’s nearly always lead to certain loss for new recruits. The founders and a few are at the top of their pyramids of participants are enriched at the expense of a multitude of downline participants, approximately 99% of whom lose money.

2. Myth: “Everyone can do this” – and earn a good income.

  • Fact: Holding up top earners as examples of what others can do is deceptive. Only four groups of people get the vast majority of the commissions and profits paid by MLM companies:
  1. the founders
  2. top company officers
  3. participants at the beginning of the recruitment chain
  4. those who through long, hard work and deceptive recruiting manage to climb to a point at or near the top of a large pyramid of participants

3. Myth: Unlike franchises, business startups, or sales of existing businesses, you can start an MLM business with very little capital.

  • Fact: MLM’s typically bleed new recruits of their funds by inducing them to buy products on a subscription basis, to pay for ongoing training, and otherwise draining them of their resources until they run out of money or give up.

4. Myth: Products can be resold at retail prices for a handsome profit.

  • Fact: MLM products must be priced high enough to support a bloated network of distributors, so prices are seldom if ever competitive with alternative retail outlets. MLM products are sold primarily to recruits to “do the business,” rather than to persons outside the network of participants.

5. Myth: Every MLM Is presented as a legitimate business – “not a pyramid scheme”

  • Fact: MLMs, or product-based pyramid schemes, have been found to be the most extreme of all the types of pyramid schemes, by any measure – loss rates, aggregate losses, number for victims, and degree of leverage. MLM loss rates (approximately 99 %) – are far worse than for no-product schemes, or even than most games of chance in gambling casinos.

6. Myth: MLM offers true “time freedom.” For those who work at it, MLM can provide an income that is reliable, leveraged, residual, long-term – even permanent income. This will allow you the “time freedom” to quit your job and to spend more time with your family or to do whatever you want.

  • Fact: These catchwords are used by MLM promoters to appeal to the desires for “easy money” that keeps on growing and providing for the comforts of life – and the resources to do what we want, when we want. However, one of the stark realities of MLM is an extremely high attrition rate. Available statistics suggest that 90-99% of recruits terminate or are inactive within a few years of joining. Those who do “succeed” must be constantly recruiting others to replace a revolving door of hapless victims of these deceptions. This can become totally consuming, leaving little time or energy for anything else.

7. Myth: Work for only an hour or two a day to supplement your income to help meet expenses or pay down debt.

  • Fact: To profit at a recruiting MLM, one must work long hours and be willing to continue to recruit to replace dropouts. One must also be willing to deceive large numbers of recruits into believing it is a legitimate income opportunity. Recruits seldom profit, but are instead only fattening their upline’s commission checks and enriching founders.

8. Myth: If you fail at this program, it is because you failed to properly “work the system.”

  • Fact: The system itself dooms nearly all participants to failure. MLM is built on an endless chain of recruitment of participants as primary customers. It assumes both infinite markets and virgin markets, neither of which exist. It is therefore inherently flawed, fraudulent, and profitable only for founders and those at or near the top of their respective pyramids of participants. Even with their best efforts, the vast majority will always lose money.

9. Myth: In this new (MLM) program, you can be the master of your destiny.

  • Fact: You will be a slave to the phone, to meeting the qualifications for commissions and bonuses, and to continual pressure to recruit new participants to replace dropouts. You are also caught in a money trap of hyper-consumption.

10. Myth: Products are less expensive through MLM because they cut out the middleman.

  • Fact: MLM creates thousands of middlemen, with few real customers outside a bloated network of “distributors” (“agents,” “consultants,” “demonstrators,” etc.) Due to a bloated hierarchy of distributors, MLM products are very expensive and cannot compete with comparable products from more legitimate sources.

11. Myth: Any MLM that offers legitimate products is by definition not a pyramid scheme.

  • Fact: The most extreme and harmful pyramid schemes are product-based pyramid schemes by any measure – loss rates, aggregate losses, number of victims, degree of leverage (enriching those at the top at the expense of time and financial investments of those at the bottom), etc.

author: Dr. Jon M. Taylor (MBA, PhD) has founded over 40 home businesses, focusing on sales and marketing, and consulted on many others. He has taught college classes on entrepreneurship, ethics, management, and personal finance. Also, his experience in MLM; communications with top MLM executives, law enforcement, and thousands of inquirers; consumer advocacy; and wide-ranging research on MLM – network marketing make him the premier consultant and expert witness on all forms of MLM, pyramid/chain selling, and product-based pyramid schemes. Visit www.mlm-thetruth.com, photo from www.freedigitalphotos.net

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