Network Marketing
Call them Network Marketing, Multilevel Marketing, or MLM, these pyramid plans are proven not to work.
Filed under Fads
| Skeptoid #176 October 20, 2009 Podcast transcript | Listen | Subscribe |
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By Brian Dunning, Skeptoid Podcast
Episode 176, October 20, 2009
http://skeptoid.com/episodes/4176
Today we're going to point our skeptical eye at network marketing plans, formerly known as multilevel marketing or MLM (name changed to escape the stigma). They say that when there's a gold rush, the way to make money is to sell shovels. Network marketing companies sell shovels, along with dreams of gold: All you have to do is go out there and dig, dig, dig, and buy more shovels, and get your friends to buy shovels too. Levi Strauss and other suppliers became millionaires, and hundreds of thousands of miners went broke.
Network marketing plans are started by a company selling some product — fruit juice, soap, vitamin pills, water filters; anything, it doesn't matter — through a network of independent distributors who are promised exponential commissions by recruiting multiple levels of other distributors beneath them. The company is guaranteed sales because the distributors are required to make minimum purchases, on which commissions trickle upward. There's little need to actually go out and try to sell the product to anyone; money is made by building your network of distributors beneath you, and their distributors beneath them. Soon the commissions trickling up from all those monthly purchases combine into a raging torrent of cash. And if you just buy a few more shovels, you're sure to strike gold.
Network marketing plans differ from illegal pyramid schemes only by one subtle point: Commissions can only legally be paid on sales of a physical product. If commissions are offered upon recruitment of new distributors, then it's defined as an illegal pyramid scheme. Pyramids are illegal because they necessarily collapse when nobody else can be recruited. However the illegal plans are pretty rare; most companies are smart enough to stay on the right side of the law. But the problem of community saturation, and inevitable collapse, remains.
A tipoff that should clue you into the wisdom of network marketing is that the companies themselves, who manufacture and sell the product, don't even eat their own dog food. They are making money the old fashioned way, by selling an expensive product. It's you whom they recruit to start a network marketing business. When an existing distributor pitches you and gets you to become a distributor yourself, you are required to make your initial purchase of "inventory" of whatever the product is. You either consume that product yourself or sell it to others. Your principal sales tool is the pitch that if your customers become distributors beneath you, they can buy the product at a discounted wholesale price. In most plans, in order to retain your distributor status and qualify for the wholesale discount, regular monthly purchases have to be made.
But even this discounted wholesale price is usually far higher than the market value of comparable products available from the supermarket. Participants nearly always find themselves in the unenviable position of having invested a lot of money in their own required inventory purchases, and desperately trying to recruit new distributors in an effort to earn commissions on their inventory purchases, and hopefully recover their own investment. So this raises the question: How often does it work out that way? How many MLM participants ever recover their own investments?
- The Federal Trade Commission cautions "Most [network marketers] end up with nothing to show for their money except the expensive products or marketing materials they're pressured to buy."
- Consumer Reports advises "Stay away from multilevel marketing schemes that make earnings contingent on your ability to sign up an ever-growing pyramid of 'distributors' who are supposed to do the same and pass sales commissions up the line."
- The nonprofit Consumer Awareness Institute analyzed available data published by the MLM companies themselves. Of the companies surveyed, they reported the least successful was Amway/Quixtar where 99.99% of distributors lose money, and the most successful was Herbalife, where 99.42% of distributors lose money.
- They also surveyed 200 tax preparers in three counties in Idaho and Utah, where 6% of residents are active network marketing participants. From over 300,000 tax returns, not a single one reported significant profits from network marketing activities.
- In a Wisconsin lawsuit, the tax returns of the top 200 of 20,000 network marketing participants were examined by the Attorney General. The average income of this top 1% was -$900.
- Newsweek found that fewer than 1% of MonaVie distributors ever qualified for any commission at all, and less than 1 in 1,000 recovered the cost of their required monthly purchases.
So if network marketing plans don't work, why do people buy into them? Network marketing plans are easily sold by simply laying out some compelling mathematics on a whiteboard. A typical program sets five downline members as the goal for each participant: To be successful, you need only recruit enough people to end up with just five who actively participate. Below those five are their five apiece, totaling 25. This is your network. Each downline of five are qualified by participating at the minimum required level, so this model already excludes everyone who is flakey or only half-hearted, leaving only the five good ones in each downline. Your commissions based on those minimum participation levels — where all five below you dutifully make their minimum monthly inventory purchases — guarantees you an impressive income. The mathematics are black and white, and it's so simple that nothing can go wrong. You'd have to be stupid not to do it.
But here is the problem that these whiteboard presentations always manage to omit. Of all the thousands of network marketing plans available now or in the past, if only one of them had ever had even a single line active to only 14 levels deep, that alone would have required the participation of more human beings than exist. That math is black and white, too. Level 14 is populated by 514, or about 6.1 billion people, the entire population of the planet, in addition to level 13 with 1.2 billion, all the way up to you and your original five. You can answer "Oh sure, but a lot of the people don't get all five or they flake somehow," but you forget that the entire premise has already eliminated those who flake or who don't get all five. The unfortunate conclusion is that a fully invested network, upon which the whiteboard presentations are dependent, has never actually happened.
A fundamental reason that such networks fail is that they depend upon recruiting people to compete with you. If you own a shoe store, and you pitch every customer on opening their own shoe store instead of being your customer, very soon you're going to have a neighborhood full of shoe stores, with everybody trying to sell and nobody left to buy. It doesn't take an MBA to see that this is pretty much the polar opposite of a sound business strategy.
Let's say you tried to make it sound, and said "Forget the multilevel recruiting, I'm going to focus on selling the product." Is anyone doing that successfully? It would not appear so. During yet another lawsuit in the UK, the government found that less than one in ten participants ever sold even a single product to another person. Since the company has its distributors as a captive audience required to make regular purchases, the products are typically grossly overpriced compared to similar products available in supermarkets. This makes their sale a dubious prospect for those few distributors who ever do attempt retail sales to customers. Surveys show that nearly all products purchased by network marketers are consumed by the distributors themselves.
This fact is rarely mentioned in the sales pitches. Instead, they typically promote the merchandise (referred to as "lotions & potions" by MLM critics) as wonderous super products that will be in high demand. But, you should always beware of success stories coming from MLM distributors. Most MLM companies pay shills who lie about having had multimillion dollar success with the scheme. These are typically the ones who travel around giving seminars, pitching motivational materials, and putting on recruiting extravaganzas that have been criticized by the Federal Trade Commission for promoting an almost cult-like religious mania as a substitute for sound business practices.
I've spoken with enough friends and other people who are into network marketing to know that the default response to this is "Oh, but this plan is different." Sure, every plan has different tweaks and details, but fundamentally they are all the same. The company is going to make tons of money selling an outrageously overpriced product every month to their captive audience buyers: You, and any friends you recruit. Not one of you has any realistic hope of coming out ahead. My advice to everyone involved in network marketing: Simply stop now. Stop convincing yourself that profits are just around the corner if you just buy a few more cases of expensive product. Just stop now, walk away, consider it a lesson well learned, and don't give them another dollar.
One final tidbit I'll leave you with. On average, 99.95% of network marketers lose money. However, only 97.14% of Las Vegas gamblers lose money by placing everything on a single number at roulette. So if you're thinking about joining a network marketing plan, and aren't dissuaded by the facts I've presented, consider instead going to Vegas and placing all your money in a single pile on number 13. Sooner or later you're going to have to take my advice and just stop now.
© 2009 Skeptoid Media, Inc.
References & Further Reading
Bloch, Brian. "Multilevel marketing: what's the catch?" Journal of Consumer Marketing. 1 Oct. 1996, Volume 13, Issue 4: 18-26.
Coward, C. "How to Spot a Pyramid Scheme." Black Enterprise. 1 Feb. 1998, Volume 28, Number 7: 200.
Dokoupil, T. "A Drink’s Purple Reign." Newsweek. Newsweek Inc., 11 Aug. 2008. Web. 22 Aug. 2008. <http://www.newsweek.com/id/150499/page/1>
FTC. "The Bottom Line About Multilevel Marketing Plans and Pyramid Schemes." Protecting America's Consumers. Federal Trade Commission, 1 Oct. 2009. Web. 13 Oct. 2009. <http://www.ftc.gov/bcp/edu/pubs/consumer/invest/inv08.shtm>
Vander, N., Peter, J., Keep, W. "Marketing Fraud: An Approach for Differentiating Multilevel Marketing from Pyramid Schemes." Journal of Public Policy & Marketing. 1 May 2002, Volume 21, Number 1: 139-151.
Walsh, J. You can't cheat an honest man: How Ponzi schemes and pyramid frauds work and why they're more common than ever. Aberdeen, WA: Silver Lake Publishing, 1998. 183-202.
Reference this article:
Dunning, B.
"Network Marketing." Skeptoid Podcast. Skeptoid Media, Inc.,
20 Oct 2009. Web.
18 May 2013. <http://skeptoid.com/episodes/4176>
Discuss!
10 most recent comments | Show all 84 comments
A flatmate of mine was into Amway for a few years. She gave me the whiteboard presentation and everything (during which I drank an entire bottle of wine a) out of boredom and b) to must er the courage to say "Er, this is just a pyramid scheme." Needless to say I was poo-pooed.) The really worrying thing was that this friend worked in an investment bank and yet the maths were beyond her! Strangely, after a a while she stopped going on about her "business", our house was gradually emptied of all the Amway products we were forced to consume because she couldn't sell them and we never spoke of it again...
Anonymous Amway victim, Gloucestershire, UK
September 04, 2012 1:24pm
Excellent article..
The new cult on the block is "Visalus" and their magic power..
BA, MA
December 21, 2012 1:56pm
I can't see why we make MLMs so different from any other business that fails. Why is that people in MLM businesses think that they don't have to have product to market? How can you have a business and not participate in that business financially? So why do we expect someone who starts a MLM business to have a higher rate of success rate than any other business? The failure rates are about the same. The difference is the level of investment. I am not a great networker and I have only been in business for a little less than two years. I spend $175 per month to earn about $500. The $175 includes, $25 for website and back office, $120 pv for product that I consume and product that I use to demonstrate, $30 to the Make a Difference Charity. There are people in my company that don't do very much network marketing because our product has a high rate of commercial appeal and they just market to businesses. I do advise that anyone interested in MLMs make sure you check out the company and the products and don't let the negative opinions discourage you. No one wants to fail but the truth of the matter is that brick and mortar businesses fail every day and they loose a lot of money. Last but not lease take a good look at any large business organization that franchises such as McDonalds -- do you see any difference?
Clyde, Bowie/ Maryland
January 04, 2013 8:43am
Am forming a consumer network (same as MLS but for consumers not marketers), The principle/model is as follows: Buy (house hold) products and take home to consume then bring/recruit more consumers and earn a commission from their purchases, if you cannot recruit anyone any more or you are just not interested in recruiting then just continue consuming like you have always done from the super market.
Is there a problem with the model above?
Julius Czar, Kampala
January 19, 2013 12:54am
I have been involved in two MLM schemes in the last 18 months. One was Usana, which sells vitamins 'health' bars and weight-loss shakes and has a skincare range. I bought my stuff to the tune of around £400 and never recruited anyone. The skincare range is excellent although not in my usual budget. The weight-loss products work if you use them correctly. But are more pricey than similar shakes and bars from Tesco. I did loose 2st in 3mnths though and the fact I'd paid so much made me stick to it!
The other is Avon. I've recruited lots of people into it, but still when I do all my accounts for the year, I have made around £15 per week which doesn't reflect the time I've put in. I think it is about the best MLM as everyone does have to sell a certain amount of physical product and not everyone has to recruit. I'm currently deciding whether to continue with the recruitment side or just stick to my customers or give up altogether!
Hannah, England
January 20, 2013 2:11pm
I would be very skeptical about the assumptions that you make in this article. Your article is filled opinions, assumptions and bias. I do hope that people are smart enough to ask questions and do the research for them selves.
You mocked the principle of distribution by saying that there would eventually be saturation in the market if too many people were recruited. This is joke. Consider how many Starbucks are there in Seattle. Does Starbucks have a problem with saturation of the market. NO...
You also missed the reality that every business has to do ADVERTISING or MARKETING. Some companies pay millions of millions to pay for national TV ADS. Other companies do not pay for advertising by instead they pay their personal network marketers the same money instead the advertising agents. This is just a different way of doing business.
Have you ever done you tax return and tried to write off as a person al tax deduction your grocery bill? Of course not that is silly, however if you are a distributor, marketing grocery items, then your consumable samples are a write off, of your taxes. HELLO, this reduction of your taxes is not part of your pay check, but it does help if you are smart enough to say yes to a part time business opportunity.... DUH.
Also you have to accept the basic truth. If you get a job and then do nothing you get fired. If you start a business and buy some inventory to sell, but do nothing you loose your money. Basic reality. Just DO IT.
Michael Spears, Calgary
January 29, 2013 3:16pm
I always wondered how anybody could be enough of a sucker to get into these things; the only person I've ever known personally who gave them a shot was also into a ton of other crank New Agey shit. Then I come here and see all these angry comments and think wow, there can't be THAT many shills online!
I just love this site so, so much. The podcast is and has always been phenomenal, but sometimes I feel like you're not getting the whole experience if you don't look at the comments too.
Carey Y., New York
March 29, 2013 1:25pm
I agree with this episode almost completely. However, there is an exception that I'd like to point out. A scrapbooking company called Stampin Up. It does follow the same model- recruiting, quarterly minimums etc. The only difference is, it's not selling lies (this fruit juice will cure all that ails you!) it sells scrapbooking supplies to people that enjoy scrapbooking and the prices are comparable (if not sometimes better) to craft storess. People do lose money, but in the same way that you lose money when you buy paper from michaels. But you also get to recruit and meet people in it. It's the same business model, but with different ethics I feel.
Jessi, Salt Lake City
April 05, 2013 2:24pm
AN EPISODE ON MLM!?!? OOH, GOODIE, GOODIE, GOODIE, GOODIE!! I myself was approached by MLM scammer. In 2009, I was approached by someone I knew through my place of work, that was marketing "Own Your Life". They said things like "we can't tell you about the whole thing, b/c you need to come to the meetings, but what's important is that it will give you FINANCIAL FREEDOM!" I was already laughing, b/c if that were true, why would they even be holding down a job?? Anyway, went to the meeting, & it was very telling. They talked a lot about their model for success, how successful it was, and how prosporus it would make you, but they kept dodging that elephant in the room, the question of "what are you selling?" They waited until the end of the meeting (of course) to inform everyone that after 45 minutes of overly positive motivational speaking, that you had to go to "an exclusive members meeting", in order to find out what they were selling (which btw, was bogus vitamins claiming they could cure cancer, oh that lovely pseudo-science.) And how does one become an exclusive member you say!? By paying a $95 fee to 'cover the cost of materials'. So, in other words, if I wanted to find out what they were selling, I had to pay 1st!! No thanks, I was born in the morning, & certainly not yesterday morning. And that is why I remain skeptical!!
Robert, San Antonio, Tx
May 16, 2013 11:15am
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I always figured that this sort of thing was for rich people. Only the rich could be reasonably comfortable dishing out the money required in an MLM activity. I'm way too poor to even try doing that myself!
Will, Texas
September 04, 2012 9:54am