Network Marketing

Call them Network Marketing, Multilevel Marketing, or MLM, these pyramid plans are proven not to work.

by Brian Dunning

Filed under Fads

Skeptoid #176
October 20, 2009
Podcast transcript | Listen | Subscribe
Also available in Russian
 

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?

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.

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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.

Brian Dunning

© 2009 Skeptoid Media, Inc. Copyright information

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. 25 Nov 2014. <http://skeptoid.com/episodes/4176>

Discuss!

10 most recent comments | Show all 95 comments

MLM Bashers' Find them everywhere Its status quo, all the renowned inventors had to weather the same short-sighted ignorante rants, all of you like minded should not be driving autos, using wireless devices, or flying in airplanes etc... or even going to the supermarket for that matter. There are scammers operating in all sectors of business and charities also. Ever heard of the term BUYER BEWARE' It goes for all. I suggest get smart, or just buy lottery tickets and just do status quo and let us hear what you have to share when you actually know what your talking about.

Leonard, Mission BC
August 21, 2013 11:52am

"all the renowned inventors had to weather the same short-sighted ignorante rants, all of you like minded should not be driving autos, using wireless devices, or flying in airplanes etc"

That's objectively false. And doesn't make a whole lot of sense in the first place. The inventions you cite were highly sought after, people were falling all over themselves to be the first to invent them, and the public was clamoring for them before they even existed.

Another Nick, Alexandria VA
August 21, 2013 1:59pm

MLM insanity . Please stop these people . And NO. I will not give you the names of my friends and family . I swear they want this more Than my money

Mike S, Worcester Ma
August 21, 2013 7:33pm

Typical sorry thats what they have done to you' and many others,you did not get the point, if you can't, will not change with the times thats
OK its a choice but in "Free America" why take the rights from others,- living in the wrong country? All should be afforded to
benefit, from the right established. NOW look at history, the evolution of business practices...Grocery store to department store.. the history of franchise which had to go to court and win that method as did network distribution - consumer direct. The american dream is what people hope to live, not the american nightmare. For many if not for mlm there would be no opportunity. I love skeptoid' Not all
on their own can recognize the cardboard sandwich's and super-j ripoffs, the magic wands and and
water adulterating deals etc... Oh and advertising' too, Can't deal with change, what do one have to say about lottery tickets...Its status quo' By the way you might know of somebody who knows some
one who needs a good opportunity that they can actually afford? But a real legit ' product that they can get
paid for advertising, even if it is just word of mouth... Thanks , sorry this done in a rush.

Leonard, Mission BC
August 22, 2013 12:25pm

yes you need to research before starting anything...if you ask me, Walmart is a pyramid...i mean you have a whole lot of people at the bottom making minimum wage and one person at the top making all the money....i have been in network marketing for 2 yrs. now....this year i have already cleared over 50,000 dollars...and i don't have to punch a time card, or put up with a boss who is on a power trip...network marketing is the primary source of income in other countries...sounds like Brian Dunning doesn't have the balls to stick to anything to give it a chance....you people keep going to your 9 to 5 jobs, i think i will go take a nap while im making money!

Terry, Nashville,Tn.
September 23, 2013 3:20pm

Brian Dunning should definitely review his stats in the above article. Network Marketing is just like any other business. If you don't do the work you will not get paid. It's the perfect system where you can leverage hours. One can only work 8-12 hours a day; however Network Marketing allows you to leverage 100 people's effort of 1 hour a day. I.e. 100 working hours in your business per day. Just like most of the other articles on this website it is written with trending keywords to attract people to the website with all the advertising on it so that Brian can make some money of whoever clicks on the ads. Wondering who is scamming who here?

JP, Cape Town
October 14, 2013 6:37am

A friend of mine introduced me to one of these ponzi schemes about 18 Months ago, I reneged after doing some research on the internet.
Since then I have been emailing him anti MLM literature that I have sourced from the internet. It seems to annoy him but he is in a quandary because now and then I send him images of scantily dressed woman so is reluctant to take me off his mailing list..

Terry, Australia
December 29, 2013 3:34am

I've been aware of MLM for a while and members of my family do very well with it. Through them I have been introduced to other friends who also do very well. It's an interesting type of business. Some valid points were made in the comments about "if you don't put the work in, you will fail." I obviously agree with this, but I am also aware that the nature of the work people need to put into this business to succeed are very different than what most are used to. I have heard from and witnessed plenty of people who don't succeed, and who do put effort into it. Whether it is do to their lack of ability or lack of persistence, they failed. As much as there is an opportunity for anyone to do well, it is ridiculous to think that everyone will do well (which is unfortunate). There is the issue Brian brought up about the lack of focus on actual product sales. This is my biggest issue with the industry, for the most part people focus on recruitment and not product sales. I would rather see the industry function as more of a franchise where each persons business is focused on the consumer. I do think (I could be wrong) that some companies have more of this attitude, my impression of Avon or companies of that nature are heavily focused on selling their product to a client base, but, again, I could be wrong.

Summary: It is legitimate and viable, BUT, as Brian has said, there is an extremely high failure rate due to whatever the circumstances may be. Realize it's not viable for majority

Matt, Toronto
February 1, 2014 4:58pm

I would challenge those in your family who are doing so well in MLM to produce proof that they have received more money in commissions than they have spent on required product purchases.

So far, without exception, every case I've seen where participants claimed to have made money was all in the form of discounts or vouchers, which is pretend money.

Brian Dunning, Laguna Niguel, CA
February 1, 2014 5:07pm

I have seen some of their statements from the business and I also know the amount of product purchases they have made as they recently became involved in a new (to them) MLM. That being said, they are some of the very few who make a living, or any profit, in the industry. They do well because they are very successful at getting others involved in the business (which I also mentioned I am not a supporter of that being core of a business). Regardless, they are an example of success in the very large and likely sea of failure. The only point I try and make is that it is a business that can be viable,but in a more realistic view most people will fail.

Matt, Toronto
February 1, 2014 6:40pm

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