Not an MLM Anymore or Less

Recently, a friend invited me to a local hotel to hear a presentation about a terrific work-at-home opportunity that reminded me of my former neighbor Carol. She always needed extra money, really wanted to help people and wanted to work from home. Every other month or so she would come over, bubbling with enthusiasm about some “great opportunity” she had been introduced to by new friends of hers. She couldn’t wait to “share it” with me. So I would get out my check book and ask, “How much this time, Carol?”

I always hoped one of those programs would work for her, as I made another contribution to her learning curve. As a former executive member of the American Marketing Association, my suspicions were always aroused when I would hear her repeat one of four statements that for years have been used to recruit people into Multi-Level Marketing [MLM]. What do you think?

1. [True] [False] The Wall Street Journal has said that by the year 2010, 60 to 70 percent of all goods and services would be sold through MLM.

2. [True] [False] Network marketing is taught at Harvard and Stanford business schools and in numerous other leading colleges and universities throughout the country.

3. [True] [False] Some 20 percent of all the millionaires in America were created through network marketing.

4. [True] [False] John Naisbitt, in his best-selling book, Megatrends, says network marketing is the wave of the future.

If you answered False to each of them, you are correct. If you answered Yes to any of them, you are certainly not alone. According to mlmwatch.org, the answer to each is False with a capital F. But you just can’t keep a good false statement down, as was the case with Carol.

The Multi-level marketing strategy is one in which a sales force is compensated not only for their personally generated sales, but also for the sales of others they recruit. That creates a downline of “distributors” and a hierarchy of multiple levels of compensation. Other terms for MLM include network marketing, direct selling and referral marketing.

MLM companies have been frequent subjects of criticism as well as the target of lawsuits. Herbalife, PrePaid Legal, Amway, Usana, and others have all spent time in court to defend themselves from claims brought against them, just as any other multi-billion dollar company. They have paid large financial settlements. They have also demonstrated that they are not fraudulent pyramid schemes.

Much of the criticism leveled against MLMs has focused on their similarity to illegal pyramid schemes, high initial start-up costs, and emphasis on recruitment of salespeople over actual sales, requiring salespeople to purchase and use the company's products. Cult-like enthusiasm techniques and exaggerated compensation schemes are not uncommon complaints either, especially from people who tried it but didn’t like it.

However, cases filed in United States Federal Court are quite different since verdicts can result in jail sentences, such as the Madoff verdict. Federal agencies get involved when the venire of legitimacy is removed from an MLM, exposing it as a pyramid scheme.

Some people believe that MLMs are nothing more than legalized pyramid schemes. So, what is the difference between a pyramid scheme and MLM? Pyramid schemes are a form of fraud.

The Federal Bureau of Investigation states, “Pyramid schemes . . . are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships.”

The Securities and Exchange Commission says, “In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.”

The Federal Trade Commission warns, "Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It’s best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products."

The critical question for the FTC is, if I may paraphrase, do commissions come from selling the product or from selling the right to sell the product.

Ever hear of the Latin expression caveat emptor, let the buyer beware? It all boils down to you, as a consumer, to be wary of things that sound perhaps a bit too good to be true. Before you get out your check book and commit to raking in huge bucks for little extra effort in the comfort of your home, do some research first.

• Find and study the company’s track record
• Learn about the product(s)
• Ask some who, what, when, where, how questions
• Understand any restrictions, such as licensing
• Talk to other distributors (beware of shills)
• Use a friend or adviser as a neutral sounding board
• Take your time
• Think about whether this plan suits your talents and goals

As an income opportunity based on the mathematical idea of a pyramid, technically referred to as “an exponential expansion system”, MLMs have great emotional appeal to a growing number of people in our economy. Multi-Level marketing or Network Marketing opportunities appeal to a need for extra income for millions of households. Even so, regardless of celebrity endorsements, such systems promising financial salvation are not for everyone, especially for my former neighbor Carol.