Multi-Level Marketing Schemes are Simply Pyramid Schemes

MLM is a marketing strategy where wealthy people of ethical inadequacy sell the idea of wealth to the lower classes.  This business model began in the 1800s.  Charles Ponzi, when he started his schemes in 1919.  He paid off old investors with new ones.  In a sense, that is what MLMs are, but on the borders of legality, since there is an actual product or service.  In 1934, Carl F. Rehnborg started the Nutrilite company, the first company to combine the methodology behind direct selling and the Ponzi scheme, and created modern multi-level marketing. 

Multi-level marketing (MLM), is also called pyramid selling, network marketing, and referral marketing.  It is a marketing strategy for the sale of products or services where the revenue of the company is derived from a non-salaried workforce, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system. 

While each MLM company has specific financial compensation for the earnings to their participants, the common feature found across all MLMs is that the compensation plans theoretically pay out from only two potential revenue streams.  The first is from commissions of direct sales by the participants to their own retail customers.  The second is from commissions based upon the wholesale purchases by other distributors below the participant. recruited by them, into the MLM.  In the organizational hierarchy of an MLM, they participants are referred to as the down line distributors.  MLM salespeople are expected to sell products directly to end-user retail consumers by means of relationship referrals, and word of mouth marketing.  They are incentivised to recruit others to join the company's distribution chain as fellow salespeople so that they can become down line distributors. 

Logically, this is an untenable system.  The Federal Trade Commission of the US published a study of over 350 MLMs, and found that 99% of the participants lose money.  However, MLMs are popular in some circles because people adhere to the delusion that they can achieve large returns through their networks.  This is statistically improbable.  It works because people are bad at mathematics. 

If we apply statistics, if an MLM recruits 10 people, and they all manage to fulfill that potential of recruiting another 10 downlines, that would mean 110 people selling the product.  If they all manage to recruit another 10, that would mean 10,110 people selling the product.  If we assume each recruited another 10, it would mean 100,010,110 involved in the MLM.  This means, at anything past the third level of distribution, it breaks down, since the odds of there being that many distinct individuals involved is economically untenable, even in an entire region.  If all these people are distributors, then who is buying?  More pertinently, what are they selling that is so special that everybody buys the exact same brand of it? 

Many MLMs do not make money selling products.  If their products were any good, they would be found in retail, where the company can maximise revenue without so many layers of distribution costs.  MLMs make money recruiting gullible people, who then make money from other gullible people.  These joiners pay a premium commission for product packages to become wholesale distributors of largely useless products. 

Despite the logical fallacy of the system, the MLM industry is still one of the world’s fastest growing.  They sell everything from jewellery to essential oils, to make-up, to even household appliances.  In the US, 6.2 million people sold products and recruiting distributors in 2018.  Network marketing industry statistics show that of the 6.2 million direct sellers, 1 million were full-time sellers, while 5.5 million were part-time distributors.  Over 10 million new pitches to US women are made annually, since they are the primary target market.  These women are mostly aged 18 to 54 years, and make up 15% of the female population in the country.  There were US$600 billion in commission payouts between 2009 and 2017.  Revenue for the industry was US$1.5 trillion in 8 years.  Of these, 45% of sales come from Asia.  In 2018, Asia made a total of US$85 billion, followed by Europe with US $38 billion, North America with US $36 billion, and finally, South America with US $27 billion.  Since 2009, the industry has seen exponential growth of $72 billion global sales, from US$117 billion in 2009, to US$189 billion in 2017.  The United States and China are the top MLM markets at 18% of global revenue.  South Korea and Germany tie at 9%.  Japan is at 8%, Brazil at 6%, Mexico, France and Malaysia at 3%, Taiwan at 2%, and finally all the other countries in the world at a combined 21%. 

Globally, the industry has grown by 1.7% annually.  The top three markets are the US, China, and South Korea.  The three countries bring in close to US$90 billion in revenue.  The Direct Selling Association claimed that in 2018, the industry made around US$35.4 billion in the US.  This was an increase of 1.3% over 2017.  This revenue was earned from sales of products or services to 36.6 million people.  Of these, 10.4 million were discount buyers, while 26.2 million were preferred clients.  The majority of distributors were aged between 35 and 44 years, comprising 26% of distributors.  Those aged 45 to 54 years follow closely at 24%, while the figure for 25-to34-year-olds is 19%.  The marketing approach is least popular with people below age 25. Those aged 65 years come in at 8%. 

Despite the fact that only 1% of those direct sellers would make any money, 29% of distributors stay as direct sellers long term.  41% of those who join as direct sellers stay motivated to find income potential in the business.  Together, they drove MLMs to a sales record of US$189 billion in 2017, from US$117 billion in 2009.  In 2017, the number of distributors grew to 166 million worldwide.  Of these, 39% of direct sellers cease being part of an MLM at some point in their life.  The primary reason they cease being MLM marketers is because they no longer want to pitch to family and friends.  One of the reasons people have been taken in by MLMs, is also because of the way they recruit, and essentially, indoctrinate people.  They are like cults.  They create a support structure that is both self-reinforcing, and coercive.  That sort of predatory recruitment means that there are people involved in MLMs who actually require intervention to leave. 

Whilst MLMs are distinct from pyramid schemes, this is on the borders of legality, and there is still much about this system that is clearly unethical.  MLMs emphasise new recruits as a source of income over actually selling their product.  They do deliver a product, which makes it legal, but that is not the primary source of revenue.  This opens these companies up to periodic censure and legal action.  For example, in 2014, Herbalife agreed to pay US$15 million to settle a class action lawsuit regarding their discounting and recruiting process.  This is not the first time any of their policies have been found questionable.  Even after the settlement, the Federal Trade Commission is still investigating them.  Various MLM companies have been sued or prosecuted for their failure to accept refunds, to fraud, to false advertising, to racketeering, to money laundering.  There is a lack of accounting for this business model, which explains why recruiters routinely lie about earning prospects.  They are not held to the same stringent compliance standards of many other industries. 

Due to the nature of their distribution, they quickly reach market saturation in an area.  They then rebrand themselves as a new get-rich-quick opportunity  For example, Nu Skin, the cosmetics MLM, has also been known as IDN, Big Planet, Pharmanex, and Photomax in the last 30 years.  They do this because they target the same vulnerable, gullible demographic, who fall for this, over and over, again; or the recruiters who take advantage of these people for money. 

In summary, the only people who have managed to get really wealthy from MLMs are the founders of these companies, and the very first movers, who often have a relationship with these companies themselves.  They have no qualms about lying about their products, emotional blackmail, and other forms of underhanded selling.  Everyone else is a dupe.