Robert FitzPatrick of Pyramid Scheme Alert has conducted extensive research on multi-level marketing companies (MLMs). The research can be difficult with companies like Mary Kay, which are privately owned and therefore don’t release hardly any information about the dismal earnings of the sales force.

On the other hand, certain companies using MLM models that are similar to Mary Kay’s way of doing business, do release public information about their representatives. Robert studied figures for Amway (Quixtar), Nuskin, Nikken, Melaleuca, Reliv, Arbonne, Free Life International and Cyberwize.com.

Written by Black Nova

Just keep saying “no.” I have learned when my friends invite me to MLM engagements of any sort to tell them that I have a personal rule of not supporting any form of MLM because I don’t believe in the business model.

Regardless of the quality of the product, if it is a direct selling business, I will not buy product or attend any parties or meetings. This was hard at first because it went against the code of being nice. But Mary Kay and MLMs like it count on this. This is why they still push parties. They know women will be guilted into “supporting” their friend’s new “business.” Real businesses have Grand Openings and don’t need to beg people to support them.

Written by Jon Taylor, PhD

A study of Utah tax preparers sheds some light on who is profiting from multi-level marketing, network marketing, pyramid schemes, or a variety of other labels given to these sham businesses.

1. Summary of what was learned from these studies

Are MLM’s* (multi-level marketing or network marketing companies) legitimate? Or are they thinly disguised pyramid schemes that enrich a few at the top of a pyramid – at the expense of a multitude of unwitting downline victims? If the latter, then consumers, the press, consumer protection agencies, and investors (for publicly traded MLM companies) have been duped into accepting it as legal and ethical, when in fact it is not.

Written by Rachel

I recently read a quote from a site promoting an MLM:

To recoup your initial $570 costs, focus on enrolling two distributors into your downline and then help them also enroll two people each.

This is the problem. Right here. It’s the exponential growth caused by unlimited recruiting (what MLMs like to bill as “unlimited earning potential.”) In the midst of a lot of talk about selling the product, the real focus for leadership in any MLM is recruitment. Some MLMs push recruiting harder than others, but they all have two things in common.

Dr. Jon Taylor, the founder of the website Truth on MLM has spent years researching multi-level marketing companies like Mary Kay Cosmetics. He’s done a variety of research, but one of his really interesting projects was surveying hundreds of tax preparers about their MLM customers. He gathered data about sales to actual consumers, commission levels, and profits.

I’m also a fan of the 5 red flags of recruiting MLM’s that he came up with. Here are the red flags, with my comments about Mary Kay inserted:

1. Would you, as a new recruit, be permitted and even encouraged to recruit other participants, who would in turn be encouraged to recruit others, and they still more, etc… from whom you could collect commissions and/or bonuses on what they buy or sell?

Robert FitzPatrick of Pyramid Scheme Alert has conducted extensive research on multi-level marketing companies (MLMs). The research can be difficult with companies like Mary Kay, which are privately owned and therefore don’t release hardly any information about the dismal earnings of the sales force. (Who would want to admit the financial truth unless forced to? And don’tcha think that if consultants were doing so well in Mary Kay across the board, that the company would be out there touting these statistics left and right?)

On the other hand, certain companies using MLM models that are similar to Mary Kay’s way of doing business, do release public information about their representatives. Robert studied figures for Amway (Quixtar), Nuskin, Nikken, Melaleuca, Reliv, Arbonne, Free Life International and Cyberwize.com.

Multi-Level Marketing expert Robert FitzPatrick debunks the myth of earning money in MLMs in his article, The Myth of “Income Opportunity” in Multi-Level Marketing.

Multi-level marketing companies live and die by the claim that participants can make money. From some extra part-time money to complete financial freedom, MLMs promise you can have it. Robert Fitzpatrick notes:

The claim by multi-level marketing (MLM) companies of offering consumers a viable “part time income” or an “extraordinary income” greater than most other businesses or occupations is their hallmark attraction. It is also their greatest defense against persistent charges of pyramid scheme fraud, mind control and deceptive promotions. The question is whether MLM is a social and financial blight or a benefit to consumers. Legitimacy of this business ultimately hinges on the truthfulness or falsehood of its income claims. It is a question that affects the fate and fortune of more than five million new recruits in North America every year and countless more in other countries.

This report reveals that 99% of all sales representatives each year in the sample of companies analyzed earned less than $14 a week in rebate income. This figure is before all business expenses, inventory purchases and taxes are deducted. The figure therefore represents a significant financial loss for virtually all that join these schemes. Additionally, the report shows that on average no net income is earned on average by MLM distributors from door to door “retail” sales.

MLM companies seek to obscure their devastating failure rates by disclosing the number only of “active” participants and limiting the income figures to a one-year or even shorter time frame, thus concealing the factor of the ongoing and mounting losses of new investors. Most MLMs do not reveal any data at all on actual average incomes.

If all the participants over a five-year period are included in the calculations, the failure rate rises even further. Less than one in one-thousand will be shown to have gained any profit at all. The so-called successes in MLM are in the same small group positioned, year after year, at the top of the recruitment organization.

The business model and business practices of most multi-level marketing companies directly cause the financial losses suffered by millions of consumers, not normal competitive factors orthe levels of efforts or talents of the participants. The collective losses represent an enormous transfer of money from several million people in the US each year to a handful of owners and recruiters. Like any other force that contributes to general impoverishment, this income transfer damages credit worthiness, breaks up marriages, ends friendships and degrades communities.

Of the two categories of the MLM income opportunity, rebate income and retail sales income, the most publicized are the rebates, commissions and bonuses paid out on the purchases by “downline” recruits. This is the source that the companies claim has “unlimited potential” based on the opportunity to derive payments from an “endless” chain of recruits. MLM allows all distributors to recruit others and qualified distributors to receive rebates on the purchases made by multiple levels of recruits that recruit more recruits.

This report analyzes data from eight representative MLM companies. Seven of the companies that are analyzed are major and very well-known MLM companies and are members of the Direct Selling Association. One is newer and growing and not a DSA Member. Charts are provided showing the actual commission payouts on a per-10,000-sales-representatives basis for seven companies. The data show not only that virtually no recruits earn rebate profits but also that the MLM payout schemes transfer the lost investments of the great majority of participants to a tiny number of organizers at the top of the recruitment chains.

FitzPatrick also discusses how little actual retail selling goes on in MLMs:

The Disguise of Direct Selling

The second element of the MLM “income opportunity” is the claim of profit from retail sales by MLM sales representatives to consumers. The retail sales opportunity is the basis for the industry’s claim that it is a form of “direct selling.” Additionally, the retail sales potential is held up as a defense against pyramid scheme charges since the payments to the upline are based on the product purchases of new recruits, not chiefly on entry or membership fees.

This report exposes the myth and refutes the claim of MLM as a “direct selling” business that is based on retail sales. Due to factors outlined in the report, the MLM sales force seldom carries out retail selling. A statistical review of twenty-one (21) MLM companies representing 5 million sales people and “projected” retail sales of $10 billion reveals that even if retail sales are assumed to be occurring, the average MLM sales person is not earning a net profit from retail sales.

Read the entire report here. 

A 1997 article from Forbes magazine does an excellent job of explaining the pyramid that is multi-level marketing. And I don’t think anyone is going to accuse Forbes of being “bitter ex-MK consultants who coudn’t make it” or “anti-MLM zealots who can’t see the truth.”

The article is about Excel Communications, but really applies to just about any MLM you could think of. And they kindly lumped in Mary Kay just for us! I’ve highlighted the most telling things:

Today we continue with the other half of the 30 common misrepresentations by recruiting multi-level marketing companies, as complied by MLM expert Dr. Jon Taylor.

Tell me you haven't heard these a million times in Mary Kay…

“It takes time to build any business.” “This is not a get-rich-quick scheme, but a ‘get-rich-slow’ program.” “Don’t expect instant success,” etc.

MLM promoters sell recruits on their programs as a business, but defend it to authorities as a “direct selling” opportunity. However, In legitimate direct sales programs, sales persons earn commissions right away and don’t have to wait months or years for commissions to exceed expenses.

Take advantage of “momentum” and “windows of opportunity.”

Again, this kind of appeal has been used for twenty years. In any endless chain scheme, the momentum cannot continue indefinitely, leaving those who come in later in a loss position, which is approximately 99% of recruits.

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

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.

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

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.

Fear of loss (of potential income by not recruiting aggressively) is a great motivator.

If MLM participants understood what is happening to them, they would fearm accumulating further losses by continuing to invest in the MLM.

You will belong to a great support team. In MLM, you have a whole network of people willing to help you succeed and be your friends.

Some MLM’s operate like a cult with an “us vs. them” mentality. Watch how quickly the team ostracizes you when you quit or discover contrary information about the legitimacy of the program.

You will be offering people you care about the very best products available for promoting their health and well being.

No matter how high the quality of the products, investment in products for which you do not have orders in hand becomes a cleverly disguised means of laundering investments in a product-based pyramid scheme.

Our products are unique and consumable – perfect for repeat business.

MLM products are typically “potions and lotions.” The secret formulas are a cover for the fact that they are priced too high to compete in standard markets.

Products are less expensive through MLM because you cut out the middleman.

MLM creates thousands of middlemen, with few real customers outside a bloated network of “distributors” ( “agents,” “consultants,” “demonstrators,” etc.) And typically, they are very expensive; i.e., not competitively priced.

Build your business by duplication. Buy five of these “business in a box” packages now, sell them to five people, and ask each to do the same, etc. Be a “product of the products” by signing up for monthly shipment of these items. Soon you will be reaping huge commission checks.

This is how recruiting MLM’s earn fortunes for their top recruiters. Commissions from initial and ongoing purchases by new “distributors” (in hopes of profiting) is the life blood of their business. The promised rewards never come, except to those who recruit their way to the top of a pyramid of participants. Take away inducements for participant purchases, and these companies would fall like a house of cards.

Our “tools for success” are unbeatable. Sign up for our seminars and conferences, and buy our books and tapes to assure your success in this business.

In at least one major MLM, the “tools business” is a pyramid within a pyramid. Hardly anyone makes money selling products, so a lucrative source of income for those at the top is the sale of “success tools” to supposedly assure the success of their downline – who are in fact only further victimized when they buy these motivational items.

MLM is like insurance, investing, inventing, acting, and writing in that hard work at the outset yields residual income for the rest of your life. This is done be “leveraging” the efforts of your downline. So you can retire early, travel, etc.

MLM is more like gambling than legitimate residual income. It appeals to the “something for nothing” mentality. MLM addiction has been observed in some “true believers.” The large residual incomes reported are more the result of time of entry and willingness to deceive prospective recruits than of payoff for hard work. To succeed in MLM, one must leverage one’s deceptive recruiting through others who can be persuaded to do the same.

Some very reputable people are involved in MLM. This credibility argument is used with many scams. Notables can be bought.

Some MLM companies invest in very worthy (and visible) causes. The mafia supported local charities. And because a bank robber donates some of his take to charity, does that excuse the robbery?

You will be helping your friends and family by recruiting them into your downline.

For potential personal gain, you are exploiting those you care about the most. In other words you are squandering your social capital.

Jon M. Taylor, MBA, Ph.D.
President, Consumer Awareness Institute and Advisor, Pyramid Scheme Alert
E-mail: jonmtaylor@juno.com
Web site for MLM research and guides – www.mlm-thetruth.com 

the lies that multi-level marketing recruiters use to con people into signing up for their scams change little from company to company. Dr. Jon Taylor, a noted expert on MLMs, put together a list of 30 common misrepresentations, and here's the first half of them.

I bet all of us have heard most of these at one time or another in our Mary Kay experiences, either when we were being recruited or when others were being sucked into the pink vortex…

Presented as a great “income opportunity,” with huge incomes reported for many.

Recruiting MLM’s nearly always lead to certain loss for new recruits. A few are at the top of a pyramid of participants are enriched at the expense of a multitude of downline participants, about 99% of whom lose money.

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

Holding up top earners as examples of what others can do is deceptive. It is unfair to sell tickets when – for nearly everyone – the ship has left the port.

Average earnings statements on official reports make MLM’s appear highly profitable.

Reports of average incomes are full of deceptions – (Example – 20 on one page for Nu Skin’s report of “Actual Average Incomes.” See “Report of Violations” of the FTC Order for Nu Skin to cease misrepresenting earnings of distributors.)

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

Products are high priced and sold primarily to recruits to “do the business,” rather than to persons outside the network of participants.

Presented as a legitimate business – “not a pyramid scheme.”

Product-based pyramid schemes have been found to be the most extreme of all the types of pyramid schemes, with the highest loss rates (approximately 99 %) – far worse than for no-product schemes, or even than most games of chance in casinos.

Work for only an hour or two a day, and build up a “residual income” that will allow you the “time freedom” to quit your job and spend more time with your family or do whatever you want.

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 are only fattening their upline’s commissions. And is there anything immoral about hard work for honest rewards?

“The job market is not secure.” The stock market is even shakier. MLM offers a much more secure and permanent (residual) income.”

MLM is far more risky than either the stock market or the job market. It even makes gambling look like a safe investment by comparison. Residual income for almost all MLM recruits is a myth.

Standard jobs are not rewarded fairly. In MLM, you can set your own standard for earnings.

Fair? Most MLM compensation plans are weighted heavily towards those who got in early or scrambled to get to the top of a pyramid of participants.

“If not legal, the program would have been shut down long ago.” MLM’s have survived legal challenges. The fact that they are still around tells you they are legitimate.

Consumer protection officials are reactive, not proactive. Since victims rarely file complaints, law enforcement seldom acts against even the worst schemes. Victims don’t complain because they blame themselves, and they fear self-incrimination or consequences from or to their upline or downline.

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

The system itself is inherently flawed – an endless chain recruitment of participants as primary customers. The vast majority will always lose money.

“In any business, one must invest time and money to be successful.” (Committed MLM participants may continue investing thousands, and even tens of thousands of dollars, over many years before running out of
money or giving up.)

The more one invests in time, money and effort, the more he/she loses – unless willing to deceive enough people to rise to the top of a pyramid of victims. In legitimate companies, sales persons are not expected to stock up on inventory or subscribe to monthly purchases. But in recruiting MLM’s, incentivized purchases (required to participate in commissions and/or advancement) are often merely disguised or laundered investments in a pyramid scheme.

An MLM company report of “actual income” of distributors may boast that “.16% of active distributors have achieved the level of _____ (the top income level)” etc. This is made to appear to be respectable odds of success. (See the book “How to Lie with Statistics”)

When statistics are presented without deception, the “opportunity” is not so attractive. The “.16%” is 0.16% – or odds of 0.0016, and ALL who signed up should be factored in. But MLMs eliminate dropouts in their statistics – a huge deception. With less than 10% remaining after five years, the number should be reduced by 90%. This leaves odds of 0.00016 of reaching the top level where the money is made. This looks far worse that “.16%”

MLM is the “wave of the future.” In fact, “Our MLM is experiencing phenomenal world-wide growth,” etc. “So get in on the ground floor of this great growth opportunity.”

MLM’rs have been saying this for twenty years, but MLM still accounts for less than ½ of 1% of consumer purchases – in spite of the fact that the number of MLM companies has numbered in the thousands. MLM’s come and go, as do new recruits, 99% of whom drop out. Long-term MLM growth is a myth.

Saturation never happens. Turnover, as in any business, is a reality that assures an ample supply of available prospects. (NOTE: The issue is not TOTAL saturation as MLM apologists suggest, but MARKET saturation. In a town of 10,000 people, the notion of 10,000 distributors to serve them is absurd.)

With few real customers, MLM products are sold by recruiting a revolving door of new “distributors” who buy products to “do the business.” And since people perceive the opportunity as dwindling with each new “distributor,” market saturation requires promoters to recruit elsewhere. So MLM’s quickly evolve into Ponzi schemes, requiring the opening of new markets and/or new product divisions to repay earlier investors, as has happened with Amway (now Quixtar) and Nu Skin (which became IDN, then Big Planet and Pharmanex). It’s not turnover, but continuous churning of new recruits to replace dropouts.

The demand for these MLM products are growing at a rapid rate. “They literally sell themselves.”

The sale of products is distributor-driven, not market driven. Most products are sold to new participants to get in on this “ground floor opportunity.”

Jon M. Taylor, MBA, Ph.D.
President, Consumer Awareness Institute and Advisor, Pyramid Scheme Alert
E-mail: jonmtaylor@juno.com
Web site for MLM research and guides – www.mlm-thetruth.com