The Myth of “Income Opportunity” in Multi-Level Marketing


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How the MLM Income Myth Is Maintained

Confuse the Consumer

Consumers have had little or no useful data on MLM income claims. Consumers are, however, subjected to barrages of personal “testimonials” and “success stories.” Multi-level marketing employs a seemingly indecipherable language to explain its trademark “compensation plans” and business model that permit unlimited authorization of sales representatives and that pay rebates based on purchases by new recruits who are recruited by the earlier recruits in an endless chain.

 

▲ They refer to the model as consumer direct marketing, one-to-one marketing, personal

franchising, network marketing and many other colorful but ultimately misleading terms.

 

▲ Some MLMs describe their pay plans as unique or much more beneficial than others in the industry. They use specialized terms as stair-step breakaway, legs, binary and trinary, PV and BV, yet most of these pay schemes are essentially identical and yield the same ruinous financial outcome to the average participant.

 

▲ Circles and diagrams are drawn at recruitment meetings and a complex organizational

hierarchy is presented, including as many as 12 levels with names such as Regent, Platinum, Diamond and Blue Diamond.

 

▲ There are leadership bonuses, breakaway bonuses, production bonuses, multiple commission levels, and numerous types of “rebates.”

 

▲ Often a “suggested retail price” is applied to goods that are never retailed.

 

▲ Rebates, which are only discounts on the investor’s own purchases, are classified as

“income.”

▲ “Distributor markup” is sometimes used interchangeably with “gross profit” as if they are the same.

 

▲ Qualifications to earn payments or rebates depend on a complex factoring of “personal group” purchase volumes, the rank of the sales representative and the size, configuration and purchase volumes of the “downline.”

 

Other methods of confusing the consumer include:

Information on income put forth by some MLM companies or the MLM industry at large often mixes income data from MLM with statistics from traditional direct selling companies such as Avon and Tupperware.

 

Nearly all data that is presented by the MLM industry omit estimates or averages of normal business costs such as auto, telephone, travel, training or postage and shipping to operate an MLM business. In this way “gross income” is confused with “net profit.”

 

Inventory purchases are also ignored as business costs and are mingled or confused with

purchases for “personal use or consumption.”

 

Many MLM companies offer “average incomes” that are actually mean averages that meld the huge incomes of those at the top with thousands of others that make nothing at all. This leaves the impression that the “average” MLM participant actually earns a “profit”, when almost no one does.

 

Some use data only on “active” participants and exclude all those that had earned nothing and quit – the majority in some companies – thereby reducing the number of sales people divided into the total payouts and increasing the “average income.”

 

A similar misleading device is to count only the “active” distributors in a one-year time frame. This ploy conceals that the top level distributors who profit year after year are the

same people whose numbers do not increase, while the new recruits that lose year after year are a revolving group whose numbers mount each year. The actual number of “losers” multiplies year by year. The number of “winners” remains the same and does not grow. If a longer time frame were used, a true ratio of gainers to losers would emerge that would shock and discourage any new recruit.

 

Figures are almost never revealed on how many consumers join and quit the program each year, thus concealing the “revolving door” nature of the scheme and the fact that no stable customer base exists.

 

And, for most companies, percentages of rebate payments that are paid to each level are not disclosed nor is the percentage of money earned on offshore sales. When the payout per level is disclosed in a manner that is understandable, the gross concentration of payments to the top organizers is revealed along with the massive losses to all others.

 

In short, MLM solicitors do not disclose the basic financial information needed to make an intelligent investment decision. Many people therefore join on the basis of hope or the personal recommendation of someone else who has also joined on the basis of hope or on the blind faith in the claims made by the company about the “income opportunity.”

 

Hide the Pyramid Math

Beyond legal interpretations, the justification for prosecuting the non-retailing companies

also rests on simple math that any consumer can understand. The math referred to by the is important to the data and conclusions of this Pyramid Scheme Alert report on the MLM “income opportunity.” Obscuring this math is another important element of maintaining the myth of MLM income.

 

The math factor can be illustrated in a simple 6-level chain in which each person recruits just 5 people. At least three levels of recruits (5 + 25 +125 = 155) are needed for each participant to begin to achieve a profit based on override commissions from the purchases of the “downline.”

Illustration:

New Picture

 

Since only those with three levels below them are profitable, only the Top Level person and the individuals in levels #2 and #3 qualify. Each of the people in next three levels below does not have enough “downline” to generate a profit. (Those in Level #4 each only have 25 in their downlines. Those in Level #5 each have only 5 people, and those in Level #6 at the bottom have none. This means that only 31 out of 3,906, or less than one percentage in the six-level chain, have as many as three levels below them and are profitable. More than 99% are unprofitable based on their position.

 

This basic formula holds true no matter how much further the chain extends. Approximately 99% are at the bottom of the chain where profit is not possible. For example, if the scheme recruited one more level, Level #7, another 15,625 participants would join. The total would now be 19,531. The number in profitable positions, Top, and the individuals in Levels #2, #3, and #4, would grow to 156, and this number would still equate to less than 1% of 15,625-person organization.

 

The big numbers, which are cited by the scheme’s promoter as providing “extraordinary income potential,” are based on overrides from the deepest level of the “downline.” Only a tiny few can ever recruit to this level. This is mathematically predetermined from the start by the MLM structure and pay plan. The pay plan itself dooms the vast majority to financial losses, not factors of “hard work” or “following the plan.”

 

The trick of the scheme is to cover up this reality and to convince each and every enrollee that he/she can succeed by building this large and deep downline. Recruits are told that the program is a formula for wealth that “anyone can do.”

 

Obscure the Nature of the Business

Multi-level marketing is not the same as direct selling any more than it is franchising. Avon and Tupperware are direct selling businesses, but not multi-level marketing. Multi-level marketing is a specialized business model. It differs significantly from traditional direct selling in its unique and characteristic policy of authorizing every active sales representative to recruit others and to earn override commissions from the purchases of generations of recruits in a multi-tiered chain. This use of the “endless chain” of recruiting is the main point of controversy. It is the characteristic that invites the financial abuse and deception.

 

The override commissions paid directly by the company to recruiters are the primary source for the promised incomes in MLM, while retail sales profits are the primary source of income in traditional direct selling

 

The MLM management chain is not the same as management structures used by traditional sales companies. Traditional direct selling companies can organize entire countries with four levels of managers overseeing a direct sales force that retails directly to the consuming public or to business end-users. In MLM companies, the number of levels expands “infinitely” as upper levels are awarded bonuses on the purchase volumes of extended generations of 12-level chains that have “broken away” when they reach purchase-volume thresholds. In this way, many MLMs function as “endless” chains.

 

The multiple levels are each paid some commission on each purchase made by new recruits. Usually between 40-60% of the price paid by the new recruit is redistributed to the recruiters above the latest entry level. In many cases, the total amount of the wholesale price that is paid to the “upline” exceeds the maximum gross profit the new recruit could earn if he/she were to retail the product at full price.

Put on the Camouflage of “Product Sales”

Though virtually none of the “sales representatives” ever earns a profit or has any “customers,” a pyramid scheme can be made to appear as a “sales company.” This is because each new recruit makes a purchase of products and the commissions are all based on the purchases of products by other recruits. There may be virtually no end-users, just a long chain of “distributors.” The few sales representatives that do earn a profit do so only from a continuous influx of newly recruited investors (other sales representatives/distributors). If the recruitment program ends, their income ceases.

 

Though the recruitment-based scheme is camouflaged to appear as a “sales” company, the

classic elements of the pyramid scheme fraud are all present:

1. Multiple levels of investors to bring in more recruits;

2. Payments to gain and maintain a position on the chain;

3. Recruitment required to move up the chain where rewards are paid;

4. Early investors are paid directly from the newest recruits’ investments;

5. A structure that places the vast majority permanently at the bottom where no income is possible;

6. Each succeeding level in the recruitment-based scheme must be larger than the one above, and the numbers of total participants must grow successively, e.g. five sales representatives recruit 25 who must recruit 125 who recruit 625, etc. until saturation.

 

Such a scheme can never stop recruiting. It can never stabilize since it has no true customer base. For as long as the scheme operates and expands, the opportunity for recruiting declines, thereby further reducing the opportunity for income. Profit in such a scheme is not true profit but only a transfer of money from the latest recruits to the earlier ones.

 

Yet, the laundering of money through product purchases can camouflage the entire operation as a “sales company” based on “products” – not fees. The product sales in a recruitment scheme are induced by the false promises of income tied to ongoing inventory purchases. No purchase may be required to join the scheme, but monthly purchases are required to “qualify” for the “unlimited income” opportunity.


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