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Multi-level marketing (MLM) started off as an innovative scheme launched by California Vitamin Company (later Nutrilite) in 1945 that allowed distributors with a minimum of 25 regular customers to recruit new distributors and draw a three percent commission from their sales.
The scheme also offered ongoing payments whenever such distributors re-ordered, allowing for a residual-like income. This caught on and, since then, MLM businesses have spread all over the world, under various names such as affiliate marketing, home-based business franchising, network marketing, direct selling, referral marketing, and pyramid selling. Companies such as Avon, Electrolux, Tupperware, and Kirby have leveraged this concept to become household names. About 1000 firms currently use multi-level marketing in the US.
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The stigma associated with MLM comes from its close resemblance with illegal pyramid schemes. Such schemes require recruiting people to not only buy and sell the product, but also to recruit other people who will not only have to buy and sell the product but also recruit people...ad infinitum. Each recruitment or sale earns the member a commission, and a portion of such commission.
Illegal pyramids and Ponzi schemes use the same structure, but unlike genuine MLM the major activity and source of commission is recruiting members rather than selling products. Many ponzi and pyramid schemes disguise themselves as MLMs by offering products for sale, but revenue coming from recruiting members and members buying a certain quantity of products or paying a fixed membership fee. In such cases, the company entices recruits to buy more products than they can sell, often at inflated prices, to earn incentives. When this occurs throughout the chain, people at the top of the pyramid reaps substantial profits, but little or no product moves to market or to actual end users and the people at the bottom who make the actual payments find inventory accumulating in their houses. Sales among people inside the pyramid structure or to new recruits joining the structure, rather than to the public, are sure tell-signs of such frauds.
Part of the stigma comes from the very structure. Even when concerned with the legitimate selling of products, the structure is unsustainable beyond a certain level. At some point, the ability to recruit more members ends, and the scheme collapses. When such collapses occurs, most people in the chain, except those at the very top of the pyramid, end up empty-handed.
The United States Federal Trade Commission (FTC) cautions the public to stay clear of multilevel marketing plans that pay commissions for recruiting new distributors, regardless of whether they offer products for sale. The FTC clarifies that the test of the legality of an multilevel marketing activity is the commissions to participants coming from sale of goods and services, rather than such sale-based revenues being incidental to the purchase of the right to participate in a moneymaking venture. In other words, if the prospects of income from the scheme depends more on the number of distributors recruited rather than sales to such people, or sales to people outside the plan, then the scheme is a fraud in nature.
Good companies place emphasis on selling the actual products -- especially to outside customers, and consider recruiting new members only as a means to drive sales, rather than as an end in itself.
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One major cause for multilevel marketing stigma is the delusion it radiates. The concept appeals to the masses as an innovative and radically alternative way of conducting business. It sells hope and entices members as a genuine “get rich quick” scheme. This is when, in reality, the company offers complicated and difficult to understand schemes that while theoretically allowing people to make it rich in the short term, include many “ifs” and conditions that are virtually impossible to fulfill. This, combined with the high upfront membership costs, leads to most participants losing money rather than making any money. The few who make money rarely make anything more than a supplementary income, very often lesser than minimum wage.
Amway ranks as a global leader of MLM activity, but government estimates in the UK (published in The Times), reveals that just 10 percent of Amway's agents in Britain made any profit, and less than one in ten actually sell a single item of the group's products. UK Justice Norris found in 2008 that out of 33000 members engaged in MLM activity, a mere 90 made sufficient incomes to cover the costs of actively building their business. That is 99.7 percent, far from gaining any income actually lost money.
Similar estimates in the USA place average annual income from MLM for 90 percent of all participants as no more than US $5,000. Amway USA’s own disclosure statement reveals that "active" Amway distributors earn an average of just $115 a month, and that a miniscule 0.26 percent of all members make more than $40,000 a year.
A landmark 1979 Federal Trade Commission decision on Amway held that the basic business model was not illegal per se; the company was guilty of price fixing by requiring "independent" distributors to sell at the same fixed price and making exaggerated income claims. Another class-action lawsuit against Amway and some of its high-level distributors alleged that Amway was indulging in an illegal scheme where distributors rarely sold products to outside customers, and that new recruits were "effectively required" to purchase products and event tickets from high-level distributors. Amway decided for an out-of-court settlement of $55 million.
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Many researchers compare multilevel marketing companies as “cults”, indulging in misleading, deceptive, and unethical behavior, such as the questionable use of evangelical discourse to promote the business, the exploitation of personal relationships for financial gain, and using propaganda to motivate the members. There have also been instances of physical attacks on people opposing such schemes.
Very often, MLM companies force members into blatant promotion of the products, even if such values run contrary to one’s belief system. The conditions of becoming and remaining a member may include sitting through periodic meetings and be subject to become "motivated" to coerce friends and family to hear "the pitch". The pitch is usually hyperbole and a flagrant appeal to greed and materialism, and aims at clouding the recipient’s mind with unbridled greed; making them take a decision without applying reason, something which even die-hard materialists find offensive.
Multilevel marketing exploit member's personal friendships and relationships under the guise of "networking". The first, and usually the only, targets of the member’s loony and deceptive pitches are friends and relatives. This ultimately results in unraveling lifelong friendships, poisoning church and civic groups, and family and friends tending to avoid the person. The MLMer turns the neighborhood into a marketplace, loosing something precious and not easily regained in the process. The approach of “the end justifies the means”, is the cause of much misery in the world.
MLM is a marketing strategy that works as a way to let people know and buy products, and offers a customized and personalized marketing approach, if done right. Marketers need to avoid the temptation of earning quick profits by spreading delusion and rather lend clarity. History stands testimony that MLM is, at best, a source of supplementary income rather than a short cut to riches, and a means of personalized selling rather than a disguised money-chain or hyperbole marketing. Position the offering as such, and make participation and level of involvement for members voluntary and flexible.
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- Federal Trade Commission. “Pyramid Schemes.” http://www.ftc.gov/speeches/other/dvimf16.shtm.%20Retrieved%20JUne%2014, 2011.
- Vandruff. "What is Wrong with Multi-Level Marketing?" http://www.vandruff.com/mlm.html.%20Retrieved%20June%2014, 2011.
- Donnell, Jayne O. "Multilevel marketing or 'pyramid?: Sales people find it hard to earn much" http://www.usatoday.com/money/industries/retail/2011-02-07-multilevelmarketing03_CV_N.htm.%20Retrieved%20Jun%2014, 2011.
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