10 Shocking Facts About Multilevel Marketing Schemes
By Gordon Gora, Listverse, 26 November 2015.
By Gordon Gora, Listverse, 26 November 2015.
Everyone has heard of a “sure thing” that will make them rich, such as the advertisements for getting rich on the Internet. The vast majority of us know that these are just scams, but for others who are desperate, they seem like lifesavers. Many of these advertisements are for multilevel marketing companies (MLMs) like Amway or Herbalife, which have infamous reputations.
Although some people defend the companies, others claim that they are no more than glorified pyramid schemes. So far, these companies have been allowed to operate with little trouble from the authorities, but more people are becoming aware of their many dangers.
10. A Legal Loophole Allows Them To Exist
An MLM is almost identical to a pyramid scheme, but the emphasis is on selling products rather than recruiting members. Pyramid schemes work by allowing individuals to sell products and recruit more members as sellers. A person’s recruits are called his “downline.” Any money made by someone in the downline is split between the distributor (salesperson) and the recruiter.
This arrangement is called a pyramid scheme because the person at the top recruits distributors, those distributors then recruit more distributors to work beneath them, and so on. Eventually, there’s a pyramid of recruiters and distributors. If the business model depends on recruiting more members for its income, it is considered a pyramid scheme.
The business model described above is illegal. Confusing right? MLMs and pyramid schemes are so close in nature that a huge, unregulated, grey area exists. MLMs were created as a loophole to get past the law against pyramid schemes. Technically, an MLM is considered legal if the business model depends on selling products rather than recruiting more members.
Although it’s most commonly called multilevel marketing, this business model may also be referred to as “network marketing” or “direct sales.” There are thousands of variations of this scheme, but the most well-known MLM is Amway. Even though Amway’s business model is almost identical to a pyramid scheme, the Federal Trade Commission (FTC) has said that Amway is a legitimate business because they focus on selling products, not recruiting more distributors.
9. MLMs Are Unsustainable
An MLM remains profitable by ensuring that a constant flow of newly recruited members sends money to their upline (the people above them in the pyramid). While most MLMs claim that their businesses are derived from product sales, many make their money from recruiting new members (which is why there is so much controversy about whether they are pyramid schemes). However, this business model is inherently flawed because there are a finite number of people on Earth.
Let’s look at an example. Suppose there were only five people in the world, and one of them recruits another to join his “network.” That new member then recruits another person, who recruits another, who finally recruits the last person on Earth. Now, all five are in the “network.” Their scheme can no longer sustain itself because all possible recruits are now members. There is no one left to join or buy products.
If you apply that scheme to the real world’s population, the results will eventually be the same. Suppose each new member had to recruit 10 more people to make a profit. By the ninth cycle of recruits, you would need 10 billion people - more than the population of the Earth in 2015 - to remain profitable.
In this situation, the market would be saturated with too many people trying to sell the same product. While the bottom would fall out for those in the lower tiers of the scheme, those on top would make a handsome profit by collecting commissions and fees from those in their downlines. The people on top get rich from the failure of the people at the bottom.
8. Amway Has An Almost Hilarious Rate Of Failure
While Amway claims that its business model is multilevel marketing, many believe that it is a legal pyramid scheme. Amway has endured controversy for years because of its setup, but as it stands, Amway appears to be here to stay.
One of the more controversial aspects of the company is their advertising, which claims that you can make large amounts of money working from your home, retire in a short time, or join a network of successful, like-minded people.
Most of us have probably seen ads for “making money on your computer” while on the Internet. Amway has also made some lofty claims about the money you can make by working with them. However, they rarely produce evidence of anyone making a profit by selling their products. By most estimates, the Amway failure rate stands at 99 percent.
Often, Independent Business Owners (IBOs), as Amway calls their distributors, lose money. In 1983, the Wisconsin Department of Justice showed that the top tier of Amway distributors in their state had a net loss of US$900 on their income tax returns. Between the costs of buying the products, recruitment fees, seminar costs, training tapes, and other products considered “essential” to success with Amway, you have to spend thousands of dollars before you even begin selling.
According to Amway, they charge their IBOs so much because of the great “opportunity” for success. While the bottom 99 percent work at a loss, those at the top of the pyramid have a median income of US$128,000 a year.
7. MLMs Target The Most Vulnerable In Society
At this point, most people know about Amway and the way it works, so why does it remain so profitable? Who’s still joining if it’s almost universally believed to be a scam? Most sensible and discerning people quickly see right through the facade that MLMs put up, but for those who aren’t as savvy or educated, a pyramid scheme seems like a fantastic opportunity to get ahead in life.
The middle class, the college educated, and the financially minded rarely join these schemes, but the desperately poor will often do anything to try to better their way of life. In these cases, they are usually being sucked into a financial money pit where their chances for success are hopeless. MLMs will target virtually anyone whom they can trick, like college students who often need money to pay bills and tuition.
For those in such hopeless situations, the MLMs seem like a godsend. Another target is high school students, who haven’t yet learned about finance. For example, Vemma was a company that sold nutritious drinks. In the Phoenix area, Vemma began to recruit high schoolers to become distributors by giving them information showing “prosperous young people with luxury cars, jets, and yachts” and making false claims that they could earn as much as US$50,000 per week. Many of these students spent as much as US$500 on starter kits before Vemma was shut down by the FTC.
6. Amway Uses Controversial Tactics To Recruit
Many people believe that Amway is a cult. Most religious cults use psychologically manipulative techniques to get new members, which are similar to the tactics practiced by Amway to recruit distributors. One former Amway distributor recounted some of the tactics used on him while he was involved with the company.
The first strategy was social isolation. This man was told to attend various Amway meetings and functions, leaving little time to talk with his family and friends. Those who refused to join were called unambitious “losers.” By forcing him to be immersed in Amway, he slowly became more distant from his loved ones. He was told that those at Amway were the only friends he needed.
He was also discouraged from watching financial television and reading magazines like Money or Forbes. He was encouraged to buy “training” tapes, but when he refused, his upline went behind his back and told his wife to buy the tapes. In all, he and his wife spent US$1,000 on meetings and tapes alone. When the man attempted to leave Amway, his upline tried to ruin his marriage to separate him from his wife, who was also with Amway. After that, his wife left the company, too.
5. Amway And Other MLMs Continue To Grow Rapidly
Amway is only getting bigger each year, especially since the economy collapsed in 2008. Even though Amway is based out of Michigan, 90 percent of its business is done overseas where most have probably never heard about the company or its business practices.
In 2014, Amway made US$10.8 billion. Altogether, MLMs rake in a whopping US$30 billion in revenues each year. With these huge revenues, many victims of these companies must think they’re guaranteed some profit. However, the average distributor only grosses US$200 a month. To try to explain this discrepancy, Amway has said that these distributors either aren’t working hard enough or they are spending more time trying to recruit distributors than sell products.
Through vigorous recruiting and the previously mentioned tactics, Amway and other MLM companies have a constant stream of new distributors who believe that working with these companies will give them financial freedom. Despite hard facts that show it is impossible to make money with MLMs unless you’re on the top, people continue to buy into these schemes all over the world.
4. MLMs Have Experienced Some Legal Repercussions
Over time, enough people complained about their losses and the practices of MLM companies that the FTC opened an investigation into Herbalife, one of the biggest MLMs. There had already been several official complaints saying that Herbalife was a pyramid scheme in disguise rather than an MLM.
At first, Herbalife seemed like a legitimate company. Its stock was traded on the New York Stock Exchange and the company always performed quite well. But in 2014, a distributor in California alleged that the company was operated like a pyramid scheme and kept him from making a profit. He started a class-action lawsuit against Herbalife. As the company was being investigated by the FTC, Herbalife settled the class-action lawsuit for US$15 million. In 2015, another lawsuit filed against them was dismissed.
Amway has also experienced legal troubles in the past few years. In 2010, Amway was sued by various distributors for making false claims, among other charges. After an investigation, Amway agreed to pay US$150 million as restitution and reform costs, although the company did not admit to any wrongdoing. This settlement became the largest in MLM history, and critics of Amway have hailed the lawsuit as a victory.
3. Products Sold By MLM Companies Can Be Dangerous
The quality of the products sold by MLM companies is notoriously bad, but some of the supplements and other “nutritious” products can actually be quite hazardous. MLMs often market “miracle cures” and products that are supposed to surpass proven pharmaceuticals. Some of these “cures” come in the forms of pills, shakes, etc. Others are sold as weight loss or vitamin supplements when they are little more than water.
For example, these companies often sell useless weight loss supplements in gyms and fitness centres to fight obesity, a serious health problem that can only be fixed through various lifestyle changes. Another product category that has become popular recently is “essential oils,” which are supposed to alleviate stress, allergies, anxieties, and other health problems.
While useful in some cases, these products are sold by distributors who are completely unequipped and unqualified to make any health claims. In the case of essential oils, the FDA had to intervene because of the outrageous health claims that distributors were making. Even holistic medicine experts doubt the promises of MLM products and distributors despite the fact that MLMs claim that their products are based on holistic medicine.
2. The Owners Of Amway Are Incredibly Influential
Photo credit: Amway via YouTube
You’re probably wondering who is behind the MLMs in America. Many of them belong to Amway to some degree, with various subsidiaries of the company formed under different names. As a result, many members don’t realize that they’re joining an offshoot of Amway.
These thousands of different operations are all owned by the DeVos family. The members of the DeVos family, especially patriarch Richard DeVos, are the primary shareholders of Amway, and the fortune they’ve made from the company has allowed them to become one of the most influential families in America.
Richard DeVos also owns the Orlando Magic, a professional basketball team in Florida. He ranks 60th on the Forbes 400 list of the richest people in America. He and his wife are huge contributors to conservative and Christian causes. DeVos has also become one of the biggest bankrollers of Republican candidates in recent decades, supporting candidates such as Newt Gingrich and Rick Santorum.
In 2006, Dick DeVos, Richard’s son, ran for governor of Michigan, although he was unsuccessful. Their enormous political influence is quite shocking considering the method in which they’ve gained their fortune. Since 1970, the DeVos family has donated US$200 million to various think tanks, candidates, parties, advocacy groups, and more. They’ve also donated US$44 million to the Michigan Republican Party since 1997.
In an interview with Mother Jones, Saul Anuzis, the former chairman of the Michigan Republican Party, said, “There’s not a Republican president or presidential candidate in the last 50 years who hasn’t known the DeVoses.”
1. MLMs Might Collapse One Day
With the knowledge that MLM companies like Amway are becoming bigger than ever, it might seem that such companies are here to stay. However, according to industry insiders and experts, the growth of these companies is actually in a bubble, and everything will eventually come tumbling down. One expert who’s been studying pyramid schemes and MLMs since the 1980s says that “the Main Street bubble” is dangerously close to bursting.
Robert Fitzpatrick is considered one of the most knowledgeable figures on MLMs. A former business consultant, Fitzpatrick has seen the almost delusional state of mind that can take over when people become involved with these schemes. Fitzpatrick actually ran a pyramid type of business in the 1980s that was shut down. Since then, he has studied them and warned others about their dangers.
In fact, Fitzpatrick has done the most to make people aware of pyramid schemes and MLMs. When talking about the implosion that he predicts, Fitzpatrick likes to compare MLMs to Bernie Madoff, who took billions from his clients in a Ponzi scheme. While Madoff scammed thousands of people, MLMs have scammed millions of individuals over the years, causing untold billions of dollars to be taken from people.
Fitzpatrick says that it will only take a matter of time and enough whistle-blowers to destroy an industry that has seemed almost impervious to attacks so far. The question is no longer how they will collapse, but when they will collapse.
[Source: Listverse. Edited. Top image added.]