The Mirage of Multilevel Marketing
Stephen Barrett, M.D.
Don't be surprised if a friend or acquaintance tries to sell you vitamins, herbs, homeopathic remedies, weight-loss powders, or other health-related products. Millions of Americans have signed up as distributors for multilevel companies that market such products from person to person. Often they have tried the products, concluded that they work, and become suppliers to support their habit.
Multilevel marketing (also called network marketing) is a form of direct sales in which independent distributors sell products, usually in their customers' home or by telephone. In theory, distributors can make money not only from their own sales but also from those of the people they recruit.
Becoming an MLM distributor is simple and requires no real knowledge of health or nutrition. Many people do so initially in order to buy their own products at a discount. For a small sum of money—usually between $35 and $100—these companies sell a distributor kit that includes product literature, sales aids (such as a videotape or audiotape), price lists, order forms, and a detailed instructional manual. Most MLM companies publish a magazine or newsletter containing company news, philosophical essays, product information, success stories, and photographs of top salespeople. The application form is usually a single page that asks only for identifying information. Millions of Americans have signed up, including many physicians attracted by the idea that selling MLM products can offset losses attributable to managed care.
Distributors can buy products "wholesale," sell them "retail," and recruit other distributors who can do the same. When enough distributors have been enrolled, the recruiter is eligible to collect a percentage of their sales. Companies suggest that this process provides a great money-making opportunity.
Although Mr. Barrett paints with too wide, too broad, and too sweeping a brush; reducing an entire industry into a tiny niche, ...what he has said thus far is somewhat accurate. Although it is the equivalent of saying beware the garment industry because XYZ brand brassieres have been found to provide less than adequate support. It reduces the entire garment industry to that of an individual brassiere manufacturer. It disregards the fact that within the garment industy we find all sorts of apparel, coats, blouses, pants, dresses, shirts, slacks etc., etc.,
However, it is unlikely that people who don't join during the first few months of operation or become one of the early distributors in their community can build enough of a sales pyramid to do well.
A completely inaccurate statement for many reasons; the first two:
- people are not building a sales "pyramid"
- in a legitimate network mktg company, it can and should be possible for one to be able to simply retail the product without building a sales organization
In July 1999, the National Association of Attorneys General announced that complaints about multilevel marketing and pyramid schemes were tenth on their list of consumer complaints.
Tenth on the list of consumer complaints. I guess there were 9 other areas that topped that. What were those?
A recent analysis of Quixtar's reported income figures indicates how poorly most MLM distributors do. In a declaration filed in a suit by two former Quixtar distributors, he concluded:
A statistical sample of distributors revealed that 99.4% of the IBOs [independent business owners] earned on average just $13.41 per week—before product purchases, all business expenses, and taxes. This average income is far less than the costs of the business, resulting in 99% of victims of Quixtar making no net profit. Fewer than 1 person in 10,000 are at the "Diamond and above" levels, the upper ranks of the Quixtar chain that every new recruit is urged to aspire to. . . .
The massive loss rates among Quixtar victims that are revealed in Quixtar's own data are the inevitable mathematical result of the endless chain business model. In this model, the success of the IBO is based on continuous recruiting of additional distributors (IBOs), who are induced to make monthly purchases for their own consumption, rather than on making retail sales in the open marketplace. In the recruitment model, only those participants at the top levels of the pyramid can earn true profits, since the source of a participant's real income is the expenditures of individuals below them on the pyramid, and only a small percentage can be in those top positions. The untenable model result in approximately 70% of IBOs quitting Quixtar within the first year. The mission of this deceptive business model is to continuously enroll losing investors (IBOs) and replace them as they suffer losses and quit the program.
Many distributors who stock up on products to meet sales goals or increase their hoped-for commissions get stuck with unsold products that cost thousands of dollars. Some companies permit direct ordering of their products, which avoids this problem, but the risk of failure is still high.
This is a poor example for many reasons.
1. Quixtar is not the industry. It is an individual company within an industry. It is the equivalent of saying The Banking industry is a bad industry to be involved in because XYZ bank made poor decisions that caused it to fail.
2. Quixtar's business model is an old outdated model no longer used for quite some time by MOST companies in the industry. Unfortunately for Quixtar, it has grown too big, and too large to change course without risking irreversible damage to itself. The vast majority of it's "distributors" are not pursuing wealth, but rather the convenience that association with such a large company provides. Despite that, by law, their incomes MUST be averaged in to the final tally of IBO incomes for their income disclosures. If we have 100 "distributors" of whom only 10 are pursuing the business as a business. Each making 1,000 a month, while the other 90 do not pursue a cheque, the average monthly income of IBO's would be $100 / month. Furthermore, a distributor is often considered active if they've paid the distributor fee. A company like Amway / Quixtar, has such a huge distributor base, that companies the world over, fall all over themselves to get access to their consumer base, offering discounts that are beyond belief. Would you pay a $70 fee in order to have the ability to purchase a brand new automobile at 0.0025% over manufacturer's cost?
More than a hundred multilevel companies are marketing health-related products. Most claim that their products are effective for preventing or treating disease.
This is a flat out untruth. No legitimate network marketing company would make such a claim. If one does, you had better run as fast as you can because it is evident that the company lack adequate enough legal counsel to keep them compliant. If that product does in fact do what the unlawful claims state, ...it will be reclassified as a drug, and the will lose access to that product in a heartbeat.
A few companies merely suggest that people will feel better, look better, or have more energy if they supplement their diet with extra nutrients.
Do you believe additional nutrients will NOT effect the way a person feels, looks, or have an impact on their energy level? Perhaps you might want to starve yourself for a month and see how much better you look, how much better you feel, and how much energy you have?
When clear-cut therapeutic claims are made in product literature, the company is an easy target for government enforcement action.
This is true
Some companies run this risk, hoping that the government won't take action until their customer base is well established. Other companies make no claims in their literature but rely on testimonials, encouraging people to try their products and credit them for any improvement that occurs.
What's wrong with encouraging someone to try something? If they do not like it, they can get a refund.
If they do like it, they can continue to purchase it. I think that's far more ethical than what we see in the market today. If I buy a bottle of energy drink at the grocery store, and do not like it, I'm out the money. If I buy an energy drink from a network marketing company and do not like it, I will get my money back.
Every company I have looked at has done at least one of the following.
Made misleading statements that could frighten people into taking dietary supplements they do not need.
Made misleading statements of product superiority that could induce people to buy products that retail stores sell more cheaply.
Made unsubstantiated claims that their products would prevent or remedy health problems
Uses research findings to promote products without noting that the findings are not sufficient to substantiate using the products.
Uses deception by omission by making statements about the biochemical properties of various substances without placing them in proper perspective. An example would be stating that a certain nutrient is important because it does this or that in the body but omitting that people who eat sensibly have no valid reason to take a supplement.
This is a very potentially misleading statement, because it he does not state which companies he has looked at.
it does not differentiate between legitimate network marketing companies, and pyramid schemes. I think this is rather significant, because it is clear Mr. Barrett cannot discern between the two.
It is the equivalent of someone stating "Stay away from bodybuilders because every bodybuilder I have evaluated was a murderer" It may be an accurate statement, but he does not reveal that the only bodybuilders he looked at were Sally McNeil, Charles Manson, Jeffrey Dalhmer, Richard Ramirez, and Craig Titus
Exaggerated the probability of making significant income.
Potential and probability are not the same thing. the potential is there, however individual performance is a variable that no one can predict. Some have better work ethics than others.
Most multilevel companies tell distributors not to make claims for the products except for those found in company literature. (That way the company can deny responsibility for what distributors do.) However, many companies hold sales meetings at which people are encouraged to tell their story to the others in attendance.
And this is so wrong how? When you contemplate a purchase, do you not want to know other peoples experience with it? Would you not find it helpful?
Some companies sponsor telephone conference calls during which leading distributors describe their financial success, give sales tips, and describe their personal experiences with the products. Testimonials also may be published in company magazines, audiotapes or videotapes.
He states this as if this were a bad thing. It's not. How would you go about training and educating an army of people located in various places throughout the country / continent/ planet? Do you hop on a plane and meet each person in their living room personally? A conference call is a highly efficient means of communication across distances. If it were so wrong their use would not be so prevalent, either in metwork marketing or throughout corporate boardrooms across the planet. The availability of tele/video conferences has dramatically increased the flexibility & efficiency of the workplace environment. Only a fool would not take advantage of the opportunities afforded through technological advances
Testimonial claims can trigger enforcement action, but since it is time-consuming to collect evidence of their use, government agencies seldom bother to do so.
Another misleading statement IMO. There's absolutely nothing wrong with testimonial claims. Testimonial claims in and of themselves will not trigger enforcement action. It is unlawful testimonial claims that will trigger enforcement actions.
To give you an idea of what may or may not be said, take a look at the recent challenge the FDA made against Cheerios.
Government enforcement action against multilevel companies has not been vigorous. These companies are usually left alone unless their promotions become so conspicuous and their sales volume so great that an agency feels compelled to intervene. Even then, few interventions have substantial impact once a company is well established.
Untrue IMO. Enforcement action against multilevel companies have been vigorous. The companies do act quickly with multilevel enforcement. These regulatory agencies understand that these are legitimate businesses that are providing products of great value to the end consumer, much needed additional incomes into many homes, employment for many, an asset to the economy, and much appreciated tax revenues to the government. They do not want to see MLM companies running into trouble and jeopardizing their status. They act quickly in the case of legitimate MLMs.
What needs to be more vigorous are enforcement actions against pyramids, ponzis and flat out fraudulent operations. Unfortunately, resources are limited and often by the time an AG or other regulatory authority gathers the evidence against the entity, the entity collapses. Too many regulators choose to look at them as self-weeding gardens. This is unfortunate for both the unsuspecting public, as well as the legitimate MLM industry. It's the equivalent of Extremist Islamic Fundamentalists wrapping themselves in the Star Spangled Banner while commiting suicide bombings. Very soon, the international community would be under the mistaken impression that Americans were suicide bombers.
I believe in this current economic climate, regulators will be more vigilant about policing the pyramids, ponzis and frauds that will inevitably emerge.
Motivation: Powerful but Misguided
The "success" of network marketing lies in the enthusiasm of its participants. Most people who think they have been helped by an unorthodox method enjoy sharing their success stories with their friends. People who give such testimonials are usually motivated by a sincere wish to help their fellow humans. Since people tend to believe what others tell them about personal experiences, testimonials can be powerful persuaders.
Perhaps the trickiest misconception about quackery is that personal experience is the best way to tell whether something works. When someone feels better after having used a product or procedure, it is natural to give credit to whatever was done. However, this is unwise.
I somewhat agree with his position here, because I've seen this double-edged sword in action. By the same token, one can try something, and simultaneously experience something unpleasant, and will flasely attribute it to the only new variable they immediately identify; the trying of the product, ...when in actuality, the unpleasant experience was caused by something else entirely.
Most ailments are self-limiting, and even incurable conditions can have sufficient day-to-day variation to enable bogus methods to gain large followings. In addition, taking action often produces temporary relief of symptoms (a placebo effect). For these reasons, scientific experimentation is almost always necessary to establish whether health methods are really effective. Instead of testing their products, multilevel companies urge customers to try them and credit them if they feel better.
Of course companies urge people to try something and give it credit if it works. What better way of evaluation is there, than through your own personal experience? As for the lack of scientific testing and experimentation... that too is a blatant untruth. Perhaps this was a factor in the past, but these days, no legitimate network marketing company is going to market a nutritional product without adequate scientific test results to back it up. That's simply ridiculous
Some products are popular because they contain caffeine, ephedrine (a stimulant), valerian (a tranquilizer), or other substances that produce mood-altering effects.
Kind of like Coca~Cola, RedBull, Coffee etc. So let's shut down Starbucks.
response split due to character count restrictions... continued below