Cult Spotting 101: Breaking Down Multi-Level Marketing Schemes (Guest Post)

Today’s cult spotting is a guest post. My partner did a breakdown of Multi-Level Marketing Schemes after being invited to join several in the last couple of years. Since MLM’s have scammed several people we know and love, I thought it would be good to post his assessment of the mathematical improbability of success and the manipulative ways that most MLM’s suck people into their schemes.

A friend recently asked me to visit his home to talk about an exciting business prospect. He wouldn’t tell me much about the company, except to say it was an incredible opportunity to augment my income, and he wanted me to watch a promotional video. I am suspicious by nature, having grown up in a cult, so I researched the company before confirming my interest. If you’re like me, you want to believe your friends and family when they rave about something that changed their life. But as I read about multi-level marketing (MLM) businesses like this one, I slowly realized that many of these companies seek out this trust to exploit it.

RECRUITMENT

The basic structure of a multi-level marketing plan is that you recruit other people to sell the product for you, thereby gaining profit from their sales. The problem comes when the MLM structure reaches its seventh or eighth level. Let’s say you are the founder of an MLM. You recruit 10 people to sell the product for you, and you promise your sellers 20% of the profit from the product they sell. Those 10 people each recruits 10 people, who each recruits 10 people. By the fourth level, there are 10,000 sellers, which is more than the population of the capitol city of Vermont.

By the sixth level, there are 1,000,000 sellers, which is more than Vermont’s entire population. And by the eighth level, there are 100,000,000 sellers, which is a third of people in the United States and approximately a fifth of the entire North American continent including Canada and Mexico. This exponential growth cannot sustain itself because, if (after the fourth level) the entire population of a small city is selling the product, there is hardly any market left to buy the product. Its ever-expanding nature makes its eventual collapse almost inevitable.

FINANCIAL MANIPULATION

This financial instability requires a different form of income in order to remain profitable. MLMs claim to focus on their products, but the main draw of the MLM structure is the Customer Acquisition Bonus (each MLM has a different name for this), whose name is misleading. You are not acquiring customers—you are recruiting sellers. The irony, however, lies with the fact that most MLMs require new recruits to purchase their own training, training materials (videos, books etc), subscriptions to the corporate service, other yearly or monthly fees, and start-up capital, often totaling hundreds of dollars. Most sellers never recoup their start-up money. In the end, buying into the scheme was the real product all along.

This is a huge red flag for me, because real businesses that are making profit from selling the actual product itself would pay for the training of their employees and often pay for their training materials. These real businesses operate within the basic supply-and-demand structure of our capitalist economy. Such MLMs, which cannot produce profit after a certain expansion point, must rely on other methods of obtaining profit—namely, selling the idea of making large amounts of money on minimal work and by profiting from others’ work.

Ultimately, this second form of income also fails mathematically. Let’s use the 20% example from above. If you are promised 20% of your recruits’ sales, when those recruits recruit more sellers, 40% of the profit has been paid out as a bonus. Upon the fifth level, there is no more profit to be paid out. Corporate doesn’t get any money; you stop getting commission; and the entire business stops working. This, of course, would be true only if our example MLM were operating like a normal business based on the profits of their product.

Instead, most of the money that enters the business comes from its recruits and their unsuspecting, trusting families and friends. This incestuous business model most frequently sucks a seller dry of contacts and resources long before the seller makes any profit.

THE LIE OF GET-RICH-QUICK

As noted above, the draw for getting people to buy into MLM’s is the promise of reaping large profits. If the business model itself isn’t obvious enough in the flaws, a quick verification check of the Income Disclosure statements can reveal how exaggerated claims of MLM’s tend to be. Check out SendOutCards’ Income Disclosure statement from 2012.

92.26% of their employees are Senior Distributors who average a gross annual income of $35.56, which probably doesn’t cover the materials and training costs. Managers make up 3.86% and average $404.11 annually, while Senior Managers make up 2.36% and average $2,483.31 annually. This means that a total of 98.48% of SendOutCards’ employees averaged less than $3,000 annually.

Advocare, whose 2013 income disclosure statement states that 91.35% of their employees averaged less than $2,500 annually, and 96.87% averaged less than $1,300 annually.

Beach Body’s 2011 income disclosure statement shows that 67.4% of their employees were retail sellers only selling the product and not participating in the MLM portion of their company – these sellers made an average of $360 per year. Another 25.7% of employees also participated in recruitment, collecting such bonuses, but even these employees only averaged $2,319 per year. Yet another 4.5% averaged less than $14,659 per year, meaning that of all Beach Body’s employees, 97.6% of them averaged less than $14,659 per year leaving roughly 2.4% of average profitability.

SequenceInc, a forensic accounting website, reports that in 2009, employees of Avon made the following:

• 36.1% earn 0 – $4,999

• 15.8% earn $5,000 – $6,999

• 26% earn $7,000 – $11,999,

• 17.6% earn $12,000 – $29,000

• 4.4% earn $30,000 and above. 

If a physical, bricks-and-mortar business used a business model that functions only on promises and hope while paying 98.5% of its employees so little, the world would condemn the business as ludicrous; yet MLM’s, which rarely deliver on their promises, continue to deceive people through puffed up promises of profitability.

THOUGHT CONTROL AND BLAME

Most MLM plans remind me of cults in the way that they function. The times that I have been to a couple meetings for other such plans, the followers are invariably blind to the mathematical problems inherent in the model. When faced with the facts from their particular favorite MLM, they usually have no answers for me but are absolutely certain that I must be incorrect. They often refer me to their mentor, the person who recruited them.

Also like cults, these groups blame failure on their constituents for lacking hard work, persistence, skill, leadership, or competence. Even when I’ve seen people pour time and money into their MLM with more fervor than most would approach any other commission job, I’ve watched as they eventually cut their losses under the assumption that they just didn’t try hard enough, never considering that it might be the business, not them, that is the problem.

PYRAMID SELLING IN DISGUISE

Many (if not most) MLMs remain legal even though they are not financially viable. Their followers point to their legality as proof that they are not pyramid schemes or scams, which usually results in an argument based on circular reasoning when pushed (How do you know they are different from pyramid schemes? They’re legal. What makes them legal? They’re not a pyramid scheme).

The only legal difference I can see between an illegal pyramid scheme and a legal MLM is the pretense at selling a real product. To be fair, most real businesses have a natural pyramid-shaped income disparity with CEOs making big bucks on top, and grunt workers making hourly wages on the bottom. However, the viability of the business model rests with how closely tied the income is to the product being sold. And most MLMs in my experience are selling people and promises, not products.

The Federal Trade Commission has this to say of MLMs: “Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It’s best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products.”

CONCLUSION

So when you’re approached with a too-good-to-be-true opportunity, be careful. Ask difficult questions that annoy the recruiter. Look up the company’s income disclosure statement and ask the recruiter why nobody makes much money. Ask them whether you must front money, and ask whether you make the majority of your profit from sales of actual product or recruiting new sellers. Check Wikipedia’s list of MLMs for this opportunity. Ask yourself whether the business preys on your family and friends instead of selling real products to people outside the company. Think for yourself and do your own research; most scams cannot stand the test of reason.

Disclaimer: This post is used as an example of cultic thinking and doesn’t constitute an accusation that the organizations mentioned are necessarily part of a cult. This series is designed to give you, the reader, tools to spot red flags of manipulation and potential abuse. It is not a series meant to name and expose cults. The red flags are symptoms that should alert you to be careful and use your critical thinking, but it is ultimately up to you to decide whether a group or organization is safe. 

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12 thoughts on “Cult Spotting 101: Breaking Down Multi-Level Marketing Schemes (Guest Post)

  1. Devilcorp says:

    Great site! Well done.

  2. Ian says:

    Terrible account of mlm. Extremely biased and untrue. Scammed? Cult? These words don’t belong in a true mlm model so not sure how long you did your research.

  3. Melissa says:

    I’m guessing Ian is a distributor in one of these MLM schemes.

  4. koryo88 says:

    Excellent article, but you may want to update your population figures. The US population, for example, is about 320 million, not 30 million.

  5. Katharos says:

    This is such a great article, honing in on pretty much everything that’s wrong with the MLM industry….from the misrepresentations concerning the opportunity (and products) resulting in enormous consumer losses and the manipulations used to both lure people in, extract as much money from them as possible and right through to keeping them believing that they failed, rather than being part of a system which predetermines failure for nearly all who make the unfortunate mistake of participating.

    From the onset, people are conditioned to believe that if they failed, they failed only through their own lack of effort and work – a reinforcement of having sold the opportunity as being something that “anyone” can do and succeed in. People are taught to reject information from outside sources and anyone with a differing opinion is referred to as being “negative” and a “dream stealer”. Every person is considered a potential “prospect” and people are taught incredibly unethical and deceptive means of getting people to meet with them in the first instance and signing them up also (such as not divulging to their prospect the real nature of their meeting upfront, lying about their actual earnings, eliciting from a prospect their wants or needs solely for the purpose of using this information to convince the prospect via the use of already concocted responses to the most common objections addressing as to why the opportunity is suitable for them – or even concocting their own “testimonials” as I’ve seen some MLM’s do)…but such acts of deception are made under the guise of “helping people”. People are worked relentlessly with every spare moment occupied by meetings, webinars, conference calls or reading motivational material in order to keep their eye on the prize, rather than focusing on the current and continuing financial losses. People are taught to edify members of their upline to prospects to give a sense of credibility and this behaviour is duplicated by people being taught to do the same. Money and wealth are promoted as being the key to all happiness and lavish lifestyles are flaunted by those ranked the highest to appeal to a person’s sense of greed. The list goes on, this is just what I could think of from the top of my head, with all of these brainwashing/cult like tactics being time tested and very successful in defrauding generally the people who can least afford it.

    It’s an abysmal industry, I personally think all MLM’s should be outlawed and only direct selling companies where the person is rewarded for selling products to those not associated with the scheme being allowed to continue.

  6. No offence, but this is fucking ridicculous. Laughed all the way through. You have absolutely no idea what you are talking about, do you?
    First of all, in MLM, statistics about how many people succeed compared to how many join is irrelevant. Not everyone who joins are even trying to “succeed”, some just want the products for a lower price, some want an extra income and some give up before they get properly started.
    No, it’s not a “get rich quick” business. That’s kind of the reason so many quit. They get it in their head that they hardly need to work at all and when they realise that’s not the case they quit. And yes, many people “work hard” and still give up. In some cases that’s because they don’t get the right training and in some cases it’s simply because they don’t have what it takes or they don’t really have the passion for the product. I’ve seen all kinds of people try and fail. Some of them haven’t even tried the product. It’s pretty obvious they won’t make it. Some people refuse to listen to their sponsor and tries to find a “better way” with no luck. My first months I was like that. When I finally started to listen, guess what – I started making money.
    I can’t speak for all companies, because some of them actually are questionable and they give us a bad rep, but in my company we HAVE TO sell to make money. If no product is sold, we don’t make money, it’s as simple as that. I make NOTHING on recruiting in itself. I have to coach my team to sell and that’s what I make money on – isn’t that fair? I spend time coaching them and I make a profit. Seems legit to me. However, you clearly don’t understand how this works. I don’t make the same profit on every sale down in the lines. I make most on my own sale, less on the sales of the people directly recruited by me, less on the next line and a little on the 3rd. Down from there I make nothing, And it’s the same for all the others. No matter where in the “line” they are. I am propably in line 100 or further down, I still make money and so does my sponsor and the people I’ve recruited. The first people who joined DOESN’T make money on me. This is a big misunderstanding from people who, like you, don’t know what they’re talking about.
    My company has been around and had growth every year for 40 years. We are debt free and cash rich. I personally know several of the 6 and 7 figure earners and some of them started during the last 3 years.
    Btw, the fact that you use the word “employees” confirm the fact that you don’t know enough. We are not employees. The company didn’t hire us. They just deliver the products and keep everything in a system. We all own our own business and are independent.
    Please, don’t say anything more before you REALLY know what you are talking about. I could say a lot more about why what you’re saying is wrong, but I’ve layed down the most important parts.

    – PROUD FULL-TIME Forever Living business owner.

    • The purpose of these posts is to provide red flags that people can then look for in their involvement in various groups. It’s to raise awareness. It is your choice as to how to use the information and ultimately your choice to decide whether or not you are involved in a destructive group. If you feel this doesn’t apply to you, then you should feel free to ignore it.

  7. Debbie says:

    I always had the creepy feeling about MLM’s. I have a friend that got sucked into buying an ‘into kit’ to get started. She couldn’t afford to part with that money but got duped by the hype. You have to eat sleep and drink the kool aid to be somewhat successful. Most are not.

  8. Beatrice says:

    The list on the link ‘list” does not list organo gold, or Lia Sophia. Both pyramids, one gone for sure

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