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.
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.
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.”
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.