The Rise of the Legal Pyramid Scheme

Thursday, 8 February 2018

Multi Level Marketing Cartoon

If you lurk on the internet for long enough, you'll be bombarded with adverts for "get rich quick" schemes that rarely work. The British public has lost £27 million in the last year on binary option trading alone but that doesn't stop us from being sucked into these false promises of fortune. With our economy in disarray, our wages never seeing an increase and our budgets being stretched atrociously far, it's no surprise a lot of us are turning to offers of additional income for very little effort.

If you are active on social media, you may have come across people who have already jumpstarted their quest for a small fortune and are trying to drag you onto their money ship. These people are actively involved in multi-level marketing (MLM) businesses and are looking to put you into their downline so they can profit from any purchase you make; whether it be your start up kit or additional inventory. MLMs are elaborate pyramid schemes and, unless you thoroughly enjoy losing a lot of money and are willing to step on a lot of toes, you should avoid them at all costs.

A pyramid scheme is described as a person who tells a number of people to “invest” their money before recruiting more individuals and convincing them to invest their money. This process is repeated 13 times until you’ve exceeded the population of the earth and the people who signed up late have lost their money while the people who got in early directly benefit from each new recruit. A pyramid scheme is illegal but, if you call it a multi-level marketing company and sell products while simultaneously recruiting more people, you’re well within the limits of the law.

In the United Kingdom, multi-level marketing businesses haven’t quite gained as much popularity as they have in the United States but a few companies may have infiltrated your home without you even realising. Not too long ago you couldn’t venture outside your front door without being invited to an Avon, Ann Summers or Jamie at Home party. While the majority of us attended these parties in hopes of buying nice makeup, quality nipple clamps and a decent frying pan or two, the distributors were frantically trying to sell us crap we didn’t need in hopes of making a small amount of money.

The desperation to flog overpriced products is a direct result of the majority of MLM distributors making very little to no profit. For example, Avon sellers can make up to 25% on orders that are over a certain value but are expected to pay for brochures, bags and samples. This means they can make £50 on a £200 order but the cost of their time and tools to get them that small commission effectively means they've made no profit and are potentially looking at a loss.

One of the biggest MLM companies in the UK is Forever Living. In 2016 the company had over 6000 UK representatives all trying to make the fortune that Forever Living promised them. The products are aimed at the health conscious individuals who are looking for natural remedies to keep their insides in tip top shape. Aloe Vera is a prime ingredient in a lot of Forever Living’s products and you’ll often find their distributors claiming the products solve multiple issues from IBS to coeliac disease. In 2015, the Advertising Standard Authority cracked down on Forever Living and their false health claims but distributors continue to push the inaccurate health benefits of the products regardless.

Forever Living isn’t alone when it comes to its distributors pushing false health claims. Herbalife - yes the same Herbalife that sponsors Cristiano Ronaldo – has distributors who claim their products have cured people of cancer, ADHD, depression and diabetes. Both Young Living and doTerra came under fire from the FDA after their distributors claimed their essential oils cure cancer, insomnia, MS, autism and even Ebola. There is never any scientific evidence to back up these claims but some distributors have gone as far as hosting parties and presentations where they bring out an alleged cancer survivor and claim that, thanks to whatever product they’re pushing, this person is cancer free. The danger of making such absurd claims to potential customers doesn’t seem to cross anyone’s minds as the desperation to make a sale takes hold.

While the ASA in the UK clamped down on Forever Living for false health claims, the FTC in the USA took things one step further against Herbalife. After the federal-government sued Herbalife for misleading distributors, the FTC fined Herbalife for $200 million and demanded they issue refunds to 350,000 people. Unfortunately, the FTC did not regulate the cheque distribution well enough so people who had signed up to Herbalife solely for product discounts ended up receiving cheques. The FTC decided that if you spent at least $1000 with Herbalife between 2009 and 2015, you were entitled to the money regardless of whether you felt misled by Herbalife or not.

Due to the lack of care, a lot of people who have received cheques are putting the money back into Herbalife which only adds fuel to the “Herbalife did nothing wrong” fire. The FTC also refrained from deeming Herbalife a pyramid scheme thus allowing the business to continue operation - with major changes - to this day. The only real thing going against Herbalife right now is hedge fund manager Bill Ackman’s attempt to short their stock but, as he has lost money and has now capped his loss to 3% while Herbalife’s stock continues to rise, Herbalife keeps coming out on top.

Herbalife is in good company when it comes to lawsuits filed against them. LuLaRoe, an MLM clothing company that specialises in awful patterns, has faced multiple lawsuits in the last few years but the latest is a $1 billion class-action lawsuit. This lawsuit claims LuLaRoe encourages its distributors to take out loans, run up credit card debt and actually sell their breastmilk so they can continue purchasing an absurd amount of inventory.

The LuLaRoe start-up kit costs $5000 but does not provide an adequate selection of LuLaRoe's clothing for your inventory. In order to get the full collection along with additional sizes, you have to pay even more money on top of your initial $5000 investment. That in itself sounds ridiculous to most people but, if you target vulnerable people and tell them for a relatively small investment they can become millionaires, it sounds like the most appealing business strategy imaginable.

The promise of becoming rich for minimal effort is a dream pushed by the majority, if not all, MLM companies but the only ones who truly make that 6 or 7 figure salary they all not so humbly brag about are the ones at the very top of the pyramid. If you get in early and continue to recruit more and more people into your downline, you’ll pull in thousands while the poor people below you desperately put more money into their failing business.

You’ll see these mysterious MLM millionaires at seminars and events hosted by MLM companies for their distributors. The millionaires love to show up to these seminars oozing faux positivity (Herbalife even encourage their distributors to shake their vitamin bottles in excitement at their seminars) and brag about their fancy cars, lavish holidays and huge houses. They’ll tell everyone in the room that, so long as they work hard, they can have all of these nice things too. Once those brainwashing gatherings are over, the distributors of whatever MLM company they represent will immediately take to social media and tell anyone who will listen how they’re so close to becoming rich, how much they love their job and how you should get in contact with them to find out how you too can make a fortune.

The whole concept of advertising that you can make thousands to other people across social media seems absurd when you eliminate the idea that these businesses are pyramid schemes. If you can make a good amount of money by selling products, why would you want to recruit more people in your area to do the same thing when that would saturate your market significantly? Walmart wouldn’t say to Target that their business is doing brilliantly in randomville USA and they should open a store there too so why on earth would you, as a seller, want people stealing your customers? Logic would dictate that you would refrain from directly increasing your own competition but MLMs encourage you to do so regardless.

In spite of potentially saturating their market, the MLMers I have on social media do their best to recruit as much as possible but have yet to make that fortune. I won’t give you the name of the company they signed up to but I will tell you that 94% of its distributors made less than $20 in 2016. In that same year, 3.5% made $924 and less than 0.1% made that 6 figure salary they’re all promised. Only one of the girls involved in this company on my social media made it to “supervisor” status while the other participants are in her downline. That means she’s directly profiting from any purchase the other people she convinced to sign up make.

Every MLM company will argue that they can’t be a pyramid scheme because it’s the sale of the products that make money as opposed to recruitment. What they fail to admit is that distributors are purchasing the products to maintain whatever status it is they’ve achieved in their MLM or even to avoid being hit with additional fees. There is no real transparency when it comes to how the money is made. The only MLM business that is supplying a slight glimpse into sales is Herbalife . Due to the aforementioned FTC ruling, Herbalife now have to supply information regarding their product sales and are challenged to ensure 80% of their sales are from consumers as opposed to distributors.

There is a typical response from people involved with MLMs when faced with the “isn’t this a pyramid scheme?” question and that is to point out that every single corporation and small business is a pyramid scheme. Even former Herbalife CEO Michael Johnson has gone as far as saying this:

I go back to any company, I started in Disney as a director then I went to be executive vice president and then president of the international entity of the company so I moved up six or seven levels and, at the top, was sitting the CEO of the company, Michael Eisner. Is that a pyramid? Is that any different than we’re doing here?

This argument however, is fundamentally flawed. The major flaw of it is Michael Johnson doesn’t actually prove that MLMs are not pyramid schemes; it’s merely a deflection tactic. Another flaw is that, unlike MLMs, legitimate businesses do not encourage their employees to purchase their products or recruit more people so they can actually earn a pay cheque. With most jobs, you agree to work a set number of hours for a certain amount of money every day/week/month. You don’t have to worry about pounding the pavement looking for sales or posting positive messages to social media with an incessant number of emojis to accompany it in a bid to drum up some business. You go to work, you do your job and then you receive your agreed upon wage. That is not a pyramid scheme.

Multi-level marketing businesses avoid the “pyramid scheme” tag as they claim to focus more on the sale of products over the recruitment of potential distributors. Unfortunately, the laws surrounding MLMs are grey areas and state regulations are reserved more for anti-pyramid activity over multi-level business structures. For as long as MLMs can prove their money comes from product sales, regardless of who is actually purchasing those products, MLMs will no doubt continue to escape the pyramid scheme tag for the foreseeable future.

Although it’s estimated that approximately 99% of people involved in MLMs lose money, there are people who are successful and make that allusive 7 figure salary. While doing the research for this post, I went in search of these success stories and found very few. The “success” stories I did find were extremely vague and they all followed a similar pattern of losing thousands of dollars with multiple MLMs before supposedly finding success with their current company.

Multi-level marketing business opportunities are designed to be as appealing as possible to the most vulnerable people. MLM seminars are flashy, polished and peppy but the distributors can be rude, intrusive and desperate. The sales and recruitment tactics are often forceful and intimidating while the products are overpriced and generic. MLMs are not there to make you money, they’re there to make the people above you money and it’s usually your finances they’re taking. If you find yourself on the receiving end of a business pitch that’s supposed to make you rich with minimal effort, get as far away as you can. If it sounds too good to be true, it’s probably because it’s an elaborate pyramid scheme.

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