The Dark Side of MLMs
by Ravi Dykema
Publisher/Editor in Chief
NEXUS, Colorado's Holistic Journal
(Reprinted with permission by NEXUS from the January/February, 1999 Edition)

Why would I want to publish an interview that criticizes multi-level marketing? Many of my dear personal friends and family members are hoping to attain, or have attained, what they call "financial freedom" and "time freedom" through a multi-level marketing scheme (MLM) or a network marketing system (they are pretty much the same). They want more money and more time. And I have heard some say that they don't think their conventional jobs will ever provide them with relief from the money grind. These people are distributing herbs, supplements, soap, airplane tickets or long distance service, and above all, they say they are "sharing" a "fabulous business opportunity." My friends are, as I understand it, betting with their time, money and hearts' commitment that their "home-based business" will fulfill at least some of their dreams. I love many of these people. I really don't want to hurt them by making their dream harder to reach. Yet I feel that I must report what I am seeing.

Isn't an MLM business just like other businesses, you may ask? Don't you take a calculated risk in return for a chance at success in all businesses? Maybe you even think MLM distribution is revolutionary: more grass-roots, decentralized, honest and personal than conventional distribution. And isn't it catching on like crazy with more and more people buying stuff the MLM way? Further proof that MLMs are legitimate, you may think, is the number of well-known successful corporations that use it, such as Amway and MCI. Perhaps some bad MLMs commit fraud, you may say, but so have some conventional businesses. That needn't taint the good ones.

Multi level or network selling is different from conventional selling. But read on and you decide.

Ever since I first heard of them, MLMs have made me feel queasy in my gut. What is it about the multi-level structure, I have often wondered, that makes me cringe, no matter the product? And why do I feel so uncomfortable when my friend's enthusiasm for his "new business" turns out to be a pitch to join his MLM? I feel used, betrayed.

I have listened to numerous sales raps. I have heard a few success stories of six-figure incomes. I have spent hours reading literature about MLMs. I have gone to an Amway meeting where I listened to Tom Hitchcock, M.D., a surgeon from Kansas City, say, "Amway wants to share profits with us." He also peppered his talk with the words, "It's win-win, have fun, and build relationships." I read part of Successful Network Marketing for the 21st Century, by Rod Nichols. And my tummy gets queasier and queasier.

Here's what I see happening in many MLMs: A few are getting very rich. A few more are getting spending money. A lot are getting disappointed.

There may be, I admit, some MLMs in which fair disclosure of risks and odds of success are made clear. However, it appears to me that the pyramid selling system employed by MLMs breeds deception.

Hundreds of thousands of people are investing substantial time and money and losing it. These folks thought they had a decent chance to "build a dream." They didn't. That dream of time freedom and prosperity was always a long shot.

Do the math. Here are Amway distributor Tom Hitchcock's figures: You enroll one new "family" every 6 months. Show them how easy it is to buy household disposable like soap and toilet paper through Amway and soon they'll be spending $200 per month, $2400 per year. They sign up a new family every six months, who in turn signs up more, etc. Hitchcock says that in 5 years you'll be earning commissions off of 1024 families' purchases totaling $2,457,600, and you'll be making $200,000 per year gross (before expenses). Then he says, "Feel the power of that because that's what happens. It's so statistically predictable that it's amazing."

How many "families" buying the Amway way year after year would it take to make the 23 people who were at that meeting "feel the power?" 23 x 1024 = 23,552 families, all steadily buying $2400 of products per year from Amway. And how many more families would have to join for all. of them to "feel the power?" 24,117,248, over seven times the population of Colorado. Does this sound like a good business opportunity? For whom? A few who got in early?

Do the math for your favorite MLM. How many "dream builders" would have to buy $100-$200 per month of algae, or magnetic insoles, or weight loss pills for you to gross $50,000 in a year?

I think most likely the casualty figures are built into MLM companies' business plans. How could it be otherwise? MLMs have a long history. They keep track, I am sure, of how many successful sales reps they have as a ratio of their total sales force.

Their profits depend on them creating only a few successful distributors, I believe. These few "diamonds" can be paraded in front of the diamond wannabes as proof of the potential. And what a garish parade it is, to my eyes. Picture a beaming formally dressed couple leaning against their Rolls Royce in front of their colonial mansion overlooking Tampa Bay. As I figure it, as long as the MLM executives can persuade their many distributors to hope for success, many of these people will keep buying the company's shampoo or nutritional supplements. They will eat the pills themselves and keep a stock to give away as samples. That's what usually generates the company's profit: sales of product, much of it to distributors.

The MLM system of product distribution is designed to sell cosmetics or computers at a profit for the company, NOT to make Mr. or Ms. Distributor rich.

What's wrong with that, you may ask? It is deceptive. I think the MLM system, of necessity, requires that the company execs lie to their customers and distributors. I believe this system of lying to sell products is bad

Here's how MLM execs lie, as I see it. They enlist legions of unsuspecting folks to lie for them. A company's new distributors buy the training manual (part of the entrance fee) and read it. Then the distributors, in a typical MLM, tell their prospective customers about a nifty business opportunity. Once the customer buys that line -- it's a line because it's really a terrible business opportunity, given the odds -- he or she buys a bunch of stuff: a training manual, a sales kit, motivational tapes and videos and a case of aloe vera capsules to use as samples and to eat him or herself. The company makes money.

Now our customer-turned-salesman wants to eat this one brand of aloe vera capsules and get her kids and husband on them even if cheaper brands are available in her local grocery store. Her brand must be, as the literature claims, the best, purist and most ecologically produced, she believes. Why? Because this one brand is going to give her prosperity and time to spare.

I imagine a company exec might describe the plan like this: "As long as we can convince Judy Distributor that riches are around the corner, she'll keep buying our products, without even checking competitors' prices."

Eventually, Judy feels bummed that prosperity still eludes her, after working so hard at it and spending a bundle: attending weekly motivational meetings, flying to a convention or two, calling everyone she knows, giving out lots of samples.

How might the company keep Judy as a customer? Keep her hope alive. Someone above Judy in the sales hierarchy (in her upline) who makes commissions off of her could tell her she just needs to work harder, improve her attitude, believe in herself. "Lots of others just like her have gotten over a similar hurdle and reached prosperity by listening to motivational tapes," Judy's team member says. "I'll sell you some." TaaDaa! More sales, and the company retains a customer for a while.

After a few years of this kind of "training," Judy will probably blame herself for her almost certain failure to achieve prosperity. She won't blame the company or the slim odds success. When she gives up and quits buying capsules, she probably won't say mean things about aloe vera or the company's amazing business opportunity. Judy may, however, feel so bummed out that she's depressed and not too productive for a while. She certainly will instantly lose all her MLM friends.

But from the company's perspective, as I imagine it, Judy was a flaming success, not a failure. Judy was a great customer for two years, and not a liability when she dropped out. Plus she duplicated herself! Of Judy's 15 enlistees (her downline), three are still pursuing their MLM dreams, eating aloe vera, buying tapes, attending the company's expensive conferences, and duplicating themselves by sharing the good news of aloe vera's healing powers. Best of all, Judy's enlistees are sharing with all their friends and acquaintances the wondrous new '90s way to get rich and have lots of free time.

MLMs by-and-large hurt people. (Although, as I said earlier, I haven't investigated them all.) The ones I have looked into use deception to induce brand loyalty and to persuade customers to buy more. I think it stinks, and I hope more people will smell the stench.

Ravi Dykema may be reached at Ravi@Holistic.com