This is a post where I'll move comments that aren't related to the post that they were submitted for. Or people can comment on things that aren't on other posts.

This post involves:

MLM Scam

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Many people bring up Tupperware as a great example of a legit MLM. They also often use it as justification that all MLMs must be legal because Tupperware is. As we know a square (a legit MLM like Tupperware) is a rectangle (MLMs), but a rectangle (MLM) is not necessary a square (a legit MLM like Tupperware). This is why the FTC says:

"Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money."

If someone makes the case about Tupperware being legit in an MLM discussion you know that they are trying to trick you. In fact, CNBC recently wrote about MLM and included this about Tupperware:

Tupperware, for example, no longer calls itself a direct sales company, instead using the term direct-to-consumer. The company didn't return calls from CNBC. But speaking to the Wall Street Journal (subscription may be required) , CEO Rick Goings said, 'Direct selling left us, because the industry became dominate by buying clubs and what looked like pyramid schemes.'"

So that's the CEO of Tupperware saying that they aren't in MLM or direct selling any more. They don't want to be associated with MLMs based on self-consumption buying clubs that appear to be pyramid schemes.

Clearly the CEO of Tupperware sees what is going on and is smart enough to distance themselves from it. Let's do the same and distance Tupperware from the dominate number of MLMs that hit the basic pyramid scheme guidelines.

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MLM News

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When trying to determine between an MLMs and Pyramid Schemes, it comes down to two points that the FTC has emphasized previously:

Often MLM supporters will claim that they have customers, but that they have signed up as distributors to get a discount on product. MLM companies have created this structure in an attempt blur the line between distributor and customer. This way, there would be no way to quantify the number of distributors who are failing to recruit others. They can always be explained away as people who don't care about the business, they just want to get a discount on the product.

Unfortunately for the MLMs, this puts them in a bad place with the regulators. As we showed above the FTC has made a point to distinguish sales outside the network. A distributor, whether he/she be a discount buyer or a failing distributor is by definition inside the network. Thus those sales further go to fuel the pyramid scheme and can't be used to defend the company as being legitimate.

A wise MLM company would use the notion of a preferred customer (as some do) so that these discount buyers are correctly categorized as customers and accounted for separately than those interested in the business opportunity. This kind of transparency, and having the numbers independently audited and published would go a long way towards a pyramid scheme defense.

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Uncategorized

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I don't like to call out individuals for scamming people, but since Shellie Gold Davidson decided to go with "Educate Yourself! Know the Difference!" in the following photo, I thought I'd break down the chart of false information she's spreading.

Shellie Gold Davidson of ViSalus Doesn't Understand Pyramid Schemes

Shellie Gold Davidson of ViSalus Doesn't Understand Pyramid Schemes

Let's start off with the first row and the columns. Yes pyramid schemes are illegal. Thanks for letting us know that. Putting 100% Legal under the column of "Legal Multi-Level Marketing" is a little redundant, no? Well let's move on...

Row #2: Main Income Sources - Notice the use of "solely" in recruiting others for illegal pyramids and MLM is legal if "ONLY" by product sales. So it's black and white, but what if income is earned both ways as in MLM where the Income comes from sales of those who were recruited? The FTC says the following about MLMs and Pyramid Schemes: "If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money." and "Avoid any plan where the reward for recruiting new distributors is more than it is for selling products to the public. That’s a time-tested and traditional tip-off to a pyramid scheme."

Clearly the FTC has a different definition than Shellie Gold Davidson of Pyramid Schemes. We'll be referring back to this document a few more times more than likely.

Row #3: Primary Purpose for Recruitment - I don't see either of these as a differentiating factor in the FTC guidelines. In MLM, why would you need to recruit people for product sales and distribution? For ViSalus (Davidson's MLM), distribution is done by the ViSalus via mail to an individual... the same way it is done from Amazon.com, which isn't an MLM. Come to think of it, they also do product sales. There's no need for a network for sales or distribution except to incentivize distributors to buy product to get involved in a fabricated "business opportunity."

Row #4: Plan - While a get rich scheme is certainly a red flag, claiming that MLM requires "true and personal effort" doesn't absolve it from being a pyramid scheme. I challenge you to figure out how to run a pyramiding business that doesn't require "true and personal effort." You can't, because you need to trick people into the scheme.

Row #5: Business Entry & Barriers - According to the FTC guidelines MLMs that are pyramid schemes can have low cash-out, low or no front-loading, and a buy back guarantee. So these aren't relevant. Furthermore Davidson's ViSalus coerces front-loading and high-cash out by requiring distributors put up $499 of product to be eligible for the BMW bonus of the "business opportunity." It's front-loading a bunch of product, though you could argue that high-cash out is a relative term.

Row #6: Value for Money - This is going to come up in the Pricing section below, but since ViSalus is overpriced, it fits the "product value far less than cash out" section of illegal pyramiding.

Row #7: Income Stability - This is just a boldface lie and the FTC guidelines make it clear. There's nothing defining about whether the income stops if the recruitment stops.

Row #8: Training - Training is not a differentiator of whether something is a pyramid scheme or a legal MLM. This chart is making up features of pyramiding just so that MLM can look good without actually addressing the FTC guidelines.

Row #9: Regular Product Movement - This is again another non-factor. Consumable products can and are often part of illegal pyramid schemes, because most of the sales are made to other distributors within the scheme. It is noteworthy that this mentions few retail sales (high cost doesn't matter). A look at ViSalus' co-founder Sarnicola shows he is making most of his money from recruiting... there's no reporting on how many retail sales he makes a month.

Row #10: Pricing - Using this test Davidson is pitching a pyramid scheme because ViSalus is clearly overpriced.

Row #11: Marketing - Refer back to Row #2 about how the money is being earned. If you are making most of your money selling product to people outside the scheme then its good. If you are recruiting others into a downline and making money from sales to them and their sales, it's an illegal pyramid scheme. Sounds like ViSalus'... and most MLMs... compensation plans are set up this way.

I've done all the hard work for you by creating a page that makes it quite clear: MLMs Vs. Pyramid Schemes. It has all the citations by the FTC and is much more reputable than Shellie Gold Davidson's biased disinformation.

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MLM Scammers

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I'm not the kind of person who picks on or calls out others (except for Tim Sales), but since Christine Sutherland, a high-level Nu Skin distributor approached me, I feel it is worthwhile to tell the story. Christine Sutherland is a Ruby distributor for Nu Skin. This means that she is more successful than 99.76% of Nu Skin distributors. (Side Note: Christine Sutherland is in New Zealand and these are United States numbers. I couldn't find the posted numbers for New Zealand, but typically these numbers are the same because the compensation plan is the same. For example I've shown MonaVie’s Global Income Disclosure Statement and MonaVie’s Canada Income Disclosure Statement are essentially the same.)

Christine showed up on my Jusuru post and left a series of comments. She claimed to an analyst, but presented no background to that. She supported MLM, but was against Jusuru. At the same time she praised what I was doing by demanding clinical evidence that the product works. She went on to say that there was at least one MLM out there doing excellent work.

From there, Christine Sutherland started to show her true colors. She went on to claim that the MLM has a proven "nutricential." A simple Google search shows that the term is used closely with Nu Skin. She then went on to quote a well-known “nurses’ study” where multi-vitamin supplementation showed a a 75% reduction in cancer after 15 years. I decided to counter with my previous research that supplements may do more harm than good.

However, I looked into the nurses' study and found that the 75% only applied to colon cancer. That's still pretty good, but the same study found increased risk of disease such as for non-Hodgkin’s lymphoma. Most importantly that link showed "The National Institutes of Health concluded that there was not sufficient evidence to recommend taking vitamins for chronic disease prevention" and "The American Cancer Society’s guidelines on nutrition and cancer prevention do not recommend taking multivitamins." (If you are interested in this stuff see this), because there is a lot more).

She took all those reputable sources such as the NIH and ACS and proving that she wasn't being open about the study only applying to one type of colon cancer and increasing another. She concluded that "for those without a background or training in clinical research, the task of assessing for validity is very tough if not impossible" which ignores the fact that the reputable sources have that background and assess the validity for us. She suggested that I should ignore those and instead read this anonymous source of wellness information.

With that she disappeared for two and half months only to come back November 1st saying, "I’ve given up dialogue with the guy because not only is he just plain negative and nasty, but he’s completely selective in the research he quotes. As a clinical researcher I work to educate people about snakeoil products."

That made me look a little deeper into Christine Sutherland's Nu Skin scam.

Ms. Sutherland claims to be both a clinical researcher and a analyst (presumably a business analyst from the context she used the term) now. She's failed to address internationally-recognized, industry-leading organizations with an unknown anonymous source of http://www.optimal.co.nz/health_studies.html. Yep, I was completely selective in the research that I quoted.

More importantly she's pitching herself as a work from home expert (while being a clinical researcher and a business analyst) creating websites such as http://www.flexiblehomebusinessideas.com/, http://www.need-to-work-from-home.com/, and http://www.2-percenters.com/. If you fill out the form on the middle one there, you can get a free e-book on making $5000 a month in 6 months... but you can get it here without giving out any personal information.

The book is essentially a marketing pitch or Nu Skin and a bunch of misleading information making it seem like a good idea.

One tidbit from Christine’s eBook scam is to state that less than 1% of people aged 65 and over earned $60,000. (Why do we care about the people age 65 and over, their peak earning years were likely 20-30 years ago when $60,000 was a worth a lot more money?) Instead she pushes that “a million a month is possible” in the MLM business… strange that she doesn’t give the percentage of people who actually do it in MLM... She

In another tidbit, she mentions that Nu Skin has increased 540% on NYSE in the last two years, more than Apple or Google. It’s performed well, but it’s up 60% in the last two years, quite a big difference than 540% and significantly trails Apple over that time. And that’s with Apple losing $100+ a share in the last month or so as of this writing. The graph gets really fun if you look at the last ten years. That’s 7000+% for Apple vs. 300+% for Nu Skin. And Christine wants to complain about selective in the research that I quote?

However, if you don't want to download that eBook and read all the crap you can check out another of her eBooks on Amazon: Work From Home - Choose Smart & Live the Dream. Notice all the terrible reviews that say it is little more than a pitch to join her MLM.

People wonder why I am against MLM. Besides the clear mathematics that show it is an unsustainable business model, it's because of people like Christine Sutherland who seem like decent people on the surface, but underneath are forced to commit a trail of fraud to be "successful" in MLM.

I honestly hate having to write posts like this, but if it helps one person avoid Nu Skin's and Christine Sutherland's scam then it's worthwhile.

Update:

I decided to subscribe to Christine Sutherland's Newsletter and found that she's spreading disinformation there as well.

Here's a quote (screenshot to newsletter):

"But you know, there are literally hundreds of excellent, award-winning MLM companies out there whom anyone would be proud to hitch their wagon to. The Wall Street Journal recently did an industry feature praising the operation and performance of some of the best.

Warren Buffet, Robert Kiyosaki, and Donald Trump all agree that this leveraged business model is an exceptional choice for anyone who wants to build real wealth, and together they've helped to drive a new admiration and respect for the way top MLM businesses operate, and deliver."

It sounds impressive until you realize that the Direct Sale News paid Wall Street Journal for an advertising section. It's not the opinion of the Wall Street Journal and they don't endorse MLM in any way. It's clear when you see that the section has no articles written by their writers and every page has an advertisement for an MLM company. It's despicable that MLM distributors hold this up to defraud people out of their money.

As for Kiyosoki, Trump, and Buffett, let's take them in order:

  • Robert Kiyosaki and Multi-Level Marketing Exposed! - Can't get much more fraudulent than that investigative article I researched and wrote.
  • And we covered MLM and Donald Trump here previously... One thing that I'll add is that Donald Trump has gone bat excrement crazy tonight, election night, and I'm pretty sure everyone knows he's on the way to the looney bin.
  • I have a ton of respect for Buffett, but like Trump, he wants to own the slave network company that has found a way to pay its sales people less than minimum while requiring them use what little money they would pay them to buy the products.

It's the same three people that MLM people always mention. None of them are willing to become MLM distributors... they are smart enough to know it is a losing business. Well, Kiyosaki tried with Amway decades ago, but failed.

The sad part is that people are trusting by nature and some will fall into Sutherland's trap of misinformation.

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MLM Scammers

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You can't go too far without finding a lie being told about an MLM. Here are a few common ones:

It is with that in mind that I found this article in New York Magazine about Jonah Lehrer interesting. Jonah Lehrer was found to be fabricating quotes and information in his stories. In particular the article starts off with this:

"Dishonesty is everywhere … It’s an uncomfortable message, but the implications are huge.”

Lehrer’s blurb was for behavioral economist Dan Ariely’s The (Honest) Truth About Dishonesty: How We Lie to Everyone—Especially Ourselves. Among Ariely’s bite-size lessons: We all cheat by a “fudge factor” of roughly 15 percent, regardless of how likely we are to get caught; a few of us advance gradually to bigger and bigger fudges, often driven by social pressures; and it’s only when our backs are up against the wall that we resort to brazen lies.

I don't believe that everyone operates by a "fudge factor" of 15%. However, for sake of argument, I won't quibble with it. With MLM the fudges are driven by social pressures, an upline pushing you to recruit more people.

It's also notable that people resort to brazen lies when their backs are against the wall. In more than a few MLMs, I've seen them set up people in big debt to start with. The only way out is often to makes hundreds of sales of overpriced product, which is extremely difficult, or recruit others.

It's not surprising that we see these brazen lies in MLM given the circumstances.

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MLM Scam

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Many people endorsing MLM products, both distributors and companies themselves, seem to be unaware of the Revised FTC Endorsement Guidelines (PDF) from 2009.

Many may recall a time where advertisers cherry-picked the person who lost over 100 pounds on a diet and in small letters at the bottom of the screen there was a disclaimer "Results not typical." The FTC has come to say that this isn't allowed any more as it is deceptive. Instead, advertisements should depict the typical results that a consumer should expect. The FTC wrote up a nice page with an example:

"Under the old Guides, if the endorser’s experience wasn’t representative of what buyers would generally achieve – for example, if the 50-pound weight loss of 'Mary G., Tucson, Arizona' wasn’t typical – the Guides allowed the advertiser either to “clearly and conspicuously disclose what the generally expected performance would be in the depicted circumstances or clearly and conspicuously disclose the limited applicability of the endorser’s experience to what consumers may generally expect to achieve.” Despite the unequivocal requirement that the disclosures must be clear and conspicuous, some advertisers flouted this directive by cherry-picking their best case scenario, touting those results in banner headlines, and dropping an all-but-invisible footnote with the cryptic statement, 'Results not typical' or 'Individual results may vary.'

No more. As the revised Guides make clear, testimonials reporting specific results achieved by using the product or service generally will be interpreted to mean that the endorser’s experience is what others typically can expect to achieve. That leaves advertisers with two choices: 1) Have adequate proof to back up that claim, or 2) 'Clearly and conspicuously disclose the generally expected performance in the depicted circumstances.'"

How does this apply to MLM? MonaVie has warned their distributors about the claims: 5 Tips Every MonaVie Distributor Needs to Know About the New FTC Guidelines with a couple of examples:

"Ex. 'MonaVie Pulse restored my eyesight.' - While that maybe an honest opinion, it is not a typical result, and therefore, any such opinion posted online or said offline would be in violation of the current guidelines, unless there is valid research to support the claim."

Many MLM distributors of juices make claims such as these... or saying that MonaVie helped them with cancer, heart disease, or some other medical condition. Not only are these illegal health claims that can't be made due to laws from the FDA, they can't by made due to these guidelines. Many MLM distributors say, "But I believe that. It is my testimonial and my freedom of speech to express my opinion on it." The truth is that MLM distributors gave that up those rights when they signed to became distributors. As an MLM distributor, you have to represent what is adequately proven, such as extensive clinical trials that the juice helps with cancer.

Another example that MonaVie gives is this:

Ex. 'I made $25,000, in one month with MonaVie, and you can too.' While this statement may be true... the result is not 'typical'. Such statements would be in violation of the current guidelines. Whenever discussing earnings, you should refer to the Income Disclosure Statement and provide the link or the actual document.

So are MLM companies abiding by these guidelines that have been in place since 2009? Nope. Let's take the ViSalus scam for example. The ViSalus Compensation Plan (PDF) on page 8 describes a scenario where a distributor would earn $72,000 per month by having a pyramid of nearly 10,000 distributors who each buy 3 ViSalus Balance Kits a month. First most single people, the youth demographic that ViSalus targets would buy one balance kit per month. Second, by definition a typical distributor could not have 10,000 distributors underneath them... the distributor depicted is literally 1 in 10,001 case (it's actually much more because each of those distributors have to be buying all those balance kits). At the end of the compensation plan in small letters ViSalus give the "results not typical"-type disclaimer. This is a clear violation of these FTC guidelines of them cherry-picking a scenario where a person would earn over $850,000 a year rather than a scenario that is typical... 99% of MLMs lose money.

It's something to think about as MLMs give examples of how much you could earn. Are they sticking with the FTC endorsement guidelines and giving an average case of what people do actually earn? Ask for an Income Disclosure Statement and look at it very carefully. Sometimes MLMs like MonaVie will hide distributors by claiming that they aren't active just because they haven't signed anyone up. If the MLM doesn't offer an Income Disclosure Statement, you should run in the other direction.

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FTC

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There's a good article in Harper's Magazine on Mary Kay and MLM this month. (It seems to also include this article)

The stand-out quote in my opinion was:

Most who make money earn about minimum wage, while fewer than 300 of the 600,000 Mary Kay ladies in the United States net a six-figure income. The women I interviewed for “The Pink Pyramid Scheme” told me stories about struggling to patch together daycare or to survive high-risk pregnancies while working long hours scouting prospects and hosting parties without any guarantee of a sale. Debts mounted, marriages failed. They couldn’t have it all because Mary Kay’s business model (like that of any multilevel-marketing enterprise) is designed primarily to profit from, rather than enrich, its workforce.

This really highlights a few key points with MLM:

  • Income Opportunity is Minimal - The expectation should be a minimum wage job. However, that's in earnings, it may not factor in costs of running the business (samples, training, travel, etc). The six-figure income is far from the norm and considering that only 1 in 2000 people make it, it's very unlikely that one can expect to work harder and smarter than the competition and succeed.
  • The Risk To Your Finances - Patching together daycare, high-risk pregnancies, working long hours, and hosting parties that might not lead to a sale... Mounting debts, and failed marriages. These are all very bad things that could be avoided.
  • Designed to Profit from its Workforce - Those six words are very powerful and very clear. They should be on the warning label of anyone looking into an MLM. Anyone looking to join an MLM should have to sign a waiver that they have read and understood this.

For those looking to learn more about Mary Kay, there's extensive information at The Pink Truth.

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MLM News

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Fresh on the heels of Pyramid Scheme Questions Causing Herbalife to Lose 3 Billion Dollars, the Direct Selling Association (DSA) issued an interesting view of legit businesses as opposed to pyramid schemes (PDF). This view was in stark contrast to the FTC's document about MLMs and pyramid schemes, which curiously didn't get a mention.

I should back up for a second. For those who are not familiar with the DSA, they are an association in which 95% of the members are MLM companies. It exists to serve the interests of those members. The DSA being almost all MLM companies is also one of the biggest reasons why most people in MLM confuse MLM, Network Marketing, and Direct Selling.

It is interesting to compare and contrast the two documents: the DSA version, biased due to its membership of MLM companies... and the unbiased one from the FTC who is simply trying to protect consumers. Let's look at some of the claims that the DSA one makes. We'll compare each one to the FTC document.

"Here's how to tell a legitimate business from a pyramid scheme:
Legitimate direct selling companies contribute to a vibrant marketplace by selling competitive, high-quality
products and services and providing a sustainable source of income for those who choose to sell those products."

There's nothing in the FTC document suggesting that legit MLMs contribute to a vibrant marketplace. This illustrates the DSA's need to sugarcoat their paper and exposes it for the marketing it is. As for the selling of competitive high-quality products and services, there's nothing in the FTC about quality of products at all. The FTC document does suggest that the consumer review the product's pricing, "Is the product priced competitively?"

We finally have a point that it seems the FTC and DSA agree on... competitive pricing. Unfortunately for the DSA, many MLM companies fail this test. Last year USA Today noted that even MLM advocates say the products aren't priced competitively:

"The problem so many have is their prices aren't competitive in the real world," says Lou Abbott, who works in multilevel marketing

It gets worse. USA Today noted, "A 31-day supply of Amway's Nutrilite Double X multivitamins is $75. Supplement retailer GNC's most comparable product, Ultra Mega Green multivitamins, cost $40 for a 60-day supply."

So a fair comparison is that about $20 of GNC's product (a 30-day supply) is more or less equal to $75 of Amway's product. This is not competitively priced and thus gives a sign that even the DSA thinks that even DSA member Amway is not a legit company and shares a trait with what they consider a pyramid scheme.

The last part of the DSA statement "providing a sustainable source of income for those who choose to sell those products", isn't addressed in the FTC document. This is more marketing because any business, even pyramid schemes can provide a sustainable source of income for those who choose to sell those products.

Let's look at the other bullet-points about legit companies from the DSA:

• Provide accurate information about the company, its products and what one can expect as a seller of the company’s
products and services.

A little research shows that MonaVie doesn't supply accurate information about the antioxidants in its juice. Additionally, LifeVantage and Dr. Joe McCord Lied about the Creation of Protandim and Joe McCord Illegally Says that Protandim is about Cancer Prevention.

MonaVie is a pending member of the DSA. LifeVantage is a member and of the DSA and has a "Code of Ethics 2012" badge.

• Charge a nominal fee for a starter kit – the median cost for the start-up kit is $99 and usually includes items
such as samples, catalogs, order forms and other tools that help the seller begin selling.

The FTC document doesn't mention anything about starter kits or pricing of them. In the past, this was a problem with MLM companies, but they've since moved to pricing the products more (see above) which costs consumers more than the expensive kits in the long run.

Nonetheless, this is the DSA promoting something that is unrelated to MLMs being pyramid schemes.

• Have a product or service that is competitive in the marketplace and is purchased by the ultimate user.

The competitive in the marketplace was covered above. The $40+ price for 25 ounces of MonaVie's 100% fruit juice blend is not competitive with V8 Fusion's 100% fruit juice blend which is around $3.50 for 46 ounces.

As for the product being purchased by the ultimate user, who else would purchase the product? The FTC document makes the point about "sales to people outside the plan who intend to use the products."

This is a stunning example of how the DSA continues to claim that selling products to other distributors who consume it themselves is legit while the FTC says otherwise. The FTC has been clear MLMs Must Focus on Sales to Outside Participants, which are very different than "ultimate users."

• Require sellers to hold little or no inventory and has a buyback policy to protect against inventory loading.

Latest documents from the FTC like the one cited above don't mention the amount of inventory.

The FTC document does mention to look for the return policy saying, "policies vary on getting full refunds — and how long it could take..."

However, in the case of most MLMs, which involve overpriced, consumable products, the financial damage is done month after month and product that is consumed obviously can't be returned.

• Base compensation primarily on the sale of products and services to the ultimate user. Compensation can be
generated from either your own sales or the sales of others you have recruited.

This terminology makes it seem like it isn't a pyramid scheme if compensation is based entirely off of product bought those recruited. The FTC seems to have a very, very different view saying, "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."

The FTC is clear that compensation should be primarily generated from your own sales to people outside the plan.

• Take time to describe the business and give potential sellers adequate time to make a decision – any opportunity
worth having will be there tomorrow."

The DSA and FTC agree on this, but this should be common sense and not a determining factor of whether a business is a pyramid scheme.

The DSA tries to be helpful in providing a few more tips where "pyramid schemes take advantage of and defraud people." Let's look at those as well:

• Promise large earnings with little effort.

Well the MLM One24, promises that one can retire in 24 months, simply by recruiting 24 people... just one a month. That's a lot of earnings from seemingly very little effort.

One of the biggest supporters of MLM recently spoke to a lot of people with the message MLM is not hard.

• Promise that one can earn a substantial income merely for recruiting people into the operation.

See the above about One24 and recruiting 24 people... just one a month.

• May or may not be a “product” to sell, but if there is it generally has little or no actual value.

The FTC document doesn't put the value of the product in their guidelines anywhere. In fact the FTC prosecuted JewelWay, which sold jewelry that had significant value.

This is an attempt by the DSA to try to make it seem like its members are legit companies because they sell products of value.

• Convince people to buy large amounts of inventory which they cannot easily sell to others and is not returnable
(this is called “inventory loading”).

The FTC document cited above does not address inventory loading. Again, this was a problem in the past, but modern pyramid schemes have abandoned the practice. It doesn't mean that they still aren't pyramid schemes.

• Charge large up-front fees to get involved, either as a direct payment or in the form of an obligatory payment for
“products”. Promoters of pyramid schemes will also try to pressure people to sign up immediately by suggesting
the same opportunity will not be available later.

Again the large up-front fees was a problem in the past, but modern pyramid schemes have avoided it by building the fees into the product pricing. However, in some cases the fees are still around. In order to be eligible in all the ways to make money with LifeVantage, one has to sign up for a package that gives a year supply of product at over $500, which constitutes both "inventory loading" and large up-front fees.

• Base compensation primarily on activity (these payments for recruitment are called “headhunting fees”).
Participants are convinced to pay to get involved with the promise of receiving “headhunting fees” when
they recruit others.

I've never heard of this. It doesn't seem to apply to any MLMs that I've come across. The participants do get compensated for the recruitment of others in the form of the product that they buy. It isn't much different than a headhunting fee. It's still a fee for recruiting since the recruited person typically has to buy product right away to be eligible for commissions.

In fact, a one-time headhunting fee is a logical way to compensate someone for a referral. Many companies have a one-time bonus to employees to recruit other employees to work for the company. This makes a lot more sense than giving compensation month after as a sales commission to a salesman who has quite possibly never met or interacted with the person making the sale as is often the case in MLM.

Bottom Line: The DSA suggests that the confusion about pyramid schemes is understandable due to their portrayal on television. The reality is that consumers don't get confused by jokes on television - they get confused by organizations like the DSA spreading misinformation like the very press release they sent out. When you read the official FTC literature on the subject, it becomes clear that the DSA is not interested in spreading the correct information about pyramid schemes, but instead creating misinformation in an attempt to make its members seem legitimate.

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Direct Selling Association, MLMs vs. Pyramid Schemes

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One of things that fascinates me about MLM is how they churn through people. The churn rate is a measure of how fast distributors leave the MLM. As Wikipedia suggests a high churn rate could be for a number of factors.

"It is a possible indicator of customer dissatisfaction, cheaper and/or better offers from the competition, more successful sales and/or marketing by the competition, or reasons having to do with the customer life cycle."

When we examine churn rate in distributors in MLM it seems most likely that it comes customer dissatisfaction. Since these are supposedly salesmen who deeply believe in the MLM product they are pitching we can discount the competition since MLM products are typically unique.

Looking at the churn rate in MLM

If the MLM business is working well, distributors at all levels are making money and happy with their MLM endeavor. Happy distributors, who are making money, have no reason to leave the business. So what kind of churn are we looking at in MLM? The answer is outrageously high numbers.

Let's look at some of the numbers put together by The Fraud Files on the MLM HerbaLife:

In the 2004 10-K, Herbalife disclosed: "For the latest twelve month re-qualification period ending January 2005, approximately 60 percent of our supervisors did not re-qualify and more than 90% of our distributors that are not supervisors turned over."

The disclosure on distributor turnover may well be the most important disclosure the company could make. While Herbalife touts that at the end of 2011 it had 2.7 million distributors, with 548,000 of them “sales leaders,” it doesn’t tell everyone that more than 90% of the 2.152 million must be replaced in 2012 (if turnover is in line with historical reports of such).

Non-disclosure of distributor failure rates is not a new problem in the MLM industry. Robert FitzPatrick notes from his research: "MLM companies seek to obscure their devastating failure rates by disclosing the number only of 'active' participants and limiting the income figures to a one-year or even shorter time frames, thus concealing the factor of the ongoing and mounting losses of new participants. If all the participants over a five-year period are included in the calculations, the failure rate rises even further. Less than one in one-thousand will be shown to have gained any profit at all. The so-called successes in MLM are in the same small group positioned, year after year, at the top of the recruitment organization."

HerbaLife stopped disclosing the turnover rate after 2005. After people like the above started to use that information to explore the massive failure of the business opportunity, HerbaLife would be silly to continuing publishing the data. After all, if it became common knowledge how bad these opportunities are, no one would get involved and the entire system would crumble.

Herbalife (Part 2)

From this Seeking Alpha article:

As we look at this quarter's results, some interesting data points pop out. First, the company started the year with 4.0 million Members. As of the end of Q3 the company has 4.0 million Members. According to the company's own regional key metrics disclosures, 1.6 million new Members joined Herbalife YTD. Solving for X, that means 1.6 million people churned out of the pyramid since December 31. That is certainly some impressive velocity. Annualized, over 2 million people will quit Herbalife in 2015 alone. I like to call that data point "Churn". I think the FTC also pays attention to this data point.

The website Pink Truth uncovered Mary Kay's turnover numbers from their own disclosure in 2005-2006. The conclusion was Mary Kay destroys a half million women a year:

"Depending upon how you look at it… 41% of the 1,180,000 involved during the year quit. Or of those 700,000 on the books at the end of the year, 69% of them will quit in the following year. 480,000 women churned and burned in 2006."

You've got the 60% of HerbaLife supervisors quit in a year and 90% of their distributors. You've got 69% of Mary Kay distributors will quit in a given year. If the business opportunity was so good, why are so many people pushing to get out of it.

The note by Robert Patrick above is particularly insightful. If we were to take a five year view of things, we'd see that the same people at the top of these MLMs making the money stay in year after year, while, logically, all the people at the bottom who aren't making money get churned through. In ten years, it's a 5 million women from Mary Kay and 20 million people from HerbaLife with more or less the same less than 1% collecting almost all the money.

Update: The New York Times chimes in:

"But like many multilevel marketing companies, Pre-Paid Legal suffers from high turnover. In 2005, the company replaced at least 50 percent of its active sales force, according to filings with the Securities and Exchange Commission. Industrywide, multilevel marketing companies typically replace almost all of their sales representatives every year."

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