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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I recently read The Millionaire Fastlane by DJ DeMarco and about a dozen pages of the 300+ page book dealt with MLM. (Full Book Review: Millionaire Fast Lane Reviewed)

DeMarco breaks down the key factors that all good business opportunities have. He presents these as “Commandments.” In this post we’ll look at the Commandment of Control.

The Commandment of Control says that the best business are ones where you have full control of the business. This makes sense because you should control your own companys destiny. If someone else can put you of business with the stroke of a pen, it is a problem. This is so basic that I feel I shouldn’t even need to go further, however I will.

Let’s apply the same Commandment of Control to MLM. The MLM company dictates all the rules. Distributor agreements will vary from MLM to MLM, but most of them have these rules that give the company the power:

  1. They allow the company to terminate your business at any time for any reason at their discretion. The result is that you can’t rely on that income as 100% of it could be gone tomorrow through no fault of your own.
  2. They limit your opportunities to join other businesses, even if they don’t compete in any way. For example, one person from Numis coin sales tried to recruit me and two weeks later was telling me that he was out of the coin selling business and into selling LifeVantage Protandim pills.
  3. They have the ability to change pricing and compensation structure whenever they want

In addition to the above there is also the control that you give up outside of the distributor agreement. For example, while you generally have the ability to price the product at whatever you want, they dictate the wholesale price that you can buy it for to be much more than it costs. LifeVantage Protandim filed with the SEC that it paid $1.20 per bottle of 30 pills including packaging (buying in bulk a million bottles). It sells the bottle to distributors for $40 and recommends that distributors sell them at $50. A distributor can choose to sell them at $80 if they want, but other distributors are selling at $50 and there are people on Ebay selling it in the $40-$45 range. So while you have the ability to charge more, you aren’t likely to make many sales that way; you’ll just make enemies when those people found out that over-charged them.

It isn’t difficult to recognize where the real money is in Protandim. The company pays another company to create it for $1.20 and sells it to the distributor for $40. That’s a gain of over 3,300% for being a middleman. The distributor making the sale gets 25% profit for his/her effort. If you really owned the business, you’d have the product made for perhaps $3 a bottle (you would have to pay more because you wouldn’t be able to order a million bottles like LifeVantage did). Then you’d sell them at $35 a piece. Every LifeVantage consumer would flock to your business because you saved the customer anywhere from $5 to $15 per bottle. You’d make $32 per bottle ($35 minus your $3 costs) on all those customers. Instantly control gave you a multi-million dollar business. However, since you don’t have it and LifeVantage does, you are just one in a sea of distributors with no competitive advantage.

Finally, there’s another layer of lack of control. The MLM company itself has its own set of business risks. It could have problems producing product supply. It could have issues with declining product quality. It could go out of business due to poor business decisions from management. If it is one of the exotic juices like MonaVie or a pill like LifeVantage Protandim, it could be shut down by the FDA for the illegal claims made by the company. In fact, MonaVie CEO, Dallin Larsen’s last company Royal Tongan Limu Juice was shut down for that very reason. It could be shut down by the FTC for being an illegal pyramid scheme (“Not all multilevel marketing plans are legitimate. Some are pyramid schemes.”).

MJ DeMarco writes of a friend who lost his business when the MLM company changed the product line and compensation plan, “He never had the keys to his business, and his empire was nothing but a mirage founded on false foundations governed by a political party in which he had no voice.” Further on he does it one better:

“I was involved in four MLM companies. Not once do I remember dictating product decisions, research and marketing, marketing restriction, rules, cost analysis or any other activity fundamental to owning a business. As a network marketer, you don’t own a business—you own a job managing and creating a sales organization… MLM distributors are commissioned employees disguised as entrepreneurs…”

He’s right. A MLM distributor is not an entrepreneur and doesn’t own a business. It is a commissioned sales job in a business where the distributor has no control.

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