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Multi-level marketing companies like Herbalife, Avon, Lu La Ro and Amway are often mischaracterized as pyramid schemes, an illegal structure whereby people pay a fee and then try to make their money back by taking a share of the fees that new members pay to join the scheme under them. But I in good faith can no longer sit by and watch the good reputation of pyramid schemes be ruined by comparisons to multi-level marketing companies.
MLM’s are not pyramid schemes… they are worse…
The business structure of every multi-level marketing company is slightly different, and the same companies use different structures in different markets to skirt around local regulations, but the basic concept remains the same…
You sign up and join the company as an “independent business owner”, you pay a fee which can range from twenty dollars to five THOUSAND dollars depending on the company. For that money you get given a sample pack with the company’s products. You are encouraged to sell those products at a markup like a traditional business, but your ALSO told to sign up friends and family under you to share in a cut of their commission. Commissions structures are intentionally made confusing so that new recruits can’t understand how badly they are being screwed. Most of the money get funnelled to the very top of the program to people that will flash a lot of money around as proof of the system working. If you think this sounds like a pyramid scheme your not alone, even the Federal Trade Commission after it concluded a year’s long investigation into Herbalife the third largest MLM in the world concluded that the company was “not determined not to be a pyramid scheme”.
But really these companies are a lot worse for three reasons.
The first reason all comes down to what actually legally separates them from a fraudulent pyramid scheme, their products. The legal argument is that money only changes hands when a product is sold so they are no different from commissioned salesmen.
Unfortunately, it’s exactly that product that makes MLM’s so much worse than pyramid schemes.
The average return of the from the victim of a pyramid scheme is around 90%. For every one dollar a victim puts into the scheme they can expect a return of ninety cents, a bad investment, but not financially crippling. The returns remain surprisingly high because early investors get paid out and when the whole thing falls apart the money hadn’t really gone anywhere and a portion of it can be recovered by authorities and returned to victims. Bernie Madoff ran the world’s largest Ponzi scheme, and even most of his investors ended up getting most of their money back because after Madoff used the money to buy a penthouse apartment, a private jet and a house in the Hamptons he had nothing left to do with it besides keeping it in the bank and paying it out to investors.
Pyramid schemes are different to Ponzi schemes, but the results are the same.
HOWEVER, the average return of a multi-level marketing company is around thirty percent according to their OWN marketing materials promoting their bonus structure.
The actual returns for most people are far lower than thirty percent and sometimes even the highest ranks of MLM members struggle financially but we will get to that soon. The reason the numbers are so bad is because of the product, for the people at the very top of the MLM to collect everybody’s money LEGALLY they need to move a lot of products, but product has overhead that syphons money out of the scheme. Some money goes to manufacture and ship the product and some money goes to the MLM company itself.
MLM products are priced well above market competitors even after the discount given to their members because the companies need to add the overhead to pay out bonuses. Somehow having returns three times worse than the most infamous corporate fraud in history is only reason one.
So it’s time to learn How Money Works to find out why multi-level marketing companies are actually much WORSE than pyramid schemes.
