The Danger of Multi-Level Marketing

Imagine receiving a phone call from a friend who begins raving about a new business plan he is starting, and he wants you to come to a meeting and hear his presentation. Upon arrival, you realize that he has invited a hundred or so of his closest friends and relatives to hear and contemplate his plan. He begins by raving how, if you are persistent in this business, with a little work over a relatively short period of time, you can earn a large and permanent income. The notion of literally thousands of dollars per month is placed before you and, money conscious as we all are, you want to learn more.

"The plan is simple", he says. "To start with, all you have to do is sign up and agree to send me one hundred dollars each month."

At this point, you obviously sense that things are not quite as they should be. "How can us sending you a hundred a month help us? If we all did it, that would be ten thousand dollars per month out of our hands, and into yours."

"Of course," he replies. "But, by joining up, you receive the right to do the same thing. You can try to recruit your friends and family and convince them to send you one hundred dollars per month as well. If you get a hundred of them, then you will receive ten thousand dollars per month, at the cost of only one hundred per month. Don't you see the beauty of this?"

The above would be an overly simple example of what is known as a pyramid scheme. Not surprisingly, as it is presented above, it is illegal. However, though filtered through an intricate array of products and services, when stripped down to their actual operating procedures, many, if not most, of the multi-level marketing plans which are out there are doing essentially the same thing. Not only that, they are doing it legally, and often they are created by supposedly Christian people, and put forth with an air of morality, helping others, and the "American Way."

However, they are not moral, they are not Christian, they are not ethical, they do not help others, and, if the American Way has to do with hard work and an honest livelihood, they certainly do not represent that, either.

Let me give you a little history. Some years ago I was approached by a friend, who had a sister, who had a boyfriend, who was involved in some sort of multi level scheme. This plan, as I remember it, involved a shopping service where one could buy apparently anything he wanted, and at an attractive price. In order to have access to that service, one would have to pay a moderate monthly fee into the system. He then would go out and convince others to come in below him and do the same thing. As an individual built his or her "pyramid", he would "earn" a certain percentage of the monthly fee from certain of the levels below them. I do not remember the exact numbers on how this system worked. However, what I do remember was that, based on recruiting (or is it conning?) two people to come in below you, and both of them convincing two people to do the same, and this trend continuing until you had nine levels in the pyramid below you (the ninth level would contain 512 people) your monthly "income" would be almost five thousand dollars. By adding more than two people directly below you, and continuing the pyramid indefinitely, you could conceivably build an enormous income.

At the time that plan was presented to me, I was just young enough and just stupid enough to have been impressed. However, by the Grace of God, somehow, I resisted. Even though it seemed to me to be a good way to make some extra cash, I realized even then that this whole idea had some problems – problems which I was not altogether ready to deal with.

First among these was that the "shopping network" you were buying into seemed to me to be entirely secondary. The primary concern was having people below you send in their monthly fee, so that you could get your share of the cash. All this served to do was create a transfer of wealth from the lower levels to the higher levels. No wealth or anything of value was created, it was only transferred.

The second thing that concerned me was that I did not see how I could have any control over what was happening more than one or two levels removed from me. If I signed up two people, presumably I could stay in touch with them to try to ensure they sent their monthly fee in and recruited others. However, at that ninth level, containing five hundred twelve people, I would have absolutely no control. I would not know any of those people or anything about them. I would only know how relatively full my "pyramid" was based on the size of my check each month.

Given this, if someone several levels below me started "stalling" the progress, this eventually could work its way back up to me, where even those one or two levels below me were no longer propagating the system. This is always a problem with pyramid schemes. Once the progress slows to a certain point, the people at the bottom start backing out. Those immediately above them would then be at the bottom and they would have to go out and recruit all over again, or get out themselves. This could eventually reach all the way back to the top of the pyramid, thereby collapsing it.

However, those who had been at or near the top of the pyramid, most likely would obtain some substantial sums of money, while those at the bottom worked at trying to recruit people and likely got little or nothing in return. The whole system really served as a vehicle for those at the top to siphon money off of those at the bottom.

Fortunately, I did not sign on to that first exposure to multi-level marketing. However, a couple of years later, I was approached by a well known company which markets household supplies through a multi level marketing business plan. I will refrain from naming the company specifically, but, suffice it to say, they bill themselves as working in a manner consistent with "the American Way." This exposure came when a former classmate of mine called informing me that she and her husband were trying to build a business, and she wondered if I would be interested in hearing about it. Always looking for a way to achieve greater financial security, I agreed.

"The first thing I will do," she continued, "is send you a tape outlining the business idea. After hearing it, call me and if you are interested, I will come to your house, fill you in on the details, and sign you up if you desire."

Within a few days, I received a cassette tape in the mail. At the first opportunity, I listened to the tape, not knowing what to expect. As it turns out, this tape told me absolutely nothing about what the business was, what product or service it involved, how it operated, what would be expected out of me, or any other pertinent information I had been led to believe it would contain. Instead, the tape was made up solely of one speaker after another, recorded at some sort of rally, going on endlessly about how much money they had made in "this business."

"I was the leading neurosurgeon in a large city," one man began. "I made over four hundred fifty thousand dollars per year. But, I never had anything until I got involved in this business." (Of course, I could only think what a horrid money manager this guy must be!) "Since being in this business, I have started making real money (as if $450K isn't real money!) and now have a huge house, drive a different car everyday of the week, etc. etc. blah blah blah."

The only hint in any of this about who or what this business was came from a passing comment one of the speakers made about making all these gobs of money "selling soap." That gave me a clue as to what company this was, but I still did not know for sure.

Within a few days, the former classmate came into my home to present the program to me. "Do you have any questions after listening to the tape?" she asked.

"Only one," I responded. "Tell me, specifically, what this business is, how it works, and how I go about making money in it." I was still young and naïve, but, fortunately, I am an overly cautious person by nature, and thus far was unimpressed with all these tales of the huge sums of money to be made in this business.

"Ok, let me explain it to you." She then went on to confirm my suspicion about which company this was. But to me, that company was a name only, and I really didn't know that much about it. As she presented the "business plan", to use the term loosely, all I remember was some scribbling on a piece of paper which included a bunch of circles, representing all those people I would help recruit, and big dollars which I would most assuredly make if I signed on. I'll never forget her asking, "Now, can you think of any possible reason why you couldn't just 'wear this business out'?"

I was dumbfounded. I did not know what to say. I could think of lots of reasons, not the least of which was, I still had not a clue how the business worked. So, I asked her again the same question I started with. "Exactly how does this work and what is the mechanism by which I can make money?"

"Well, I'll tell you what", she responded. "Let me leave you a couple more tapes to listen to. I'll come back in a week or so after you listen to these tapes, and we can talk further. These tapes will answer any questions you may have." (It seemed we were going in circles to me.) But, I reluctantly agreed to listen to the tapes, eagerly hoping to find out more specifically how this system worked.

Well, I listened, and guess what? More of the same! Speech after speech lauding what huge sums of money the participants in this business make. At least with these tapes, (which I guess were "Round 2" for those who were not sold during "Round 1") they freely and openly mentioned the name and nature of the business. But, there were no specifics, other than the required work of recruiting everyone you could. The closest thing to an honest description, one which did not try to pass it off as a foolproof get rich quick scheme, was when one of the speakers indicated that to make money in this business, you (and likely your spouse) had to be willing to work six nights per week, for at least two years.

I really did not need to hear much more than that. Given the fact that I already had a full time job, was still not all that far removed from being a newlywed, had a young son, and a brand new daughter, we had no burning desire to spend six nights a week for two years on anything, regardless of the financial outcome. Some things, at least to us, were more important than money.

At any rate, within a week or so, she returned to my house and asked, once again, if I had any question. "Just the same one", I replied. "Exactly how does this work?"

After much more trivial conversation, she finally indicated that a regional meeting was upcoming, and perhaps I should attend. There, they would discuss in-depth how the business actually operates. "If you will just come to the meeting, you will learn what you need. Then, I am sure you will want to join." This whole ordeal started sounding like a broken record to me.

So, my wife and I went to the meeting. The crowd there reminded me of a cross between a high school pep rally and a Pentecostal Church. There was much shouting and clapping and hooting and hollering. Since my wife an I are basically quiet, private people who rarely, if ever, make a public showing of emotion, this caught us entirely off guard. The first thing they did was ask us to all stand up and cheer. At the urging of our host (my old schoolmate) we were seated on the front row. I did not fill entirely comfortable standing and cheering, but also felt weird just sitting there while everyone around me were carrying on like nobody's business.

They had brought in one a young couple who were like the people on the tapes who had gotten rich from this business. Just for starters, I found it interesting that of the hundreds of people there from our area, and probably hundreds more in our area who were not present, they had to bring someone in from outside who had gotten rich enough to lead the pep rally.

During the course of the event, an interesting thing occurred. They split the women and men apart. The women went to one room while the men remained in another. The male member of the rich couple led the all-male meeting, while the female led the ladies. I have to wonder if this was some sort of divide and conquer technique. That is, the thought seemed to be if they could use a method on the females which might appeal to them, and another method on the males which might appeal to them, then perhaps they stood a better chance of convincing at least one of them to join the group if they hadn't already, or to remain in the group if they were already in but having doubts. By convincing one, perhaps they both would join or continue,

Well, this thing drug on for what seemed like hours. I kept waiting and waiting for that promised part where the business plan would be explained in detail to me. However, yet again, it was not to be. Instead, most of the meeting focused on how to get people to sign up without actually filling in the details. "Just keep showing them the circles and the dollar signs. When they ask for more information, give them more of the tapes", etc. In short, my friend was simply doing what she had been trained to do. Mislead, confuse, or whatever, but just keep waiving the money in front of the people and sooner or later they will sign up.

Well, this meeting was my last exposure for that round. It was not over until nearly midnight, far later than we had told our babysitter. My "friend" could tell I was visibly angered by the whole thing, and she never contacted me about it again, except in a panic trying to get me to send her the tapes back. I kept them for "payment."

That would have been the last of my exposure to these businesses except that later, some family members became involved in a computer version of the same business plan. Skeptical, but always willing to listen, I went to their house for a presentation. As I listened, the plan sounded vaguely familiar to me. Pressing the point, I was able to find out that this was simply the updated, computerized version of that same plan based loosely on "the American Way."

As he presented this foolproof method of making money, he, like my classmate before him, laid out a series of circles, representing the recruits I would go out and get below me, and a series of seemingly baseless numbers indicating the riches I would receive for so doing. Upon completing his presentation, I told him I could save him a lot of trouble if he would just simply tell me how the system actually worked. He said he would, but, somehow I felt that I still left empty of the knowledge I was seeking.

As I lie awake that night pondering these things, I began to put myself mentally into the position of facing my family and friends and presenting this plan to them. If I were to get involved, I would absolutely have to do some fairly serious recruiting. Of course, I felt that to do it correctly, and to do it in the only way I would feel comfortable doing it, I would not just indiscriminately propose it to all who would listen. I would choose only those who I thought would take it seriously, and pursue it diligently. Naturally, those same people would also be the ones who would be skeptical about any plan claiming to provide an almost endless source of riches. On top of that, these people, whom I was now making a mental list of, would be only those honest and above board types who would not become involved in anything remotely underhanded. This is how it should be, of course.

But, thinking along those lines reinforced in my mind my need to totally understand how the system worked. I could not present it to them not understanding it myself. If they posed the difficult questions to me, I better well be able to provide honest and adequate answers. Better still, I should be able to present the plan in its entirety in such a way to begin with that leaves little left to the questioning of the potential recruits. If this plan is really an honest, ethical way of earning an income, I should be able to demonstrate that to them through my presentation. This, of course, would mean that I would have to present it in a way different from the way the company itself apparently trains its recruiters to do. That alone gave me pause for concern.

Realizing that I obviously wasn't going to get a straight answer from any of the people presenting the plan to me, I began simply to logically think through the plan as it was presented. The main points reiterated over and over by my presenter was that for this to work I would have to follow a threefold plan. First, I would have to do as much of my shopping as possible through the Internet site involved. Specifically, he mentioned household goods such as soaps, dish and clothes detergents, toilet paper, cereal, and a whole litany of other items. The service was not limited to these types of items, however. Apparently, nearly everything you would care to buy is available. But, it was interesting to me, and perhaps significant, that these items in particular were pushed.

While speaking of buying through this service, the recruiter was honest enough to indicate that the prices of these items was not always the cheapest. Pushing the point, it seemed to me that the truth of the matter was that these items were often actually overpriced. On top of that, there was the concern over shipping costs, as well as sales tax which was added, which oftentimes is not added to Internet commerce. Rest easy, we were told, your total shopping cost will likely still go down because you can avoid the temptation to "impulse buy" unnecessary items. Also, there is no cost associated with shopping around such as gas, wear and tear on your vehicle, and the use of your valuable time.

Well, that was little comfort to me, for impulse buying has never been a major problem. I will squeeze a penny until Lincoln grimaces. As for the costs associated with traveling to the store, I will be going to the grocery store anyway. I am sure that not all of my grocery needs would be met over the Internet. I don't know if items such as meats, eggs, cheese, milk, produce, or other things were available. However, even if they were, I don't like to buy these items sight unseen. So, there would be no savings associated with no longer traveling to the store.

As for the timesaving, I am sure it is a time consuming proposition to sort through the Internet sight and find all the various items one would need. The total amount of time spent shopping may go up or down slightly, but I don't know that the overall difference would be noticeable. Also, as far as other, non-household items, such as clothes, stereos, etc, I likewise would not buy those sight unseen. Therefore, I would have to still spend time shopping, then, leave the mall, come home, order them over the Internet (if I could find the same exact item I wanted), then purchase it at a total price which may be less, but very well may be more than I found it in a retail outlet. I was struggling seeing the advantage of this.

In the end, it seemed that locking myself down to shopping on this network would not always, or even usually, work to my favor as far as actual money spent. But, "changing the way you shop" to simply mindlessly using this service was the first, and strongest point which was reiterated over and over during the course of the presentation.

The second point of the plan which was stressed was to go out and tell others about the plan and convince them to do the same. Seeing as how I am struggling fiercely with the validity of step one, step two would be a near impossibility. How, or why, would I convince others to do what I was not convinced myself was a good thing? Would it be ethical? Could I do it while clearly telling them the parameters of what they were doing?

Step three was simply a further, more detailed application of step two. In step three, you would note those below you who seemed particularly successful at steps one and two, and work harder with them to teach them and counsel them to do even more. Step three, like step two, seems useless unless and until I can convince myself that step one, (narrowing all my shopping down to one source regardless of the price), would be beneficial. I could not find anything beneficial in that idea.

At this point, however, the obvious question arises: How do I actually make money doing this? The answer to that is not altogether simple, but will be covered here in two parts. First, remember that the goods purchased are at least sometimes of a higher price than those same items could be available for elsewhere. This fact was admitted to by all parties involved, and, the fact that sometimes this price was even significantly higher was admitted to as well. Again this is especially true when the added tax and shipping, where applicable, was added. Also, likely this is where the household item list comes in. Those household items are the things you would buy month in and month out. They are the items which the original company (the one promoting the "Amercian Way") produces and sells. These items are likely among the most overpriced items available through the system.

Now, I as an "owner" of this business which included all those who fell below me on my "pyramid" (yes, pyramids again!), would receive a cut of the money spent by those below me. The amount of this cut is unknown because it is not specifically dictated by the amount of money actually spent. The value depends on a complicated system of "point value" and "business volume." That is, someone buys an item costing a certain amount of money. That item has a point value assigned to it which is not directly tied to its cost. According to my recruiter, that point value is usually between two and three to one. That is, to receive one hundred points, someone would have to spend between two and three hundred dollars. For a given amount of "points" gathered during a month, a certain percentage of the "business volume" would be awarded.

That "business volume", like the point system, seemed to be a mysterious entity. It was not necessarily determined by the price of the item. Simply put, the combination of "point value" and "business volume" seemed to be related, as it must assuredly be, to the amount of profit margin in the given product. That is to say, the more overpriced the item was, (such as the household items offered) the more lucrative the combination of points and volume would become. In short, I receive money based on how much overpriced volume was purchased by me and those below me. In other words, money traveled "up the pyramid" from those who spent too much on items they could get for less elsewhere. It is indeed a "pyramid" where nothing of value is created, but, money is transferred from those below to those above. Just like my imaginary pyramid where I convince people to hand over their money to me, in this pyramid I do the same, only filtered through the sale of items which the consumer may be purchasing anyway, and could likely purchase at a lower price elsewhere.

This, however, raised another interesting problem in my mind. While this seemed incredibly "sneaky", it also seemed economically impossible. If someone twelve "generations" below me received a cut of what they purchased, and every "generation" above them including me and those fifteen or twenty generations above me, also received a percentage cut, it wouldn't take long to eat up all the profits from the sale of that item and then some. There is not an endless stream of money to be generated. There can not be, say, ten dollars of profit in an item, and thousands of dollars to be dispersed from this profit.

Well, further probing yielded the answer to this problem. You see, I get my cut of all those below me in my pyramid. If I have a large pyramid with a great volume, I may get a cut of thousands of dollars for that month. My percentage is based on the total point value and business volume of those below me. I, in turn, have to pay those below me their percentage cut as well.

As an example, let's say that I have a percentage level of twenty five percent, and my business volume is ten thousand dollars. I would then receive a "bonus check" for twenty five hundred dollars. But, then assume that my volume comes from four people who each have a volume of twenty-five hundred dollars and a cut of fifteen percent. I would then have to pay out fifteen percent to each of them, or a total of fifteen hundred dollars. Therefore, my net, would only be one thousand dollars. This fact is conveniently left out, or at least hidden very well, in the recruitment presentation. Whereas I may see my check as being for twenty five hundred dollars, my net business would only be one thousand dollars.

Of course, an added net income of one thousand dollars in a month is still good, right? But, how hard would I have to work, how many hours would I have to put in, convincing people to pay a higher price for goods against their better judgement, to get that type of return? In reality, it would be difficult to get ten people providing that kind of volume. Likely, for a long time, I would have few, if any, people with that kind of volume of sales. Therefore, my percentage would be much closer to the percentage I would have to pay out, and my net, would be much much smaller. Only after years of hard work could I possibly have enough people below me in my pyramid, spending more for the same goods, to receive any worthwhile income. And, as with all pyramids, at some point it will start stalling and collapsing as stated before. This does away with the notion, also presented in the recruitment information, that at some point I could stop working and simply continue to receive residual income at the same, or even ever increasing rates. The price of eternal income is eternal vigilance. I would have to continue to recruit, and ensure that those below me did the same to keep whatever income I did develop.

The end result of all this is as follows: For any given transaction, at most, twenty five percent of the "business volume" (whatever that might be) is generated to be dispersed amongst all the levels of a given pyramid. If the pyramid is one hundred generations big, those few dollars generated by the twenty five percent of the business volume is dispersed amongst those one hundred "companies." Depending on how that pyramid has progressed, there may even be those levels where the participant actually receives no net income for that purchase. At other levels, a fairly large percentage of this cut may be obtained. In general, however, it is at the upper levels that the most money is made. The net result is that for every purchase, a small amount of money built into the profit of the product is generated and transferred upward in the pyramid. If, in a given month, one hundred million dollars of "business volume" is sold, and twenty five percent is dispersed (and it will never be more), this will yield twenty five million dollars to be dispersed amongst the various levels of the pyramid. However, if the pyramid consists, in total, of one hundred thousand people (or "companies"), then, on average, each one would receive two hundred fifty dollars for that month. In reality, some few would receive substantially more, meaning the overwhelming majority would receive a mere pittance. The odds of becoming one of the small minority who do get filthy rich in this scheme are small, and require endless hours of hard work to convince others to purchase overpriced goods against their better judgment. Thanks, but no thanks.

Multi level marketing is a sneaky, un-American way to transfer wealth.

In the end, these multi-level marketing schemes are actually more heinous than the imaginary (and illegal) pyramid I started out talking about. At least in my imaginary system, the people would know up front exactly what they were getting into. They would know all the risks, and all the potentially unethical practices involved in this transfer of wealth from the lower levels to the higher. In this "business plan", all the dangers, pitfalls, and unethical practices are kept neatly hidden in a labyrinth of details, transfers, and the supposed legitimacy of pushing an actual, concrete product line. In reality, my imaginary system is far less unethical, and should come much closer to being legal, than the real life scams pushed by those claiming to be of "the American Way."