Multi Level Marketing Spreads Quickly Online, But What is it?
I was just tired of focusing on school and work. I wanted to focus on my passions, and living a healthy sustainable life.
Pete James Esch paces up and down his kitchen. He’s telling me about the time he worked as a distributor for Monavie, a fruit juice and supplements company which sells its wares through the controversial practice of multi-level marketing (MLM). This is also known as direct selling, or network marketing.
To those involved in multi-level marketing schemes, they’re seen as a sure-fire way to ditch the corporate lifestyle and the crushing tedium of the 9 to 5. Millions of people have pinned their hopes and financial futures on this, and are working as distributors for the likes of Amway, Herbalife, It Works!, and the controversial WakeUpNow! – the last of which folded earlier this year, only a month after being portrayed on This American Life.
To critics, the network marketing model is troublingly similar to that of a pyramid scheme, which is ultimately unsustainable. They argue that the majority of people who get involved either fail to make enough money to live off, or actually lose money.
So, what is Multi-Level Marketing? Is it legit? And should you put your hard-earned money into it?
What Is Multi-Level Marketing
Pete joined Monavie in 2012.
“I was with my friend Ben. We had been hanging out, and I was approached about getting involved in Monavie. I tried the juice, and really liked it, and then Ben sponsored my joining fee”.
Around the time Pete joined Monavie, it cost $50 to sign up as a distributor. This $50 gives Pete the right to purchase, and to sell, Monavie products. When he sells a bottle of juice (which costs $40 for a 25fl oz bottle), he gets a cut.
If Pete manages to convince someone else to become a Monavie distributor, he will get a cut of any sales they make. In MLM parlance, their “business” would be part of his “team”. As he recruits more people, and convinces more people to buy the product, he advances in rank within the Monavie hierarchy. Each advance in rank comes with better terms, higher percentages, and even perks. If you manage to get Black Diamond status, you get a Mercedes car allowance. If you reach the highest level, Triple Crowne, you get $3,000,000 cash.
It’s important to note that the majority of the companies involved in the MLM space don’t do much direct marketing themselves. You’ll very rarely see an advert on TV for Amway, or It Works!
This is because the vast bulk of the advertising comes from the individuals selling the product. The more tech-savvy distributors have bought Google adverts, and whenever you search for a specific scheme, you’ll find their name, websites and phone numbers. There are even thousands of vloggers who’ve released thousands of videos pontificating about the benefits of their chosen scheme. But for the majority of sellers, marketing their “business” means they run events and spend hours speaking directly to potential customers.
For Pete, that meant his friends and family. “I created a list of people who I thought might be interested, and spoke to them”, he said, adding that he found a great many people he spoke to had reservations. “They’d say it was a pyramid scheme”.
Some people aren’t as fortunate as Pete. There are countless stories of friendships, family relationships, and even marriages having been ruined as a result of MLM.
Active distributors of Monavie often attend motivational events. Here, samples of the latest products are doled out, and enthusiastic, fashionably-dressed speakers pontificate about how Monavie changed their life. The aim of these events is to make the audience feel good, and to affirm the decision to get involved in Monavie. They’re given tips for speaking to people, and even given book recommendations. Pete tells me he read Dale Carnegie’s How To Win Friends And Influence People after it was recommended at an event.
They’re also taught to counter accusations that network marketing is a pyramid scheme.
“Like, everything is a pyramid, you know? You go to work, and there are managers and CEOs and people under them. The government is a pyramid. How is Monavie any different?”
I told Pete that argument didn’t wash with me. There’s a fundamental difference between an organizational hierarchy, and a system that is ultimately unsustainable and fails a sizable proportion of people who sign up for it.
The proof of this can be found in the income disclosure statements. These legal documents break down the average incomes for participants, and are periodically published by network marketing companies. They make for somber reading.
Three quarters of people selling homeopathic remedies and body wraps with It Works! earned less than $752 in 2013. Just short of 15% of all distributors earned no income at all. 1.58% of all distributors earned an average of $23,002, and 0.55% earned $54,000.
I tried to find numbers for WakeUpNow!. Based in Provo, Utah, they were seen as one of the rising stars of the network marketing field, until they effectively folded in February amid a storm of controversy and allegations they were a “financial cult”. At the time of writing, their income disclosure statement is offline. However, an earlier copy grabbed from the Internet Archive (archive.org) suggests that 82% of all distributors earned nothing for the entirety of 2013.
The numbers for Monavie are predictably dismal. 70% of all distributors earned an average of $1,681 in 2011. That equates to a weekly income of $32.
While some people do make a great deal of money with network marketing (a tiny fraction of a percent of Monavie distributors earned on average $2,337,251), the vast majority do not. Pete, for the record, has not made any money from selling Monavie.
Which raises an interesting question: is this even legal?
Is Network Marketing The Same As A Pyramid Scheme?
Before continuing, I want to make an important distinction between pyramid schemes and network marketing. Pyramid schemes are illegal; network marketing isn’t. A pyramid scheme is marketed as a financial investment, often with promises of high returns, but is built on redistributing money while creating no value. Network marketing, on the other hand, is centered around a product – Monavie’s fruit juices and WakeUpNow’s energy drinks are two examples.
Pyramid schemes have a long and sordid history. One of the earliest, and one of the most notable, was ran by Charles Ponzi – an Italian immigrant to the United States who cost his “investors” $20 million. Hence the phrase “Ponzi Scheme”.
In 1996, the Albanian government collapsed as a result of civil unrest, after a number of pyramid schemes failed. These schemes promised incredible returns, and were even promoted by politicians – including the economic advisor to Fatos Nano, who would later become prime minister of Albania. The ensuing mayhem and violence resulted almost 4000 deaths, and American, German, Greek and Italian troops being deployed to stabilize the country, and to evacuate American and European citizens.
More recently, there was the case of Bernie Maddof.
Maddof, who was sentenced to 150 years in prison in 2008, conned investors out of $18 billion in one of the most audacious cases of fraud the world has ever seen. He was seen as a reliable, established figure in the finance community, largely as a result of his tenure as the head of NASDAQ – but he was paying existing investors using money from new investors. The majority of the money came from Hollywood actors (including Footloose actor Kevin Bacon), the American Jewish community, and other individual investors.
With pyramid schemes, incredible sums of money are lost. Quite often, it’s people’s life savings. But with multi-level marketing, the sums lost are comparatively quite small. Just $50 here. $100 there. Oh, and time, which is the only non-renewable resource we have .
The differences don’t just stop there. Pyramid schemes are, without exception, illegal and those who run them almost always end up getting caught and sent to jail. It’s not just Albanian government officials and Bernard Madoff. In October 2013, the owners of a relatively small ponzi scheme in Bristol, England were sentenced to a total of 18 months in prison for their part in a scheme which took in a (compared to Madoff) paltry £21 million.
Multi-level marketing isn’t illegal, and is regulated like any other business. Any company that works in the direct selling field has to abide by advertising standards laws. It seems likely that the FTC (Federal Trade Commission) will increase its involvement in the regulation of direct selling, compared to its relatively hands-off approach in years gone by.
Another vital difference between direct selling and getting involved in a pyramid scheme is the focus on a product. When I speak to Pete, it’s obvious that he’s really passionate about the Monavie juice drink. Through the course of our one hour conversation, he showed me packets of powders and supplements that he pulled from his kitchen cupboards, and told me with great passion and enthusiasm about their supposed benefits.
With direct selling, it’s possible to make a profit without recruiting anyone. It’s just not all that likely.
Will MLM Make You Rich?
Almost certainly not. Most MLM schemes require the participant to sell incredibly niche products, with very slender compensation margins. If you’re looking for ways to make money free from the grind of the 9-5, there are other, more reliable ways .
Pete knows that many have reservations when it comes to the MLM model. He knows that people unfavorably compare it to pyramid schemes, and Ponzi schemes. But he’s not giving up. “I’ve still got my Monavie subscription. I just really like the product. I’m not selling it though”.
Today, Pete is working as a painter and carpenter, and taking classes in the evening. He’s studying to become an accountant. I asked him if, after three years of struggling to make a living with Monavie, he’d give it another shot when he finishes college.
Photo Credit: (6I2C0523-1) Dan Schenker