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									     2007 ASBE Conference, Austin Texas
           “Myth or Reality:
    Is Multilevel Marketing Really
         Entrepreneurship?”
            D. Anthony Miles & David Gomez
                   Graduate Students,
            University of the Incarnate Word



                        Company
                        LOGO

4/14/2011                                      1
                      Agenda

        History of Pyramiding and Multi-level
         Marketing (MLM) .
        The Structure of Pyramids and MLM
        Legal Issues and Policies with MLM
        MLM Firms Today
        Conclusions and Critical Observations
        Questions and discussion



4/14/2011                                        2
             What Is Multilevel Marketing (MLM)?


  Multilevel Marketing (MLM) is also called “Network Marketing (NWM)”,
  “Direct Selling”, “Personal Retailing” and/or “Consumer Direct
  Marketing” is:
      •Network of distributors that sell retail products through
      nontraditional distribution systems; is a product-based distribution
      system.
      •Pyramid infrastructure based on recruiting individual distributors of
      goods and services.
      •Recruitment-centered, rather than product-centered.
      •Products that are sold through MLM networks most likely cannot be
      found in traditional retailing markets or sectors.
      •Products are mostly beauty and health related; (high-priced
      “potions and lotions”) lotions, skin care, vitamins and health drinks.
      •MLM has expanded into service related industries (i.e. Prepaid
      Legal Services, ACN, Primerica Financial Services).



4/14/2011                                                                      3
                        The History of Ponzi Schemes, Pyramids
                             and Multilevel Marketing (MLM)

     •“Ponzi scheme” began in 1920’s by Italian immigrant named Carlo
     “Charles” Ponzi. Thus emerged the term “Ponzi Scheme.”
     •This scheme was based on paying the earlier investors with the
     incoming money from the new investors.
     •The scheme was not based on actual earnings.
     •Although cash rich, Ponzi was not wealthy.
     •This scam was financially insolvent; robbing “Peter to pay Paul”
      Ponzi took in about $200K per day; paying out 50% ROI to first investors.
     •In 1934,Ponzi was later arrested, convicted and deported back to Italy.
     •Other Ponzi schemes examples: chain letters and pyramid schemes.
     •From 1930’s to 1970’s more Ponzi/pyramid schemes grew in U.S.-
     classic 1-2-4-8 no-product pyramid schemes (“The Airplane Game”).
     •MLM (product-based pyramid scheme) emerged in the late 40’s;
     Amway Corporation founded in 1949 by Jay Van Andel and Richard DeVos;
     selling soap door-to-door and recruiting distributors.
     •In 1979, FTC Judge ruled that Amway was not a pyramid scheme,
     assuming “retail rules” were satisfied (10 retial customers, 70% sold or
     consumed before reorder, refund provisions).
Source: Walsh, (2001)
  4/14/2011                                                                       4
                    The Structure of Pyramids and MLM Companies

                      The Structure of Pyramids and MLM Companies




                                    •Insert picture



     For example: 1 person recruits 6 people; then 6 people must recruit 6 individual each which is a total of 36
     people; 36 must then recruit 216 and etc. However, the pyramid’s potential of increased growth collapses before
     any further growth. There is no profitability in recruiting. Profitability should be in the sale of the product, not in
     recruiting a downline.
Source: Taylor (2007)-illustration by Wikipedia
  4/14/2011                                                                                                                    5
                        Five Causal and Defining Characteristics of
                         a Product based Pyramid Scheme (MLM)


      1) Recruiting of participants is unlimited in an endless chain of
         empowered and motivated recruiters recruiting recruiters.
      2) Advancement in a hierarchy of multiple levels of “distributors”
         is achieved by recruitment rather than by appointment.
      3) Ongoing purchases (products, sales “tools” and etc.) by
         distributors are encouraged in order for them to be eligible for
         commissions and to advance to the business (“pay to play”).
      4) The company pays commissions and/or bonuses to more than
         five levels of “distributors.”
      5) For each sale company payout for each payout upline
         participant equals or exceeds that for the person actually
         selling the product creating an inadequate incentive to sell the
         products directly and an excessive incentive to recruit.



Source: Taylor (2007)
  4/14/2011                                                                 6
                 Common Behavior Characteristics of
                   Multilevel Marketers (MLMers)


   •Mulitlevel Marketing (MLM) is a direct descendant of Ponzi/ pyramid
   schemes.
   •MLM’ers typically operate as independent contractors, not
   entrepreneurs.
   •Many MLM’ers do not acquire a tax ID to operate as a legitimate
   business.
   •Usually prey on people’s fears during difficult economic times.
   •Notorious for deceptive practices in recruiting individuals.
   •Utilizes a complex web of deceptions in recruiting participants- -
   For example, refusal to disclose upfront the firm’s name and pyramidal
   nature of the scheme. their firm’s name up front.
   •Misrepresentation of past and potential earnings is common in
   recruiting.
   •MLM performs well in the Bible Belt, Sunbelt, Intermountain West,
   California and Northwestern U.S.
   •MLM’ers exploit personal relationships: friends, family & business
   associates.

4/14/2011                                                                   7
                     Statistics on Multilevel Marketing

  The Wirthlin Researchers (1998) asked individuals what was the relationship with the person
                                        Text
  that recruited them in MLM. The following statistics revealed the following:


                                               MLM Company Rep
                                                     28%
                                                                   Close Friend
                      Acquaintance                                     23%
                          20%
                                           Multilevel Marketing
                                                                  Immediate Family
                                                                      Member
                                                                        6%
                       Co-Worker
                          9%
                                                Relative
                                                  7%




Notable statistics: 1) Over 60% of recruits drop out of MLM within a year; 2) 99% of individuals
that join MLM suffer losses-after subtracting product purchases and necessary expenses.
  Source: Kuntze (2001) & Taylor (2004).
4/14/2011                                                                                          8
                            What Are the Problems with
                            Multilevel Marketing (MLM)?

 MLM has four major problems as a business model:

 1) Market Saturation.
     • Unprotected sales territory causes the market to become highly
        saturated by many reps;
     • Often sell commodity-based products that can be found in retail
        stores.
 2) Pyramid Infrastructure.
     • Doomed by design; fundamentally flawed.
     • Prone to eventual collapse.
 3) Morality and Ethics.
     • Uses deception with overzealous product claims
     • Fabricates how much money can be made which are false.
 4) Relationship Issues.
     • Leveraging personal relationships is unethical;
     • Strains and jeopardizes personal relationships by malicious
        recruitment.

 Source: Van Druff & Van Druff (2004)
4/14/2011                                                                9
                Pyramid Schemes vs. Multilevel Marketing

Pyramid Scheme Characteristics:                         MLM Characteristics:
 All the money goes to the top                          The revenue is split between
   person in the pyramid.                                 those at the top and to the MLM
 Focus on growth through                                 company.
   recruitment of people.                                A direct descendant of pyramid
 “Robbing Peter to pay Paul.” Pays                       schemes.
   initial investors with incoming                       Focus on growth through
   recruits investment.                                   recruitment of people.
 Recruitment-centered rather than                       Recruitment-centered rather than
   product-centered.                                      product-centered.
 Require substantial upfront fees                       Monitor performance of
   from people who are recruited.                         independent agents
 Pressure recruits to purchase                          Have buy-back policies in place so
   corporate products for their own                       agents do not get stuck with
   consumption or stockpile large                         excess inventory.
   amounts of inventory.                                 Low upfront fees to get in.
 Pyramid infrastructure                                 Incessant meetings to attend.
                                                         Pyramid infrastructure.
 Source: Van Druff & Van Druff (2004) & Taylor (2007)
4/14/2011                                                                                 10
                Why Do People Join Multilevel Marketing (MLM)?


   Low barriers to entry; ease of entry.
   Low to minimal start-up capital needed.
   Home-based employment.
   No experience needed to enter the business.
   Cannot be fired or terminated.
   No franchise fees or royalties.
   No territorial restrictions.
   No discrimination: gender, race and etc.
   The myth of achieving unlimited passive income vs. linear
    income (job pay).
   Appealing to people’s greed and promise for making quick
    money
 Source: Kuntze, (2001) & Miles & (2007).
4/14/2011                                                        11
                 Why People Should Not Join Multilevel Marketing?


     Highly difficult to make a profit      Lack of management control
      (less than 1% make a profit).           systems with sales territory.
     Image problems with public.            Enormous strain on resources:
          High level of rejection and        time and money travel (fuel costs)
           resistance from the public.       Strains personal relationships;
     Time and labor intensive.               leverages personal relationships
     Market saturation of                    recruitment.
      products/services; products are        Pyramid infrastructure: does not
      commodity-based.                        work.
     Attrition Rate. Extremely high
      attrition rate.
     Deception. Uses deceptive
      practices to recruit individuals.
     Constant meetings ad nausea.
          MLM’ers must constantly drag
           people to meetings against
           their will.



    Source: (Kuntze, 2001).
4/14/2011                                                                     12
               Why Has MLM Continued to Prosper in the US?


1) Government inaction. Authorities rarely investigate MLM firms.
    • Many firms use the “Amway Defense”
    • Difficult to prosecute without proof and documentation.
2) Political influence.
    • Many MLM firms are big contributors to political campaigns.
    • Direct Selling Association (DSA) has also been successful in
       lobbying in favor of MLM firms.
3) MLM victims seldom file complaints.
    • Fear of self-incrimination and consequences from or to their
       upline or downline.
    • MLM victims typically will not file fraud charges.
    • MLM typically has 10,000’s of victims.
    • Severely damaged their personal relationships.
4) Colleges and universities
    • Look the other way on researching MLM.
    • Very little academic research is conducted on MLM.
 Source: Taylor (2007)
4/14/2011                                                            13
                   Top 10 Multilevel Marketing (MLM) Companies


  Top 10 MLM Firms                                                Other and Past MLM Firms
   ACN                                                            Arbone
                                                                   Avon
   Amway/Quixstar                                                 Equinox International
   Freelife International                                         Mary Kay
   Herbalife                                                      Nutralite
   Melaleuca                                                      Rexall Showcase International
                                                                    (RSI)
   New Ways International                                         Shaklee
   NuSkin                                                         Tupperware
   Outbound Voice, Inc.                                           Bioperformance
   Pre-Paid Legal Services
   Tahitian Noni International                                   Note:
                                                                         Out of several 1,000’s these are the
    (new)                                                                 most popular
   USANA (new)                                                          Thousands of MLM’s have come and
                                                                          gone.
Source: Direct Selling Association (DSA) (2006) & Taylor (2007)
  4/14/2011                                                                                              14
                     Legal Issues with Multilevel Marketing (MLM)


   •    Amway Corporation is the most investigated MLM company.
   •    The Federal Trade Commission (FTC) cautions people about MLM.
   •    MLM cannot escape its negative past beginnings as Ponzi Schemes.
   •    In 2005, China prohibited pyramid selling; has strong anti-pyramid
        laws.
   •    The State of Texas has had the worst laws on anti-pyramid statutes
        in the nation-crafted by the DSA to exempt MLM’s from pyramid
        scheme prosecution.
   •    The DSA has been successful in promoting similar pro-MLM
        legislation in Idaho, Utah, North Dakota, and several other states.
   •    Overall, the U.S. has relaxed statutes against MLM due to political
        lobbying by MLM associations and organizations.
   •    Laws tend to target illegal pyramids (and Ponzi Schemes) more than
        MLM firms.
   •    USANA is undergoing an informal investigation by the SEC for fraud.


Source: Van Druff & Van Druff (2004), FitzPatrick (2007) & Taylor (2007).
 4/14/2011                                                                  15
            Is Multilevel Marketing (MLM) Entrepreneurship?


•Strong body of research suggest that MLM is not entrepreneurship.
•MLMers are actually “subcontractors” rather than entrepreneurs.
•MLM does encourage entrepreneurial spirit, but not actual
entrepreneurship.
•On average MLMers do not acquire a business tax ID with the IRS.
•Many MLMers file their IRS taxes as individuals and not as business
entities.
•MLM is recruitment-centered rather than product or service-
centered.
•Seriously flawed as entrepreneurship; doomed by design.
•MLM in a Wal-Mart Dominated World? Will Not Work.




4/14/2011                                                              16
                    Is Multilevel Marketing Entrepreneurship?


 Small Business Development Center (SBDC) counselors
 characterized participants of MLM as:

       •Somewhat gullible, socially unable.
       •Not very educated about business.
       •High-risk dreamers in search of the entrepreneurial
       “golden fleece.”
       •SBDC refuses to counsel anyone involved with MLM
       as an entrepreneurial venture.
       •SBA refuses to finance any enterprise characterized
       as MLM (SBA 2006).


Source: (Kuntze, 2001)
 4/14/2011                                                      17
                 Multilevel Marketers (MLM) vs. Real Entrepreneurs


Behavioral and personality differences between
MLM’ers and real entrepreneurs are:

             • Lack of education;
             • Lack of business experience;
             • Lack of innovation skills;
             • Motivated by symbolic aspects of success such
               as money, lavish lifestyle and identity
             • Willingness to take on high risk concerning
               questionable endeavors.
             • Entrepreneurial businesses are product/service
               centered, not recruitment-centered.


Source: (Kuntze, 2001)
 4/14/2011                                                           18
                 Is Multilevel Marketing (MLM) Profitable?

Utah County has the highest concentration of MLM firms in the U.S.; these studies
conducted with CPA’s and tax preparers reveal the following:

1)    A principal of H&R Block tax preparer in Northern Utah whose group has prepared
      over 15,000 tax return stated, “All of his MLM clients lost money.”

2)    Telephone interviews conducted with 33 CPA’s and tax preparers that had a total of
      864 clients that participated in MLM in counties where no MLM’s were headquartered
      could not recall one MLM client that made a profit.

3)    Telephone interviews conducted with 33 CPA’s and tax preparers (in Utah County with
      the highest concentration of MLM’s in the country) had a total of 2,070 MLM clients-
      there were only 43 who recorded a profit. Those who profited were positioned
      at or near the top of their respective pyramids.

4)    Comments made on MLM by CPA’s with Counties that had no MLM Headquarters:
      •  “I would never advise a friend to do MLM - unless he needs a tax write-off.”
      •  “It’s a scam.”
      •  “It’s a pyramid scheme.”
      •  “There’s money to be made in MLM – at the top.”

Source: Taylor (2001) from http://www.mlm-thetruth.com
 4/14/2011                                                                              19
            Critical Observations on Multilevel Marketing (MLM)

•Highly labor and time intensive; recruiting is difficult.
•99.9%of all people involved in MLM firms never earn a profit.
•High attrition rate: more than 50% who join MLM quit within 1 year;
•SBDC counselors refuse to assist any client involved in MLM;
•SBA refuses to finance any individual or business that is MLM.
•Often sell commodity-based products; that can purchased through
traditional supply chains.
•Too recruitment-centered, not product-centered.
•Unethically exploits and strains personal relationships;
•Products are very difficult in terms of brand loyalty;
•Suffers from bad public image. People have strong distrust of MLM.
•MLMer’s are typically “subcontractors”, “salesmen” not entrepreneurs.
•MLM, aka “Personal Retailing”, does not work in this “Wal-Mart Era.”
•MLM is not technically entrepreneurship.



4/14/2011                                                            20
     2007 ASBE Conference, Austin Texas
             “Myth or Reality:
      Is Multilevel Marketing Really
            Entrepreneurship?”

            Questions?


                    Company
                    LOGO

4/14/2011                                 21

								
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