During the pandemic, almost everyone I knew was receiving a “hey girlie, are you interested in hearing about a business opportunity which has changed my life? I’ve earned $x amount without even trying!” As the pandemic evolved, so did the emergence of MLMs as distributors utilised both the internet and the uncertainty of the virus to grow.
My interest in this topic piqued when studying a paper that focussed on the financial markets and the regulatory environment. I came across the documentary “Betting On Zero” by Ted Braun that follows Bill Ackman (billionaire investor and hedge fund manager with a current estimated net worth of $2.8 billion) as he accuses Herbalife (an MLM) of being an illegal pyramid scheme, and creates a short investment in it (which is investing in a way that he would only profit if the value of the asset falls).
So what is a pyramid scheme?
Pyramid schemes are a business model where members recruit people below them through a promise of payments as they get more members to join below them (profits are driven by recruiting people rather than product sales). They are designed in a way to benefit those at the top of the pyramid while making it impossible for those at the bottom to succeed.
They were declared fraudulent, and illegal around the world, and in particular in New Zealand, they are in contravention of the Fair Trading Act. The Commerce Commission urges consumers to be wary of offers on social media that are recruiting you to earn money from the comfort of your own home, particularly as social media provides that elevated platform. An important thing to note is also that any testimonials that are exaggerative such as “since I joined [company] I have made [$$$] by barely doing anything!” is in breach of the Fair Trading Act’s prohibition on exaggerating earnings participants can obtain from involvement in an activity.
As pyramid schemes were declared illegal, the goalpost was shifted, forcing companies selling an unattainable dream to people to to rebrand and fit within the new confines of the law. Thus, the MLM business model began to soar. The distinction here is that in these schemes, salespeople sell products to customers directly but are also incentivised to recruit others. The differentiation which impacts the legality is that here, participants can earn commission from selling products too rather than pyramid selling which solely relies on the recruitment of others into the scheme. All regulators urge people considering involvement in such schemes to diligently research that they are in fact, not party to an illegal pyramid scheme.
Despite the legality of the MLM model, they are not without controversy on the basis that it still maintains that pyramid structure where those at the top make the most amount of money, and people at the bottom do not necessarily make even a fraction of what they were told they could. Numerous anecdotes emerged over the pandemic of former MLM members telling their terrifying stories of bankruptcy and debt.
In the search for some autonomy and wanting to be more financially free, unfortunately, women are who are most susceptible to being sucked into a scheme that may in fact be too good to be true. Many societies, studies and education institutions that are dedicated to investigating and educating people on the dangers of MLM business models.
So whilst they are legal, there are numerous reasons against participating in an MLM.
“The Case (for and) against Multi-level Marketing” by Jon M. Taylor of the Consumer Awareness Institute is a 382 page research paper examining how MLMs actually worked by taking the Amway precedent and outlining the many questions that needed to be posed.
After examining 350 MLMs, he found 100% of the MLMs to be recruitment-driven and that the income was primarily driven from building a downstream team as opposed to product sales. Chapter 7 of the paper, entitled “MLM’s Abysmal Numbers” noted that MLM’s notoriously misrepresent potential earnings and that across all MLMs he researched, 99.6% of participants LOST money despite Taylor making liberal assumptions in their favour.
In chapter 8, he concluded that MLM’s are a “composite lie; made up of a whole litany of misrepresentations.’ The Consumer Awareness Institute’s research is endorsed by the Federal Trade Commission and published on their website.
So why is the selling aspect generally unsuccessful? Most of these products are highly priced when compared to other products of a similar quality. As these products are generally undifferentiated, consumers can get the same products in stores or online. In addition, in the person-to-person selling model that MLM’s so heavily rely on, there’s a pressure on personal relationships and selling to people you know only. This can also strain your relationships if you’re constantly insisting that friends and family buy a certain product from you.
Often in MLM’s, the sales of the products don’t actually earn enough of a margin for you to turn a profit and studies show that sales people struggle to sell products at the suggested retail prices, forcing them to often discount products. This, in turn, pushes them to turn to the promotion/recruitment aspect and that in order to be profitable they need to get to the upper levels of the hierarchy.
Therefore despite the powerful allure of an MLM program which may promise the opportunity to be self-employed and the hopes of unlimited income, for the reasons above, I am extremely apprehensive of any “Hey, Girl…” messages. I urge you to do any research diligently before investing into any schemes.