Legitimate MLM or Pyramid Scheme: How can you tell?
We’ve all been there. Whether it was a spouse or parent that was pitching an exciting business opportunity, we’ve all been sold an opportunity of a lifetime. And deep down in our gut, we felt…maybe a little uncertain. Is it legitimate? Is it legal? Unfortunately, distinguishing a good network marketing company from a bad one involves more art than science. It’s hard to tell a difference and there’s never a sure answer. I prepared this article to help consumers make wise choices during these tough economic times. The article is also written to be informative for network marketing executives to help them run their businesses.
Legitimate MLM or Pyramid Scheme: How can you tell?
Tags: kevin thompson, mlm attorney, mlm law, mlm pyramid scheme, network marketing
August 12th, 2009 at 3:35 pm
Overall, good information. I take issue with some of the points, however.
1. The FTC has gone on record as saying the lack of retail sales to non-participants is NOT an automatic problem.
2. Amway did not come away with a total victory in the 1979 FTC case, and especially not in the 2008 UK case. The FTC made them change their “one price for all” policy, which amounted to price fixing, and the UK totally shut down the tool scam, which makes Amway IBOs in the Emerald and above positions most of their profit, while most IBOs below Platinum operate at a net loss.
3. You did not mention the tool scam associated with the Amway business, as mentioned above. Sometimes it is what is NOT told to the prospect or lower level participant that is the most significant source of profit for the high level partipants and most significant source of loss for the lower level participants.
4. Amway now requires sales to 5 customers, and the recent court case with TEAM indicates about 3.5% of sales is to non-participants.
5. If MLM wants a better reputation, they need to make the above facts known.
August 12th, 2009 at 3:45 pm
6. You said the 70% rule is common, but it is NOT commonly understood.
7. It is true 300 PV promotions have occurred in Amway, this problem would be even more severe had it occurred with an MLM having less variety of products.
8. A larger number of products also makes it more likely the participants can be meeting retail sales requirements with competitively priced products, while many other products are not competitively priced.
August 12th, 2009 at 4:58 pm
In the same memo you’re referring to, the FTC also said that the sale of a product does not automatically legitimize an operation. The FTC has also said that Burnlounge was a pyramid because the majority of revenue came from distributors, not customers. They’ve been on both sides of the issue. Sales to nonparticipants are essential.
Amway surviving in the UK and in the 70s in the U.S. are victories in my book. They lived to fight another day.
The UK government did not shut down tool companies in Amway. I discussed this in another ebook. Amway shut them down when the action was initiated and the UK judge said the issue was moot. He said nothing about tool companies.
Misrepresentations are always an issue.
Regardless if a company has 1,000 products or 1, if sales are not made to nonparticipants, and distributors are asked to spend several hundred dollars a month, there’s a problem.
Yes, theoretically, a larger supply of products will help the sales force make retail sales quotas by giving them a larger offering for customers. However, the proof is in the numbers, which as I said, we’re not privy too. In the meantime, we can only track the symptoms.
August 13th, 2009 at 3:06 pm
I agree, the FTC has been on both sides of the retail issue.
In the Burnlounge case, and I haven’t read the FTC’s exact words, I believe the majority they are talking about is the signup fee, which was being used to pay downline bonuses, as opposed to product consumption. It is indeterminate whether sales to nonparticipants are essential, but such sales do provide a positive “check mark” in an MLM’s favor.
Do you know the behind the scenes discussions that occurred prior to Amway taking action to shut down the tool companies? The judge said the action taken in shutting down tool profit (the tool companies weren’t shut down, just the ability to profit from them) was part of his decision and that action was to be a permanent condition for Amway to remain in business in the UK. If this is what you mean by “moot”, I agree. He said plenty about the tool companies, by requiring ZERO profit. He also considered the tool companies, and the policing of their behavior, to be a job that Amway could no longer ignore.
Misrepresentations are bigger issues when major issues, such as the tool scam, are ignored by Amway. Just because misrepresenations will always exist is not a reason to ignore them.
The FTC has said there may or may not be a problem with no sales to nonparticipants. Don’t you agree it is easier to understand spending more if 1000’s of products are available versus 1? The major point wasn’t whether more self consumption or sales are possible, but whether some products could be priced competitively and others not.
I made an error above, there are still 10 retail customers required for downline bonus volume to be earned.
August 14th, 2009 at 1:11 pm
In the UK order, in paragraph 6, the judge said, “Petitions were also presented against Britt and Network 21 but these have been the subject of arrangements made between the presentation of the petitions and the hearing of the Amway petition and SO ARE NOT BEFORE ME.” Honestly, I don’t fully understand this sentence. But it’s the only sentence that references the tool companies and the tool companies were not discussed in the order.
August 19th, 2009 at 7:14 pm
The judge said Amway was responsible for the tool companies, particularly their behavior. Britt left the UK, and left a lot of IBOs hanging with tickets to a major function. The “leader” of N21 issued a letter accusing Amway of being responsible, then Amway told him to withdraw it. He later issued another letter accepting joint responsibility for the problems. Paragraph 57C clearly states tool profit will be ZERO. Who cares whether the tool companies themselves were discussed further? The point is tool profit must be ZERO.
August 20th, 2009 at 9:47 am
I stand corrected. I checked the order and the reference about zero profit is there. However, it’s important to note that the judge was listing some of Amway’s changes that would prevent the problems i.e. the tiered approach, zero tool profit, etc…so the judge did not order the “zero profit” rule; rather, he was patting Amway on the back for implementing it. Still, it’s there.
Just to give folks an idea of what we’re talking about, paragraph 57c states:
“All BSM deployed by certified retail consultants and business consultants will be rigorously controlled by Amway, and it will be impermissible for any profit to be derived from its production or dissemination. Thus the scope and incentive for third parties to misrepresent the business opportunity will be significantly reduced (and, incidentally, ABOs will not be pressured into buying BSM in excess of their reasonable needs.”
August 21st, 2009 at 9:41 am
I understand, and noted to the UK DBERR the order was not as specific as paragraph 57c. However, “http://www.amway.co.uk/cms/opportunity/training_support” says, “Amway Business Owners must never charge you for books, tapes, CDs, website access or other types of published materials or services, and they are only permitted to promote Amway’s authorised materials. You can obtain a list of available materials – and their cost – from Amway.”
I’ve said many times I think this goes too far, as I believe cost recovery and a modest profit should occur, but that is how the rules are stated for the UK.
August 21st, 2009 at 9:42 am
It does seem curious the materials must be free, yet you can obtain the cost from Amway.
August 21st, 2009 at 9:51 am
Here’s another piece, just prior to paragraph 57, and I conclude it would be very ill-advised for Amway to trash the no tool profit rule, particularly the “ongoing implementation” part:
“….I am in no doubt that the real spur to action was the commencement of the
Secretary of State’s investigation. As a result (to quote Amway’s evidence) :-
“Amway has now addressed BSM issues robustly and
effectively and, at the same time, has introduced a new business
model which is retail and customer focused and which has the
full support not only of Amway Group’s senior management
but also its employees in the UK and, most importantly, a
considerable number of people who want to be able to be an
Amway Business Owner.”
This evidence was not challenged by the Secretary of State (though it was the
subject of comment). The revisions are set out in detail in the evidence filed
which was fully formulated, comprehensive, open and transparent. Amway
submit and its evidence asserts that it is capable of effective and ongoing
implementation without the supervision of either the Secretary of State or the
court: but it offers undertakings to the court in any event.