Pyramid, Ponzi, and Investment Schemes

January 5, 2013 Leave a Comment

Is One Hiding Behind Your MLM Program?

By Len Clements © 1997

Pyramid, Ponzi and investment schemes disguised as legitimate MLM programs continue to flood the U.S. market. But unlike their predecessors, they’re hiding their true nature better than ever. Many quasi-pyramids and money games today are taking great advantage of the ignorance of most people as to what constitutes an illegal pyramid. Please understand, I do not use the term “ignorance” derogatorily. The term comes from the word “ignore” and many of us are simply ignoring a few basic, simple facts that make up a composite of a typical pyramid or other such scheme. Also, understand that I am not an attorney, an attorney general, or a postal inspector. But I know what questions they ask – and so should you! Also, as I describe the legal definitions of these various kinds of schemes I’m going to use plain English. For example, where the proper legal language might refer to the payment of “consideration,” that being anything from gold dust to chickens, I’m going to assume that it’s safe to just say money. If you want all the verbose legalese, call a lawyer.

Let’s start with the ol’ classic – the Pyramid Scheme.

By definition, a Pyramid Scheme is one where there is some kind of direct financial reward for the act of recruiting another person into the scheme. A blatant pyramid scheme would involve no product at all. You simply pay a chunk of cash to play, and hope you recruit enough others to cash out, usually for several times what you originally invested.The roots of most pyramid/MLM law is founded on the Amway vs. FTC decision in 1979. Perhaps the single most defining characteristic of a legal network marketing company vs. an illegal pyramid scheme came from these hearings. Essentially, the question was asked… “Can the last person in still make money?”

Obviously, the last person in a pyramid scheme will never make a dime. But if you were the very last person to ever sign up as a distributor for Amway, or any number of other legal MLM operations, could you still make money? Of course. By buying the product at wholesale and selling it at retail. The last person in, with no recruiting, can still make money.

If you were the last person to sign up in your MLM program, could you reasonable expect to be able to mark up the product or service and resell it to an end user? That is, someone who only wants the product or service? Are you, and your downline distributors buying the products because you genuinely want them, or are most of the distributors making token purchases simply to satisfy a quota in the compensation plan? Having real products of value to an end user is a key element of a legal MLM enterprise.

Having said that, one of the most common, and least accurate questions you can ask in determining if something’s a pyramid scheme is simply asking, “Is there a product.” Almost every pyramid out there today has thrown in some kind of token product knowing you’ll ask that question. Some extremists will go so far as to tell us that the “service” they provide in exchange for your fee is their administration of the intake and outgo of cash. Some will claim you are paying to have your name added to a mailing list. Of course, the typical chain letter leads you to believe you are paying for a report of some kind. However, there are literally dozens of schemes out there that are not nearly as obvious. Some offer what appears to be an abundance of bona fide, tangible products. But again, the focus should be on value and motive.

One of the best examples I can recall was a program called The Ultimate Money Machine. For $350.00 you were to receive such items as luggage, a 35mm camera, and a seminar on cassette tape valued at, of course, hundreds of dollars. Well, the camera was a cheap, plastic job that probably had a value of less than $10.00, and the luggage you unrolled from a tube. Total cost to the company forall of these products was probably less than twenty bucks!

A program called Euro-Round required a $100.00 payment in exchange for nothing. Later, to “make the program legal,” they added a little book.

Schemes like Investor’s International, CommonWealth, Global Prosperity, Delphin, and it’s various other incarnations, would have you buy some literature and a few cassette tapes, with a material cost of around ten to twenty bucks, for usually about $1,250. There rationalization is that “Information is priceless!” Okay. Let’s (reluctantly) give them that. But such schemes usually withhold a larger and larger portion of your income to qualify you in subsequent stages, or cycles, and these funds are allegedly for the purchase of, usually, a live seminar on some Caribbean island. At the top stage you might end up paying as much as $100,000 for a seven day seminar in Belieze. It better be catered!

A few companies today still offer product vouchers or certificates that can be spent on items out of a catalog or from various local merchants. They are actually only offering the funds to purchase these products. There is usually a commission paid once the certificate is purchased, even if it is never redeemed. The result? Nothing but paper, most of it cash, being exchanged. There is a great deal of recent legal precedent in this area. The upline shouldnever be paid out of any kind of down payment, layaway, voucher purchase, or any other similar transaction that does not involve an immediate acquisition of a product or service of value. In other words, no one should get paid until an actual product gets shipped.

As to “motive,” again, are you and others buying the product because you want that product or can sell that product, or are you buying it because you have to to make money? For example, if a company pays commissions on sales aids or distributor training, which several are doing as of this writing, this creates a legal vulnerability. Obviously, you can’t mark up a product brochure, distributor manual, or distributor training course, and resell it to someone who’s not a distributor. Obviously, you would never have purchased any of these items if you weren’t a distributor yourself. These are sources of income that can only be derived from recruiting because recruits are the only ones that would ever purchase them.

So don’t just ask if there is a product involved. Question whether the product is even close to being worth the overall price paid. You don’t have to be an economics genius to know the answer. Just ask yourself this question: “Would anyone realistically ever purchase this product or service without participating in the income opportunity?” Thousands of people purchase products from such companies as Nu Skin, Watkins, Herbalife and Amway every day without becoming distributors. They just want the product. This is true for most of the MLM companies out there. But certainly not all.

So, now how exciting is that big ad you just saw that boasted “NO SELLING!” Consider it a big red flag.

Now let’s discuss Ponzi Schemes.

First of all, no, a Ponzi is not the same thing as a Pyramid, although Ponzis are often referred to as a pyramid. In a pyramid scheme, you pay in X, the pyramid promoters keep, let’s say, 20% of X and use the other 80% to pay all those who “cash out.” Not unlike legitimate MLM operations, a distributor can earn far in excess of what they personally paid in, but the MLM company itself never pays out much more than 40-50% of every wholesale dollar that comes in.

In a Ponzi scheme, you pay X to the promoter who promises that you will receive a certain specific return, say 2X (twice your investment) back in a few days. The promoter accomplishes this by finding another sucker who’ll buy into the same promise, and he then uses the second suckers investment to pay off the first’s.

As an example, let’s use Carlo Ponzi himself. Back in the early 1920’s, Ponzi offered a $1,500 return on a $1,000 investment. When sucker A paid him $1,000, he then got sucker B to believe the same pitch and invest another $1,000, then took $500 from B’s money to add to A’s original investment, and paid A back his $1,500! Of course, a modest “service charge” was retained by Ponzi. With only $500 of B’s investment still in hand, Ponzi now needed to find sucker C so he’d have another $1,000 to add to the $500 he already had, and then pay sucker B his promised $1,500. Now, he had to find yet two more suckers to have the funds to pay off sucker C. And so on, and so on.

Ponzi accumulated millions. He died a penniless ex-con.

Ask yourself this question about the program you are evaluating: “If all recruiting stopped today, would this company still be able to pay monthly commissions in the months ahead?” Although there may be no pyramidal hierarchy involved, a Ponzi Scheme does involve the need for a never ending flow of new participants making the initial investment. This also falls, once again, on the value of the products. If not one new person is ever again enrolled as a distributor, could sales volume realistically continue to move through the organization?

But there’s more to consider. Let’s say a company has great products that people love and would continue to purchase even if they didn’t make money. However, for every wholesale dollar they pay to the company, the company pays $1.05 back to the distributor force in commissions and bonuses. In other words, their compensation plan has a 105% pay out! Technically, if they really did pay out more than 100%, this would be a Ponzi Scheme. The company must sell one more product to be able to cover the compensation for the previous sale (otherwise, they’d be 5 cents short). And there are a number of MLM deals today that claim to have such exorbitant pay outs. In reality they most likely do not. Probably not even close. For example, one MLM program claims a 112% pay out, but the percentage is based on the point value of each product (called BV, or Bonus Value), not on the actually dollar amount – and the BVs average about 68% of wholesale dollars. Another company promotes a 109% pay out, but usually forgets to mention their 75% BV ratio, and the fact that the 60% they pay on the first two levels (15% and 45% respectively) is only on the first $300 purchased by each distributor during the month. The pay 5% on all the volume over that. Yet another company claims a pay out that actually exceeds 200%! The catch is, they pay a higher percentage on those you personally sponsor, and the pay out they display in their ads is based on the wholly absurd scenario that every single person in your downline is personally sponsored.

So, just because someone says they pay out more that they take in (over 100%), doesn’t necessarily mean they are running a Ponzi Scheme. There’s very likely a catch. Still, considering state and Federal regulator’s penchant for taking on a guilty ’till proven innocent attitude (they attack first and ask questions later), I’m curious as to why these companies would want to even create theillusion that they are paying out more than 100%. Why would they even want to pretend they are a Ponzi Scheme?

Lastly, let’s discuss “Investment” Schemes.

The three regulatory agencies we need to be concerned with the most, from an MLM opportunity stand point, are the Federal Trade Commission (FTC), Food & Drug Administration (FDA), and the often underconsidered Securities & Exchange Commission (SEC). From a personal, independent contractor stand point, you have the IRS to worry about as well. But that’s another article. You’ll likely never have to contend with either the FBI or FCC – unless, of course, that “sense of well being” you get from your herbal product is derived from a South American poppy, or you enroll Howard Stern as a distributor.

Getting back to the SEC…

“Securities” are basically things you invest money in, like stocks, bonds, mutual funds, commodities, and so on. You have to register the securities you sell with the SEC and you have to have a license to sell them. Skip either step and you might be going away for a little while.

In 1946 (as part of the SEC vs. W.J. Howey Co. decision) the Supreme Court defined an investment contract as one where “…the scheme involves an investment in a common enterprise with profits to come solely from the efforts of others.” (The word “scheme” is used here, and throughout this paragraph, in a basic, non-derogatory sense). So, there’s three things to consider: First, is there money being paid into the scheme (an investment)? Second, are there a lot of other people paying money into the same scheme (a common enterprise)? Note that, so far, every MLM operation appears to meet the first two criteria. But the third test is where we depart, or should depart, from a security – is the money you make from the scheme derived “solely from the efforts of others?” Well, I don’t know about you, but I work my tail off about 50 hours a week building and managing my downline! Sure, your time investment ideally forms a bell shaped curve (part time, then full time, then eventually back to part time), but there should always be a mandatory effort on your part to build, manage and support your organization.

This, of course, does not bode well for schemes (I’m using the negative connotation now) where you pay a “downline building service” to build your downline for you. It appears to be undebatable that all three aspects of the “Howey test” apply to such a deal. You pay money to the same promoter that many others are, and they openly promise to do all the work for you and you simply sit back and cash the checks. No, there has not been a lot of legal action against such schemes because, well, they have a 100% failure rate all on there own!

In closing, I want to make it clear that this article is not necessarily based on the author’s opinion of the way it should be. Much of this discussion is based on years of precedent, not just my laymen’s interpretation of the law. It’s simply the way it is. For the record, I am a Libertarian. Personally, I believe we, as adults, should be allowed to do what ever we want with our own money as long as there is full disclosure and we are made aware of all the risks involved. We’re spending the half our government lets us keep. It’sour money! In fact, I’ll go so far as to say I personally feel pyramid schemes should be legal. Not providing full disclosure about the risks and lying about the potential benefits should be against the law – and, in fact, already are! If all this information is provided, then we should have the right to be stupid with our own money.

Having said that, rules are rules. And until someone changes them, we’ve got to play by them.

My soap box is cracking. I’ll step down now.

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MLM Products: Shouldn’t We Be Ashamed?

January 5, 2013 Leave a Comment

By Len Clements (c) 2001

Once upon a time, one of the greatest bragging rights of most all network marketers was the superiority of our products. The theory gos: MLM operations don’t have huge advertising and marketing budgets, so they can afford to pump a lot more dollars into developing their products. They also, again in theory, are afforded a greater margin thus lower priced products than comparable items sold through conventional means.

So much for that theory.

In reality, there is rampant inflation in this industry. Product pricing is spiraling out of control, and has for most of the decade. This is likely due to the massive influx of MLM opportunities into an already over saturated market. As the existing distributor pool continues to be spread thinner and thinner, most companies have chosen to compete for distributors by juicing up the numbers in their compensation plans. The bigger the pay out, the more distributors they will attract. One need only peruse any of the MLM trade publications and it will become glaringly obvious that the vast majority of MLM programs today compete by comparing the theoretic pay outs of their comp plans. And, sure enough, prospective distributors do migrate towards the program that promises the greatest income. After all, we aren’t doing this for our health. Are we?

So, as the percentage of each product sale that goes towards commissions increases, so must the margin between the company cost and wholesale. Thus, the wholesale and retail price of the product increases as well. And it’s been steadily increasing for fifty years, and skyrocketing the last five. Just take a look at the first MLM compensation plan back in 1945. It paid 3% down one generation! Most plans back in the 60’s paid overrides of around 15-20% down four or five generations. During the 80’s total pay outs of around 40% were common. I remember designing a unilevel plan back in 1991 that paid 7% down seven levels (49% maximum pay out) and being concerned that the 35-40% it would actually pay was too much. Today, that plan would be laughed at. Most compensation plans have theoretic maximum pay outs of 60-75% or more, and many actually pay somewhere in the neighborhood of 45-60%.

The result is an 8 ounce bottle of shampoo with a suggested retail price of $25.00! Nine to twelve dollars wholesale for shampoo is common place in this industry today. Of course, they all try to justify their pricing with the old “superior quality” routine. Hey, for $25.00 the stuff better not only clean my hair, it better soak into my brain and make me smarter. Or, how about a 1.5 ounce candy bar for $2.20 — wholesale! One Halloween and, boom, you’re wiped out. Or, how about a box of laundry detergent for $49.00? Oh, but it’s “concentrated” they’ll tell you. For that price, it better be so concentrated that not even light can escape from the box!

All of the above are real examples. To only a slightly lesser degree, the examples are endless. And we should be ashamed.

Not only are the prices of most MLM products getting ridiculous, so are the types of products. I mean, how many prepaid calling card companies do we need? Several companies now have gone so far as to not even offer a product. Instead they provide you with the fundsto purchase a wide array of products and services from third-party, non-related vendors (usually a catalog company of some kind). They then claim to be offering “thousands” of products and services. Uh uh. They are actually selling nothing but the opportunity to make money. The travel industry has been inundated with quasi-travel agents trying to get discounts by flashing laminated “independent outside travel agent” cards. The MLM industry was quick to jump into the foray in a big way. After all, imagine how much commission you could pay out (and profit you could make) by selling a $4.95 laminated card for $300-$500 per year! Yes, there are some legitimate travel deals out there that do offer a bona fide service, and a few are network marketed. A few. Most, however, are nothing more than “card mills.” Every month it seems we have some new gimmicky miracle product on the market. A few companies are, once again, offering a smoking cure (this is a fad that comes and goes every few years). Of course, if the product actually worked it would be front page news all over the world, the pharmaceutical industry would surely be trying to classify it as a drug, and the tobacco industry would be spending billions to debunk it.

Another company is selling a single product — an aphrodisiac based on green oats. This is the same ingredient that was the basis for a short lived fad back in the late 80’s, before the media began to report that it didn’t really work on men and gave many women headaches (which, of course, kind of defeats the whole purpose of the product).

Most recently there have been a wave of “fat sponge” products based on ground up crustacean shells. This ingredient was previously used to soak up oil spills and as an ingredient in hair conditioners. Very few formal studies have been done (that I know of, and I looked hard) on the long term results of ingesting this stuff in the body. In this case, only time will tell if we have another aminophyllin on our hands, which was an asthma medication found to reduce thigh circumference when applied regularly to the skin. Several MLM companies had heated battles over the rights to aminophyllin a couple year ago — which dissolved about the same time that many woman began reporting adverse reactions to the product.

One MLM company has devoted itself almost entirely to ridding us of parasites in our bodies. Their cassette tape which describes the benefits of their product is certainly compelling and moves a lot of product, I’m sure. Curiously, though, I’ve yet to speak to a single user of this product (and I’ve spoken with several) who didn’t have some variation of an “I passed an eight inch tape worm” story. I’ve even heard about one woman who claims she rubbed the product on her arm and eventually induced parasites to emerge from her skin! I mean, come on people.

Today, with the success of such tapes and the “parasite tape” and the “Dead Doctors tape” it was inevitable that more MLM companies would start to ask, “What kind of tape can we produce that will scare the hell out of people?” The result (and it’s only the beginning, folks) is a new product that will rid you of microscopic arachnids (spiders) in your bed. Something this companies tape claims we allhave! In fact, one part of the tape I listened to the doctor/speaker went so far as to claim that the feces from these little critters can account for “up to 10% of the total weight of your pillow!”

If the Cold War hadn’t ended, there would undoubtedly be some MLM company right now distributing tapes describing the great threat of Soviet nuclear weapons and the horrific effects of radiation poisoning — and the need to purchase their radiation testing product and/or bomb shelters. And I’m only exaggerating slightly.

Probably the most ridiculous MLM product I’ve seen yet was a set of shoe insoles that apply accupressure to key points on the bottom of your foot. This product was then suppose to make you healthier and even cure diseases.

It’s funny, in a strange sort of way, that for decades we have all been taught, over and over and over, to “duplicate what works… don’t reinvent the wheel… find out what your successful upline is doing and do the same thing.” Then, as soon as these same people go out and try to start their own MLM company, what’s the first thing they do? They try to come up with some gimmicky compensation plan no one has ever tried before and look for a product niche no one else is currently in! Folks, there is a fifty year history to network marketing. There is half a century of precedent to go by to help us determine what works in this business and what does not. And for fifty years, tangible, consumable products have worked and almost, but not quite, everything else has failed! Try to come up with a list of all the current MLM companies that do notoffer tangible, consumable products (i.e. skin & hair care, nutritional, home care, automotive, personal care, foods, etc.) that are at least three years old. I came up with fourteen (such as Primamerica, Discover Toys, Prepaid Legal, Jewelway, Excel, etc.). Just fourteen. Out of thousands and thousands of companies over the last fifty years. Fourteen! And don’t put NSA on your list. Over half their sales today is a nutritional drink. Quorum? No, they also added consumables to their line, as did Nikken and The People’s Network. Companies such as Personal Wealth Systems and American Benefits Plus tried to convert to a consumable product line just to survive (the former eventually merged with a product company, the latter became KaloVita, which also merged with a product company). Even Destiny Telecom won’t be eligible for the list in a couple years — they just added consumables to their line!

Personally, I believe that most MLM companies out there today were started by a group of people, usually ex-distributors, sitting around a table with the idea that they can make a lot of money by running their own MLM operation and asking the question, “Now, what can we sell?” The result is a hodgepodge of token products whipped up simply to support an MLM compensation plan. Think about it. Were there really hundreds of people out there who were into the pycnogenol/DHEA/Cats Claw/Colloidal Silver business who all decided to start an MLM company right about the same time? Come on. (To their credit, at least they were following the “duplicate what works” theory). Or, how about all these “lead generation” deals where you spend $100.00 per month for 500 names of “opportunity seekers” (which likely cost the company less than ten bucks). Oh, they claim they are generating their own leads with their own ads, but if they even get 1,000 people to join they are going to have to come up with half-a-million leads per month! Yes, some such services, such as Ad-Net and Pro-Step do offer a service of value, but most are simply using “leads” as an excuse to exchange cash.

These are all MLM programs for the sake of an MLM program. So many such companies today offer mundane, token products with basic formulations designed to keep production cost to a minimum and margins high — so they can pay out “the most lucrative compensation plan in the industry.” And their products are still twice the price of the stores!

What I wished more distributors understood was that the calculation to compute your commissions has a number on both sides of the multiplication sign. It’s V x P = C. Or, sales Volume times overridePercentage equals Commissions. In other words, PRODUCTS times COMP PLAN equals commissions. And it’s the product side of the equation that is as, if not more important in determining your income. I don’t care if a plan pays 10% down fifty levels — 500% of zero is zero! Any pay out multiplied by a small amount of volume is going to result in a small commission check. It’s the volume side of the equations that has an “unlimited” ceiling. It doesn’t matter what the percentages are, how many levels you’re paid, or even what type of plan you are working — you move enough volume through it and you are going to make money!

The point here is that when you price your products outrageously high to accommodate a higher pay out, guess what happens. Thepercent side goes up, that’s true. But the volume side goes down. You don’t have to be an economics professor to figure that out. It’s tough to move a lot of $25.00 bottles of shampoo. On the other hand, if more companies would keep there pricing in line, even if it meant reducing the percentages in the comp plan, income might actually increase! Why? Because 6% of $100.00 is more than 10% of $40.00. Not only that but we might actually reduce the number of MLM company failures at the same time. Let’s take another look at our equation: V x P = C. Now let’s add another variable called CP, or Company Profit. Now, raise P and V goes down, C stays the same (at best) — and CP goes down as well. Not good. Now, lower P, raise V, C stays the same (at least) — and CP goes UP! In fact, it’s even possible that the company could end up paying morecommissions to the field — and increase their profit at the same time. Imagine that. Increasing profit while increasing an expense! Increased sales volume is a wonderful thing, isn’t it?

And, by the way, if you can find a way to increase P and increase V, C and CP, then contact magician David Copperfield as soon as possible. He’s looking for new material.

How do you create a higher sales volume? Find a product line that accomplished the following:

1. It is highly consumable. Not just consumable. I have a 2 ounce bottle of skin cream I purchased from an MLM company that I’ve been using as an after shave balm for almost five years now — and it’s not gone yet. And I still haven’t used up the water purifier I bought back in ’87 or the gold ring I bought in ’89.

2. It lends itself well to transfer buying. In other words, there are a variety of products you would likely have purchased anyway. Most folks usually don’t add Ginkgo Biloba or colloidal minerals to their weekly shopping list.

3. Can actually be retailed. They are products that people would actually want to buy even if they weren’t part of the income opportunity.

4. Are of genuinely high quality. Genuinely being the key word here.

5. And most importantly of all, they must be priced reasonably!

All compensation plans have a certain personal volume that must be met each month to qualify for commissions. Most distributors tend to do what ever the minimum volume that is required of them. The whole idea behind numbers 1 through 4 above is to get the distributor to purchase more than they have to. And you just can’t do that if you fail at number 5. Paying $29.00 for a $12.00 bottle of vitamins in not transfer buying, even if you would have purchased vitamins anyway. And you certainly can’t mark up those vitamins even higher and retail them.

Please understand that this is not a condemnation of all network marketing companies. There are a few that have held there pricing to within reason, maintained their quality, and still have very competitive compensation plans, although they may not look as good on paper percentage wise.

But then, I pay my bills with dollars, not percentages.

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MLM Advertising – Are We Shooting Ourselves in the Foot?

January 5, 2013 Leave a Comment

Compiled by Len Clements © 1996

Once again we take a pointed stab at those among us who take it upon themselves to write their own ad copy. Only this time it’s not for laughs. These are ad headlines from a variety of MLM trade publications, as well as several outer-circle business magazines — and they are not funny.

As you may have noticed, MLM doesn’t exactly have the greatest reputation in this country. Many of those we are trying to pursued to take a look at MLM seem to feel our industry is made up of get-rich-quick schemes that are really designed to make them go-broke-slowly. Their impression seems to be that MLM doesn’t really work, or if it does, those who participate in it are all con artists.

Well, here’s a sampling of how we, as an industry, are trying to convince them otherwise.

BURNED BY YOUR MLM COMPANY???

Have Them Gladly Refund Your Money

(Card Deck, 5/95)

STOP MLM RIP-OFF

Free Audio Tape Explains Why 99% Of All People

Fail In Network Marketing

(Postcard, 5/95)

DON’T GET RIPPED OFF IN MLM!

(MLM Magazine, 7/95)

DUMP THOSE MLM BLUES

(MLM/MO Newspaper, 6/95)

HAVE YOU GOT THE MLM BLUES?

(MLM Magazine, 7/95, different ad than above)

If You Have Lost Your Shirt In Other Programs, Here

Is Your Chance To Get It Back!!!

(MLM Magazine, 7/95)

DISSATISFIED?

(MLM Magazine, 7/95)

No More Unstable Companies, Disappearing Uplines.

(MLM Magazine, 7/95)

THE SHOCKING TRUTH ABOUT NETWORK MARKETING

(MLM Magazine, 7/95)

DON’T BECOME A VICTIM

(MLM/MO Newspaper, 7/95)

SICK AND TIRED OF LOSING MONEY?

(Business Magazine, Spring ’95)

THE REASON PEOPLE FAIL IN NETWORK

MARKETING. Free Report…

(Business Magazine, 11/94)

THEY AREN’T TELLING YOU HOW MLM

REALLY WORKS!

(MLM Magazine, 2/95)

THE GREAT DECEPTION

(MLM Magazine, 1/95)

LOSING MONEY IN MLM? Of Course You Are…

(MLM Magazine, 2/95)

FRUSTRATED IN MLM?

(MLM Magazine, 2/95)

HAS MLM BEEN LONG ON HYPE AND SHORT

ON DELIVERY?

(MLM Magazine, Spring ’95)

EVER BEEN SCAMMED IN MLM?

(MLM Newspaper, 6/95)

WARNING!

Your (sic) Being Lied To And It’s Costing You A

Fortune!

(Business Magazine, 5/95)

MLM DOESN’T WORK!

Unless Your (sic) Willing To Work Hard And Pick A

Company That Lasts

(Business Magazine, 5/95)

NETWORKING — NOT WORKING?

(Business Magazine, 5/95)

ARE YOU TIRED OF SWIMMING ALONE WITH

THE MLM SHARKS?

(MLM Magazine, 4/95)

Although they are not specifically negative towards MLM, such ad headlines as these should really enhance our image as well:

CRIME PAYS (Numerous MLM publications)

FREE MONEY (MLM/MO Newspaper, 3/95)

I RAID DOWNLINES (MLM Magazine, 3/95)

BULLSHIT (MLM Newspaper, 7/94)

Now let’s all think real hard and see if we can come up with a theory as to why MLM has such a bad image.

Hey! I have one…

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Courting MLM: Are We Ever Going to Get Married?

January 5, 2013 Leave a Comment

By Len Clements © 2001

In many unfortunate ways, the correlation between human courtship and the way in which many of us “play the field” within MLM is disturbingly similar. In other ways, it is not similar enough. An analysis of how our species seeks out its mates compared to how we decide on which MLM opportunity to “commit” to might reveal a lot about the MLM condition in this country.

Let’s take a look.

First, let’s break down the four basic components of what we look for in a potential mate. First, there’s physical appearance. Not just facial features and body characteristics, but style and dress as well. Second, there’s personality. How easy are they to get along with? How much do they have in common with your “world view.” Are they emotionally stable? How supportive and respectful are they? In general, how likable are they? The third consideration would be, at least in most cases, their degree of success. How much money do they make? How much security do they offer? And the fourth and final consideration would be that totally intangible, mysterious thing we call love. Which, by the way, most would agree has nothing what-so-ever to do with items one through three.

So what are the basic components of what we look for in a good MLM opportunity? Well, I could answer that question by essentially reiterate the entire previous paragraph, making only a few minor word changes.

Certainly the overall appearance, or perception we have of an MLM program is key. MLM is by far the most perception oriented business opportunity is this country. Especially when it comes to compensation plans. Who cares what it really pays — how good does it look on paper! Right?

Does a company’s “personality” make a difference? Ever been involved with or considered an MLM opportunity that didn’t appreciate or respect its distributors? Was unstable? Had little in common with your philosophy or product interest? Just wasn’t verylikable?

Some folks may claim that level of success or amount of wealth is not at all a consideration when it comes to a mate (and most of them would be fibbing, if not at least to themselves), but it would be foolish to claim this makes no difference in picking an MLM program to commit to. It is a major consideration.

Even “love” comes into play.

I’ve found there is so little difference between the symptoms of love and infatuation, at least in the beginning. I’ve had crushes that I would swear were cases of true love. Only after years of experience and growth do we finally gain the maturity to tell the two apart (remember our grade school days when we were “in love” with every good looking boy or girl in our class?).

Both infatuation (crush) and love may make us swoon, not eat or sleep for days, distract us, obsess us, make us act real goofy, temporarily enhance our efforts to look and act better than we normally do, and just get us all excited. The difference is that one stays and the other goes away! It’s like two mountains. Time may weather away one mountain and turn it into nothing. There’s nothing solid underneath to support it. Or, it could be like one of those volcanic mounds you see in Arizona landscapes where the loose, soft dirt washes away, but there’s a strong, rock solid core that will remain for centuries. In the beginning, from the outside, they both look pretty much the same.

Same with MLM opportunities.

Have you ever fallen in love with an MLM opportunity “at first sight?” Have you ever went to a meeting or heard a presentation for the first time and left it three feet in the air? Not been able to sleep that night? Got you all excited and distracted? Has an MLM opportunity ever made you act at least a little goofy? (Be honest, now).

Then, usually, it goes away, doesn’t it? The novelty, the infatuation, the “crush” dissolves into nothing. And sometimes, usually after months or even years of searching, you find one that, oh, perhaps you lose a little passion for after a while, but you get comfortable with it. It works (always a good trait in a mate), it’s supportive, it doesn’t cheat, so you get complacent. And then, on those oh so rare and glorious, perhaps once in a lifetime moments, you fall head-over-heels in love. And no power on earth will ever pry you away from that MLM program.

The comparisons are endless.

Ever fall in love with an MLM program and then get dumped? Ouch! I swear it’s the same kind of pain. It’s awful. It eats you up inside thinking about the “possibilities,” the lost promise, the fear of never finding another quite like that one.

Ever fall in love with an MLM program and then settle down and have a family? You bet we do. That’s exactly what MLM is all about, isn’t it? In fact, both families and MLM downlines have something directly in common — it’s called a genealogy!

Ever cheated on your MLM program by pursuing another one the side? Or looked over another company’s brochure and lusted in your heart?

Ever get overly protective of your MLM program. Trust me on this one — we do!

Ever created a lasting, fulfilling relationship with anyone while you were actively dating several others at the same time? Ever heard of anyone ever getting rich in MLM using the portfolio approach?

Think about the whole courtship ritual time line. Compare our agendas from the earliest moment of interest (in the opposite sex or an MLM opportunity) through to mature adulthood. The stereotypical, usually but not always male, junior-high-schooler was interested in “one thing.” The immature, novice MLMers also seems to view his or her first MLM opportunity based on not much more than how much it will “put out.”

As we grew older, suddenly things like “good looks” and status come into play. We became at least a little more selective. We dreamed about “going steady,” usually with the homecoming queen or the star of the football team (or both, if you lived in California). And as we gained more experience in MLM, we too found there was more to a good MLM relationship than simple lust (in this case for money). Suddenly, previously insignificant things like the product line began to take on more significance. The company’s reputation mattered (because it affected our reputation as well). We became more selective.

Then finally, we grew up. Stability and commitment became primary considerations. Oh, attractiveness still counted, but personality and compatibility became paramount. As many of you grizzled veterans of MLM would agree, there comes a time in your MLM career where the most important question about an MLM programs becomes “will it last?”

In both life and MLM, there are, of course, variations to all of this depending on whether you’re a man or a woman. But even those are comparable. For example, it’s said that girls mature faster than boys. How many woman do you know who are promoting or operating a money game or pyramid scheme? (In fact, the operators are almost exclusively men). It’s said that women are more attracted by personality and other more emotional issues. Men are more interested in physical appearance. Again, is it any wonder that men are primarily responsible for the creation and promotion of MLM programs that simply “look good” with little or no substance behind them?

In some ways, it’s too bad that we don’t treat our pursuit and commitment to MLM opportunities even more like we do our romantic relationship.

For example, how many people do you know who married, and never dated anyone other than, the first person they were ever attracted to? Probably zero. How many people do you know who became a distributor for, and never considered any MLM program other than, the first one they were ever introduced to? I know many (including myself) who joined the first MLM program they were ever pitched on, then discovered there was this wide wonderful world of MLM opportunities to choose from — only to realize there were others they liked a lot better.

The divorce rate in the U.S. is now over 50%. From the glass half full point of view, that means that 50% of all married couples stay married for the rest of their life. Can you even imagine a network marketing industry where 50% of its distributors join one company and stay committed to it for life!?

Of course, one reason why some couples stay together is for the sake of the children. Have you ever stayed in an MLM program you didn’t really care for anymore because you still had a downline?

Some couples with children do separate, usually followed by a bitter battle over custody of those children. Do I even have to explain the correlation to MLM here? “Custody” battles over downlines and individual recruits are commonplace today.

Another reason why some married couples stay together, or perhaps why those that do divorce at least attempt to work things out, is that the divorce process (at least in most states) is an expensive, painful, pain in the butt. Even amicable, uncontested ones not involving children (trust me on this one, too). Also, there is a guilt factor for some as well. Remember, in most marriage ceremonies, we swore to God that, for better or worse, in sickness and in health (etc., etc.) we’d stay together “…until death do us part.”

Here’s Crazy Idea #247:

How about having the recruiting process involve, no, not a ceremony (unduplicatable), but at least some kind of written or verbal swearing in. Perhaps a signed (totally non-binding, non-legal) document where the new recruit agrees to “marry” the opportunity, forsaking all others.

Also, make the divorce process tougher. If you had to go through some kind of elaborate, tedious, expensive process to leave your MLM opportunity to pursue another, perhaps we’d work a little harder on making our MLM marriages work.

Right now, the MLM industry seems to be mostly made up of adolescents who are being bombarded with “come ons” from all directions. Is it any wonder there is so much promiscuity in this industry? Even those mature adults among us who have committed to a stable, loving relationship with an MLM opportunity are constantly being tempted by alluring competitors, and the money game sirens have driven more than one good MLM marriage onto the rocks.

Not only that, but bigamy and adultery are not only not illegal or immoral sins in network marketing, many of us openly encourage it!

(By the way, for those of you who just aren’t getting it, I’m not saying MLM is full of bigamist and adulterers or it’s distributors practice promiscuity in the sexual sense. I’m making an analogy. MLM is full of people who fool around with more than one MLM program. Most of my readers are a pretty hip bunch and probably think I don’t really need to explain this. But, trust me once again, someone is going to write me a letter or leave a voice mail message telling me how offended they are for including them among adulterers and bigamist — even with the inclusion of this paragraph).

Yes, there are times in both marriage and MLM that it just doesn’t work. Even when you did all the right things for all the right reasons. Sure, MLM divorce is as inevitable and as justified as it sometimes is in married life. Occasionally, the MLM program we’re in just isn’t the one we fell in love with anymore. MLM programs change just like people do. Their values change. Their “appearance” changes. Their “personality” changes. And yes, sometimes they pass away.

But still, nobody today really gets married to their MLM opportunity. We’re all just sort of “living with” our MLM programs. If we get mad at it, or things get a little bumpy, we just pack our bags and walk out the door. No big deal.

Perhaps it should be.

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Regulatory Red Flags

January 5, 2013 Leave a Comment

How Many Is Your Company Waving?

By Len Clements © 1997

This industry is over half a century old. There is nothing new. Pretty much everything has been tried and what you see today are just variations and enhancements of the same thing that’s already been done. So, if you want to know how well a certain type of product fairs in the MLM marketplace, or how a certain compensation plan gimmick will effect distributor earnings, or if a certain aspect of an MLM program will raise the ire of a state or federal regulator, all we have to do is look back at all the companies who have tried it in the past and see what happened to them.

Here are some examples of a few not so new ideas that are either hot, or making a comeback. By the way, not being an attorney, judge, or agent for any regulatory body, I must make clear that I am not declaring any of these acts to be illegal. What I am saying (suggested wording complements of my literary attorney) is that, in my laymen’s opinion, they may cause the company to be legally vulnerable.

Now that I have the C.Y.A. provision out of the way, let’s begin…

TRAINING BONUSES

While some companies have masterfully depicted their “coding bonuses” as not coming from any distributor training fee, others are openly bragging about their “Huge up front training bonuses.”

Why is this a red flag? Let’s go back to the FTC v.s. Amway decision in 1979, when the FTC accused Amway of being an illegal pyramid. Amway won that case (fortunately for all of us) and the test which they past, which is right in the language of the decision, was simply, “Can the last person in make money?” In the case of Amway, the court said, Sure, the last person in, who has no downline, can still make money by buying the product at wholesale, marking it up, and reselling it to someone who is not an Amway distributor. This is, to this day, the defining criteria of a legal network marketing opportunity.

Okay. So, can you buy a $495.00 distributor training package, mark it up even more, and resell it to someone who is not a distributor? Obviously, this would be absurd. The only ones who buy the training packages are distributors, therefore the only way you can earn bonuses from this volume is by recruiting more distributors. As even the most novice MLMer surely knows, you can’t earn money from recruiting! No, not even indirectly.

Now, if you were to ask a distributor who represents an opportunity that does offer training bonuses how they can do that (and oh yes, I have, many times) they will usually quote the company’s rationalization of, “Well, we have all these other products too — and you certainly can retail those to non-distributors.” Which is kind of like saying, Hey, it’s okay that I rob banks because I give a lot of my loot to charity. Just because you have a lot of legal ways to earn commissions and bonuses doesn’t make the possibly illegal ways any more legal.

Or, they might respond by telling you about how they’ve already been investigated by the FTC or some AG. This response was given to me recently by a distributor for a company that is about four years old, which added training bonuses just three months ago. So it’s very likely the “code” didn’t even exist the last time any regulatory agency looked at them. Plus, investigations usually are very specific in their intent. If an investigator goes in looking for evidence of misleading income claims or front loading, then that’s what they look for — not indirect rewards for recruiting. What’s more, such a retort may even raise yet another red flag since it could easily be interpreted as an indirect claim to regulatory approval of their training bonuses (a BIG no no).

Recent cases that provide precedent would be, for example, the Final Judgment in the case of California v.s. Destiny Telecom. Here in (part 5, section g) the state demanded that there be no commissions paid on anything directly or indirectly related to sales aids or training (ironically, to my knowledge, Destiny never did either of these things). In the case of the FTC v.s. World Class Network, it was determined that a training package on how to be a travel agent, which was arguably a product that could have actually been retailed, was not a commissionable product via an MLM system of compensation (WCN can still direct market the product). The state of North Carolina has ruled in more than one case that only verified retail sales to non-distributors can produce commissionable volume. Yes, it’s true that this essentially makesevery MLM company illegal in that state, but none-the-less you certainly would have a hard time convincing the NC AG that you can retail even one of your distributor training packages to non-distributors, let alone all of them. Recently the Pennsylvania Attorney General’s office filed suit against Nu Skin due primarily to their Big Planet division selling and paying commissions on their $300.00 training packages (this issue has since been resolved). And if there were any doubt left, the Federal Trade Commission recently closed down FutureNet due mainly to their up front training packages. This action has since been resolved with the FTC and the “Final Judgment and Permanent Injunction” signed my FutureNet should eliminate any possible argument over this issue. In the “Definitions” section, part F, “Compensation related to recruitment” is defined as “…compensation paid to participants in a multi-level marketing program as a result of or relating to any type of training provided to either new or existing participants.”

PAYING ON PRODUCT VOUCHERS/DOWN PAYMENTS

When you pay money to your MLM company for a product or service, you must take possession of that product or service before any commissions or bonuses can be paid to your upline on that sale. For example, if you send $200 to the company as a down payment or layaway towards a product, let’s say a gold coin, and then the company pays your upline from that $200 payment, but you haven’t actually received the gold coin yet, what has happened? That’s right — nothing but an exchange of cash. You paid money in, the company sent part of your money to your upline, and you didn’t get anything in return for your money. Kind of like a pyramid scheme, isn’t it? Sure, you may pay off the product and eventually get it, but that’s not for certain. The only safe way to administer this would be to hold the commission until the product is paid off and actually shipped.

Along the same lines, a company should not be paying commissions on product vouchers or certificates until the vouchers are actually redeemed for real products. Otherwise, all you have is paper going back and forth — and most of that paper is money.

Examples of precedent in this case would be American Gold Eagle (vouchers), Club Atlanta Travel (travel certificates), Gold Unlimited (layaways), Passport to Adventure and International Metals & Trade (down payments towards product certificate), and many others. Each of the above was attacked by either a state or federal regulator specifically on this issue (and in some cases on other issues as well).

When I bring this issue up with MLMers who represent such systems, they usually site the few remaining companies that use a similar system without consequence (so far). Well, Jessie James robbed 36 banks. So, using the same logic, I could have pointed to Jessie right after bank number 35 and used him as an example of why I believed robbing banks was legal. “Hey, Jessie’s doing it, and no one is stopping him!”

COMPANIES THAT PROMOTE “NO SALES”

Again, an MLM opportunity must have a product that people can resell to others who just want the product. If the distributors themselves are the only ones buying the product, then the only way you can make money in the program is to recruit distributors, right? Remember, can the last person in still make money? If no one ever recruits another person, and you don’t sell the product and make a profit, then you simply can’t make money.

Not only that, but any network marketing venture absolutely doesinvolve selling, in many other ways than just retailing the products (like, selling people on the idea that MLM is an honest, respectable way to earn a living, or that they should choose your MLM program over the 1,200 others out there, etc., etc.). So, to claim otherwise could be considered misleading or even fraudulent.

MEDICAL OR ANTI-AGING CLAIMS

MLM companies have tried for years to play semantic games with their product pitches to make them safe from FDA, of FTC, attack. But, at every new turn of phrase there was Big Brother standing in the road waiving his index finger slowly back and forth and shaking his head (and with what appeared to be just a hint of a smile on his face and a thank you note from a doctor sticking out of his pocket).

Today, quite simply, nothing is safe to say anymore. Nothing.

Many companies and distributors are still trying the approach where they claim a certain substance has a certain benefit, and that their product has this substance in it, but they are not claiming that their actual product has this benefit. In other words, A=B and B=C, but they are not claiming A=C. To no one’s surprise, the FDA and FTCare doing the math!

Even the personal testimonial, once considered safe haven when relating the benefits of a product, is coming under attack.

You would think with the number of major, well publicized hits some MLM companies have taken over the last few years that we as an industry would be toning down our product pitches considerably. Yet in just the last few weeks I’ve seen ads that claim everything from “effortless” weight loss to “cures” for cancer, arthritis and AIDS! One tape I just listened to — a corporate produced tape — has a woman on it claiming one of their products “reverses the aging process.” No, she didn’t say the appearance of aging, but the actual aging process! Some companies now are claiming they have a product that will reverse the aging process by as much as 20 years! This an be especially dangerous when given to a 19 year old.

And, by the way, don’t think that federal regulators only go after companies that make fraudulent claims about their products. Rarely, in fact, do they claim the company’s product benefit claim is not true — they just claim that there is no, or not enough, substantiation. So, the product might actually do what they claim it does, but the MLM company just doesn’t have enough scientific proof.

In other words, even if your product works you can’t say it does.

INCOME CLAIMS OR PROJECTIONS

Like product claims, there’s no really safe ground here as well. You might think that revealing your income would be okay as long as you could prove the income was factual. Not only is this not true, but the act of displaying a commission check as evidence of earnings is considered one of the most taboo acts in this industry (although its practice is making a comeback of late). What’s more, there is at least one case that I know of where someone was prosecuted on a federal level for revealing his actual income. And let’s be clear on this: he was not prosecuted for providing inaccurate or fraudulent information — he was prosecuted even though he was telling the truth!

Recently, some state and federal actions have resulted in MLM companies prohibiting their distributors from making “false or misleading” income claims and prohibited income “projections” all together. Okay, so what exactly is a “misleading” income claim? If I said I made $50,000 last month, and I was truthful, then is that misleading? Perhaps, if you’ve implied that income is easy to achieve or misrepresented the time and effort it took to achieve it. So, what exactly do I have to say to not do that? How many disclaimers do I have to include? At what income level is all this disclosure not necessary? If I only claimed to have made $50 last month, do I even have to say anything else? If not, then where between $50,000 and $50 is the line drawn?

Do you see the dilemma here?

What confuses the issue even more is that answers to these questions are being determined totally arbitrarily by regulators and usually on a state-by-state basis.

Since your prospects can’t pay their bills with theoretical dollars, nor from their upline’s income, the whole subject of current earnings and projections shouldn’t even be an issue. It’s best to just keep your discussion to the mechanics of the pay plan, the value of the products, and to what your prospect is going to do to achieve their own personal income goal.

ONE TIME PAY PLANS

These are deals where you make a one time out of pocket purchase and then, supposedly, you never have to order anything again to stay qualified for commissions from that point forward.

In reality, a portion of a future commission check is retained by the company and products are then sent to you. For example, you make a one time $100 purchase and begin building a downline. When you reach a certain point (usually it’s the completion of the first “cycle” in a binary plan), you earn, let’s say, a $1,000 check. But the company keeps $400 of that and applies it towards a product purchase, and they send you the products and a $600 check. The $400 qualifies you for the next pay cycle. At a certain point enough others beneath you follow you into the second cycle with a $400 share of their first check, and you earn perhaps $5,000. But, the company keeps $1,000 of that and sends you $4,000 plus $1,000 in product. The $1,000 then qualifies you for the third cycle, and so on.

So, what is really happening here? Well, remember that first $1,000 check? That was your money. All of it! What occurred is the same as if you received the whole $1,000 check, deposited it in the bank, then sent the company a $400 product order — with your money! So, yes, you do make more product purchases than just the first one.

What really raises the red flags, besides the fact the very claim of a “one time” purchase is fraudulent, is that, once again, the last person in can’t make money. Ask the question this way: If all recruiting were to stop today, could this company continue to pay overrides to all of their distributors? Well, if no more “one time” payments were received to keep new money flowing through the cycles of the plan, then overrides would dry up within one pay cycle and the whole scheme would come to a grinding halt.

Not only that, but the company may be hard pressed to convince state AG that the $1,000 product purchase to enter cycle three was for the purpose of obtaining product for personal consumption and retail to non-distributors. In reality, of course, the $1,000 purchase is almost transparent to the distributor. They accept it as an automatic part of the system because that’s what has to happen for them to get paid more money from the next cycle.

DOWNLINE BUILDING SCHEMES

When you pay someone to build your downline for you, and they promise to place any number of distributors in your downline for that fee, there are two possible violations of law. One involves securities law, and the other involves basic laws of mathematics.

Isn’t it obvious that if a company were to promise even one person in every participant’s downline, they’d have to have an infinite number of enrollments? What do you think happens when the absolutely inevitable point is reached when the organization has fanned out so far that there are hundreds, perhaps even thousands, at the base all waiting for their big, free downline? It becomes mathematically impossible to provide it, so they quit. The organization begins to unravel upward as fast as it was formed (and the unfortunate MLM company the scheme was attached to get’s deluged with product returns – which is why most responsible companies forbid the promotion of such deals). This event is so predictable that there is a name for it. It’s called the “Window Shade Effect.” It describes what has occurred in literally every single downline building scheme that has ever existed. Which is why such schemes have a 100% failure rate throughout MLM history.

Yet, I see more such schemes popping up today than every before.

Where securities law comes into play can be explained by a review of the Howie vs. SEC decision (1948). From this decision came a clear definition of a security, which has three aspects: 1) an investment of “consideration” (in this case, plain ol’ money); 2) a “common enterprise” (a lot of people all paying money into the same scheme); and 3) there is income to be “derived solely from the efforts of others.” So, all MLM programs would seem to meet aspects one and two. However, most of us work our butts off building and managing or downlines, and moving product (right?!). So, we are not offering a security (like stocks, bonds, mutual funds, etc.). But, what if we all paid money into a deal that will build our downline for us, and all we had to do was sit back and wait for the check?

Several reps for such schemes recently defended this issue by claiming this downline building service was only an “option.” You didn’t have to have them build it. Okay. I see. So, only some of their distributors might be selling unregistered securities without a license. That’s not comforting.

It should be noted that, to my knowledge, no such scheme has ever been targeted for violating securities law, in spite of being so wide open to such attack. Very likely this is due to the simple fact that they go away so fast all on their own. Why bother?

Allow me to state for the record that some of what you’ve just read as it pertains to legal issues I personally do not agree with. I’m not implying any of this is right or the way it should be. So please, don’t yell at me if you disagree with the concepts. Hey, I’m a registered Libertarian. I believe we should do what ever we want with our own money. I think pyramid schemes should be legal as long as there is full disclosure and you know what the risks are. We have a right to be stupid with our own money. It’s our money! In fact, I find it so infuriatingly ironic that my state will declare a company an illegal pyramid, wipe out the incomes, and in some cases the livelihoods, of thousands of innocent distributors, simply because they purchased an overpriced prepaid calling card for $100 that they have no plans to resell. But, if I pay $100 for state lottery tickets, which I have a far, far greater chance of losing, they’ll take my money, smile, wink, slap me on the back and encourage me to come back next week and try again.

Opps, I hear my soapbox cracking. I better step down.

By looking at the past we can see the future. We can all learn from those before us what’s safe and what we should stay clear of. Yes, the legal climate is changing and the rules are getting a little blurry. All the more reason to leave yourself a good margin for error. Give any red flag a wide birth. Don’t, as some companies are doing today, drape yourself with it and dance in front of a snorting bull.

Sure, some companies have been waiving these red flags for years with no consequence. Some, when recognized, will simply be asked to please put away the red flag (eliminate the offending aspect of the plan). Others may be forced to make changes, get beat up a little, then get on with their business. I’m not at all suggesting that every MLM opportunity that employs any of the aspects discussed here is doomed.

Not all ticking bombs go off. But I still wouldn’t want to be sitting on one.

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Personal Consumption and the 70% Rule

January 5, 2013 Leave a Comment

Recent Regulatory Misinterpretations Can Be Harmful to Distributors

By Len Clements © 1999

Back in 1975, the Federal Trade Commission sued Amway on the grounds that it was an illegal pyramid. In 1979 the court ruled in favor of Amway. Stemming from this decision a body of law and interpretive precedent was set that to this day define the criteria of a “legal” network marketing opportunity. The three main aspects of this criteria are: A generous buy back policy (usually 90% of the wholesale price paid for all resalable products returned); The Ten Customer Rule (distributors retail products to at least ten non-distributors per month), and; The 70% Rule (verifying that at least 70% of all previous wholesale orders have been sold or consumed before any subsequent orders be placed with the company).

The serious challenge that has arisen in recent years involves the interpretation of the 70% Rule. Previously, the “or consumed” provision in the above definition has received little or no resistance. In fact, this has been generally accepted without incident or harm for the entire 20 year period since the Amway decision. However, for some unknown reason (although many theories abound) several actions have been taken recently in which the “or consumed” aspect has been thrown out. The judge or regulatory body has demanded that 70% of all previous wholesale purchases be retailed to non-distributors only. Furthermore, they have ruled that no commission, bonuses or overrides be paid on product personally consumed by the distributor!

Perhaps the most publicized case involves the Ninth Circuit Court of Appeals decision against Omnitrition. A class action suit was filed (by two disgruntled ex-distributors) and the suit was originally dismissed in Omnitrition’s favor by summery judgment (it didn’t even go to trial). When the class appealed this decision, the Ninth Circuit Court not only ruled in favor of the class action (demanding only that the lower court must hear the case), the court uncharacteristically offered a detailed opinion as to why. The court proclaimed that personal purchases were not applicable in satisfying the 70% Rule and therefore there was a legitimate case to be made that, in fact, Omnitrition was operating an illegal pyramid (again, this decision only required the lower court to go forward with the case and did not actually declare Omnitrition a pyramid scheme). The outcome of the lower court trial is still pending.

Having spoken with numerous individuals within the offices of Attorney’s General (yes, that is the proper pronunciation) throughout the country over the years, I had ample opportunity to quiz them as to their position on this “or consumed” issue. Only onestate, Michigan, offered the clear and specific opinion that “personal consumption does not satisfy the 70% rule in this state.” Ironically, this is the home state of Amway itself which has evolved into the epitome of transfer buying and personal consumption within this industry. (And, again, without incident or harm to anyone). In fact, Amway recently went counter to the regulatory trend and reducedtheir ten customer requirement to five customers! And, in spite of this verbal declaration given to me over the phone, I can find no specific action taken by the Michigan AG’s office in which they’ve challenged the personal consumption aspect.

Most recently, California and North Carolina have boldly and clearly declared that personal consumption does not (no longer?) satisfy the 70% Rule and that no commissions or bonuses can be paid to distributors on personally consumed product. One recent case involves Destiny Telecom and the state of North Carolina. This case is especially disturbing in that the state not only demanded that Destiny verify to the state, on a monthly basis, that 70% of all wholesale orders by distributors are being retailed to non-distributors, but further demanded the following: “Should a North Carolina retail customer subsequently establish such a connection by becoming an ‘Independent Representative’… any prior salesmade to that customer shall be considered an internal sale from the time of sale and shall not be considered a retail sale for any purpose at any time” (underline emphasis mine). Understand, this startling and bizarre provision is declaring that, for example, if you are strictly a retail customer for an entire year, then you decide to simply sign a distributor application, even if it’s just so you can get the products at wholesale and you have no intentions of working the business, Destiny will not be able to count, nor will North Carolina accept, the entire previous year’s worth of sales as retail sales!There is no legal, ethical, or logical explanation for such a demand to be made on a network marketing company.

But there’s more.

Immediately following the above statement (found on pages two and three of the Consent Agreement between Destiny and NC), the agreement goes on to demand that “Destiny shall immediately revise its records to ensure that the benefits provided to all relevant participants are adjusted accordingly.” In other words, all the commissions and bonuses that were previously paid on this year’s worth of retail volume (based on the above example) must be deducted from those distributors next check! Amazing.

California’s AG’s office, within their Final Judgment against Destiny, has ruled that any type of sales aid or live training is not commissionable. Curiously, Destiny never paid commissions on either of these items — but several major competing companies do! While the judgment was somewhat ambiguous as to the personal consumption issue, nothing was left to the imagination in the consent decree issued by California against AuQuest. Herein they ruled that commissions may only be paid on sales to the “ultimate consumer.” However, they went on to define “ultimate consumer” as “Persons who are not a part of the AuQuest Marketing Plan.”

At first glance the state of Arizona, in their consent decree with TeleSales, Inc. (another prepaid phone card deal) seems to have used a little common sense in the matter. They ordered that commissions must be based on “retail sales,” but defined this as being sales to persons who “are not part of (the) marketing program” but also sales to “persons who, although desirous of becoming or who are part of (the) marketing plan or distribution system, are buying for their own personal or family use.” There is a subtle nuance in this definition that may have been missed. Arizonadid not say that a distributor’s own personal consumption is commissionable to his or her upline, but rather a “sale to” anotherdistributor for their personal consumption! This, of course, begs the question, Why would a distributor buy at retail from another distributor when they can buy at wholesale direct from the company via their own distributorship? (Arizona also fined several of what TSI reported to them to be “major” distributors $25,000 each, which begs the question, What is a “major” distributor? Exactly how big does someone’s downline have to be before they stop becoming the victim and become the perpetrator? Five hundred? Five thousand? What!?).

What these rulings requiring commissions be paid only on retail sales to non-distributors does, in effect, is place the selling distributor in a very precarious position from an ethical standpoint. They would now be motivated to hide the fact from their customer that they can simply sign up as a distributor, likely at no charge, and get the product significantly cheaper. When the retail customer inevitably discovers this option, they surely will question the selling distributor as to why this option was never presented to them. They’ll probably be at least a little POed — and rightfully so. To place a distributor in this position is the real crime here!

These regulatory people’s job is to prevent us all from getting hurt. Isn’t creating a strong motivation to keep retail customers out of the distributor scrolls, thus causing them to pay 30-40% more than they need to be paying for their products, harming that customer?

What’s more, it can cause harm to the distributor as well. Think about it. Who, in the 53 year history of network marketing, has ever been harmed by purchasing only the amount of product that they can comfortably consume themselves? No one! Who has been harmed by buying more than they can consume, or even sell? Thousands! What the 70% rule effectively does, when personal consumption is not factored in, is require by law that the distributor purchase over three times as much product as they can personally consume! If Mary only wants to purchase $100 worth of products for herself and her family, the 70% rule (sans personal consumption) requires that she purchase $333 worth of product — then be forced to sell the extra $230 worth within 30 days, or be forced to lie about it just so she can get the products she wants the next month (typically, companies are not suppose to let you order more products unless you’ve met the 70% rule).

Not only that, but if Mary does only order $100 worth, this screwy interpretation of the 70% rule would require that she sell $70 of it, leaving her with only $30 for herself. So, she must then order another $70 in product to get the $100 worth that she truly desires. But wait! Now Mary has purchased $170 in product total. She needs to retail $119 of it to satisfy the personal consumption-less 70% rule. So she retails another $49 to satisfy the rule — leaving her $21 short of the $100 worth that she really wants for herself. So, she orders another $21 from the company. But, alas, she’s now ordered a total of $191, and $14.70 more product must be retailed.

Isn’t this just a little ridiculous?

In an effort to make our industry less financially risky, thus lessvulnerable to media and regulatory attack, most MLM companies have enacted a free sign up system where even the “at cost” distributor kit is an optional purchase. But, by doing so we’ve now totally blurred the lines between “customer” and “distributor.” It makes no sense for someone to be paying retail prices for something they can get at wholesale by simply calling an 800-number and “signing up.” So, now retail customers all appear to be “distributors” in the company’s database. Our efforts to make ourselves less vulnerable has made us more vulnerable! What’s more, the absurd way in which some regulators have defined the law in this situation actually puts us and our customers back into a situation of spending significantly more money than we were originally requiring. All in an effort to protect us!

The true spirit of the 70% rule was to simply eliminate front loading and stock piling. In years past it was routine to find many people “buying into” a certain position in the compensation plan with an up front several thousand dollar purchase. This is where the term “garage qualified” came from. And to keep qualified for that position, they’d order hundreds or thousands more each month. These purchases were not because they wanted the product or had the retail client base to sell it to, but rather it was simply a token act to keep qualified in the plan. The 70% rule was designed to eliminate this practice. Well, by counting personal consumption towards the 70% rule it still effectively accomplishes this! And, once again, by not counting personal consumption the distributor/consumer is force by law to actually purchase more products than they wish to!

Arguably, companies like Destiny, AuQuest and TSI were worthy targets due to the lack of any significant amount of retailing and the great emphasis placed by their distributors on recruiting and “buying into” a higher pay level in the plan. Other recent targets, such as Fortuna Alliance, Gold Unlimited, and Boston Finney, also demonstrate that regulators are picking their spots. Very likely noMLM company is truly retailing 70% of their sales volume to non-distributors. Yet the Amways, Shaklees, and Herbalifes continue to do business, unchallenged, in even the most MLM-unfriendly states. As it should be.

On an even more positive note, three states, Texas, Oklahoma, and Louisiana, have recently passed model legislation that specifically declares personal consumption as a valid sale and applicable to the 70% rule. Several other states will be considering similar legislation in 1999 as well.

The greatest fear we should have is that, someday, there is federal regulation of the network marketing industry — and theydemonstrate the same utter lack of understanding of how this business works and what’s best for it’s participants. On a case-by-case, state-by-state basis, we can survive and even thrive. But if Big Brother ever decides to cop the same attitude as a few state AG’s, well, better thank you lucky stars for the Amways, Shaklees and Herbalifes.

Personally, I’m hoping for federal regulation. And I hope that it will be based on the precedent set in the FTC case against Amway back in 1979 and require all companies provide full disclosure and allow for personal consumption to apply towards the 70% rule.

Let us hope.

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Does MLM Make Us GOOFY?

January 5, 2013 Leave a Comment

By Len Clements (c) 1995

My nine-plus years as one of the MLM industry “watchdogs” has involved several hundred hours of reading various MLM related books, newsletters, and magazines and conversations with literally thousands of MLM participants, vendors, trainers and owners. Over this period of time, I have come to the conclusion that something about the MLM (Multilevel Marketing) industry is making quite a few of us really goofy. Perhaps our “herbal formulas” contain more herbs than we know about. Or, maybe it’s the radiation we’ve absorbed from watching all those videos. It could be that pressing a phone against your head six to eight hours a day is cutting off blood vessels to our brains. All I know is, something is going on here.A classic example would be a conversation I had about two years ago with a local print shop owner. A print shop, by the way, that claimed to have several MLM clients.

I called this printer to get a quote on what it would cost to reprint a limited number of back issues. She said they had a special deal where all double sided 11×17 pages would be 15¢ per sheet. I then asked (remember this is the owner I’m talking to) what would be the fewest number they could print. She replied that they could print whatever amount I needed. Okay, what about ten? Well, she said, they really couldn’t print that few. She then explained to me about set up costs, labor and various other fixed costs. Fair enough. So exactly what is the least number you could print, I asked. She again replied, “As I said sir, we can print any amount you wish.”

Uh oh.

“How about twenty?,” I ventured. Nope. Couldn’t print that few either. It just wouldn’t be cost effective, you see, because of those fixed costs, which she began to list again.

Now, I had already tried “fewest” and “least.” I wouldn’t dare try “minimum.” That’s another whole syllable. Ah, what the heck, I thought, let’s give it a try.

“All right. So exactly what is the minimum number of sheets that you can print?”

“Sir,” she responded, obviously getting annoyed, “like I said, we can print whatever number you like, we just can’t print that few.”

Believe it or not, we went through this loop about three more times, each time with me raising the requested number by ten, followed by her desperately trying to get though my thick skull that they could print whatever amount I needed — except for every amount I requested.

The call ended with me (who my little league team used to call “Spock” due to my inability to get riled) yelling into the phone “51, 52, 53, 54… STOP ME WHEN I HIT A NUMBER YOU CAN PRINT!”

She hung up on me.

To this day, I still don’t know what the least, fewest, minimum number of pages is she could print for me. And I never will. She went out of business — just like the MLM company she was a distributor for (Consumer’s Buyline).

The logic portion of the brain seems to be most affected by MLM exposure. More evidence of this can be found in the ads we place. Just recently I saw one with the headline “Little Known Secrets…” What other kind of secrets are there? Well known secrets?

Or how about this one: “Brand New MLM Now Launching!” Have you ever seen an old company launch?

Or how about this logic buster: “Earn income through the retail sale of our FREE reports!”

In the August, 1993 issue of my MarketWave newsletter I listed some of the best (worst) ad headlines I’ve seen. Here are some of my favorites.

How To Get 1,000,000 People To Mail You $3.00. For Info, Please Send $3.00 To…

Earn Big Money Working At Home, In Your Mailbox.

You Can Make A Fortune — By Passing Out, Or Mailing Tapes I Will Give You.

Don’t Think Your Thoughts. New Thoughts!!!

Join Bodywide Today!

History Making MLM Just Lunched!

I’m not making these up, folks. In fact, here’s another headline I just saw you can add to your list: “The MLM Learing Group.”

I mean, how does this happen? I liken these types of mega-typos to a pedestrian being accidently hit by a train in broad daylight. I occasionally hear about this happening, and as morbid as it is, I almost want to be there to see exactly how such an event could occur. When a typesetter keys in a headline of “Credit Problems, Money Troubles, Down On Your Lick?” (actual copy), does he not look up and read what he just typed at least once?

Here are a few more true stories from the annals of my MLM career.

I got a call about two months ago from a distraught gentleman who was incensed that I did not have a system in place to provide him with a sample copy of my MarketWave Newsletter. He and his wife were roaming the country in his motor home. And yes, he was quite serious.

Another gentleman called recently to order a subscription and a back issue. When I explained that there was a $1.00 shipping and handling charge on the back issue, he protested that since I had to send the first issue of his subscription anyway, why was he being charged for the shipping on the back issue? (An argument that has come up more than once, by the way). I explained that there was additional postage, and back issues were all hand folded and collated, and were more expensive to produce since they are reprinted in limited quantity. He wasn’t buying it. Literally. He bluntly stated that he would cancel his order if I charged him the extra buck.

I later discovered that this guy earns in excess of $13,000 per month in a well known MLM program. That’s thirteen thousanddollars — one of which he got to keep that day.

Just recently a new MLMer, who sounded way too young to have already been so affected, called our voice mail and requested a sample copy of MarketWave. His message was as follows: “Yes, this is John Smith from Tampa, Florida and I just read your book. I would like to get a sample copy of your newsletter as soon as possible and I will send you the dollar you requested. Thank you.” Click.

The real frustrating part is that Mr. Smith (not his real name) is thethird person to leave such a message so far this year! And that’s not counting the two by Mr. Smith himself, who’s still wondering where his sample is and whose address we still don’t know.

I can’t count the number of times, especially in the early years of MarketWave, that I would fax information requests or a series of questions regarding the company I was reviewing in the newsletter, only to be completely ignored. Or, made numerous calls to the corporate office to talk to the President of VP regarding questions or concerns that I didn’t feel comfortable asking distributors, and never have a single call returned. And then, after the review is published, I get a call or letter from the President chastising me for not getting my facts straight.

Actually, that’s not a good example of being goofy, that’s just me venting. Thanks for indulging me.

Goofy? How about the infamous MetChem scandal? This is the bogus review I did in April of 1993 for a scheme where you could get paid $6.00 for every tin can you sent in (because MetChem found a way to convert tin into platinum, you see). Honestly, it’s not the fact that sixteen of my subscribers called in to get the address for MetChem (after all, the information was supposed to be coming from a reputable source — me!). It’s the fact that the instructions to order the information clearly stated “Go sit in the corner. Haven’t we taught you anything?,” then asked that you spell out the first letters of each sentence of the first paragraph — which spelled APRIL FOOLS. Fortunately, twelve subscribers called back to sheepishly ask that I ignore your previous request. Good for them. The other four claimed they followed the instructions perfectly — and still wanted the address!

So far, I’ve received four death threats. One was just a prank (I’m pretty sure), but the other seemed quite serious. This angry, anonymous caller was upset that I had “trashed” her opportunity in my newsletter and that my review was “sinful.” That review resulted in the third highest rated opportunity ever featured in MarketWave, and the highest of all for the year in which the call was made.

Last month I had a discussion with a man who was dissatisfied with the performance of his current company’s compensation plan (we’ll call his company Generic International). He called to ask me about the plan I was working. I told him the type, and he replied, “Eh, I was hoping to stay with a plan like Generic’s.” I then explained the pay out. “Hmmm. Actually, I kind of like a compressed pay out — like Generic’s.” I forged on. After explaining the qualifications, he responded by explaining to me why he liked the way “Generic was doing it.” The conversation eventually went beyond comp plans to products. After telling him about mine, sure enough, he was hoping to stay with products “like Generic has.”

I then explained to him that the clinical definition of insanity (which means you’re really goofy) is the process of doing the same thing over and over and expecting different results.

He stayed with Generic International.

I recently came across a distributor produced full page ad for an MLM opportunity within which the distributor described his company’s great new support tool — an automated downline and sales volume tracking system. Nothing wrong with that, except that when describing how simple the steps were to use the system he used his actual ID number and password! Yes, of course I called and accessed the system (I’m not nosey, I’m inquisitive). This guy, who was claiming to have achieved great success with this opportunity, had 115 people on his first level alone, but his total commissions earned for the past month was $26.00! The headline of his ad read: “My 10 years of MLM frustration.” I have a theory about that.

Another MLM company I was preparing to review sent out an open letter to all of its distributors chastising them for accepting returns of their weight loss product. It seems many of them were returning the 30 day supply of product with only a few of the capsules consumed. The author of this letter, their National Marketing Director, claimed that customers must use all 30 days worth of product to get any results. Therefor, in spite of their “100% money back guarantee” on retail customer returns, the company would no longer provide refunds on unfinished product returned by its distributors — unless the bottle was returned empty! Hmmm. There’s got to be a way around this policy. Let’s think hard.

A discussion of goofiness in network marketing cannot end without at least a mention of those folks who claimed to have depleted their life savings to purchase huge inventory loads upon joining an MLM opportunity (the highest I’ve heard of is $120,000). Or those who leave high paying, secure jobs to work an MLM opportunity full time after only a few weeks or months of success. I just read about a Long Island man who left a $192,000 a year job to work FundAmerica back in early 1990. Bad timing. Bad.

NGS (Networking Goofiness Syndrome) seems to be spreading in epidemic proportions. This dreaded malady must be stopped before the end of the 90’s when 65% of all goods and services will be moved by way of network marketing.* Unknowing college and university professors all over the country are now teaching people how to inflict themselves with NGS.* Even Donald Trump claimed he would risk exposure to NGS by pursuing network marketing should he ever loose his fortune again.*

(*All of the above statements are common MLM myths. They are completely untrue. Don’t repeat them, please.)

Fortunately, despite all of the massive exposure I’ve had to network marketing over a prolonged period of time, I personally seem to have been completely unaffected. I have experienced no symptoms of Networking Goofiness Syndrome of any kind.

By the way, not to change the subject, but I want all of my readers to be aware that I no longer wish to be referred to by my given name, but rather by this unpronounceable symbol:

 

Thank you for your cooperation.

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MLM Gimmicks

January 5, 2013 Leave a Comment

The Truth Behind All Those Screwy Deals

By Len Clements (c) 2000

Network marketing is a very perception oriented business. To compete for distributors you must somehow create the perception, or in most cases the illusion, that your opportunity will make your prospect richer, faster, easier. Instead of emphasizing a strong work ethic, loyalty and commitment to one MLM program, and an honest, moral approach to recruiting, it seems many, way toomany, MLM programs today are offering the proverbial “magic bullet.” They claim to have discovered some “revolutionary” new product, concept, or system that no one (out of tens of millions of people over half-a-century) have ever thought of before. Have they? Let’s take a closer look…

Let’s start with “infinity” bonuses. This is a form of commission that pays on a certain percentage of volume per level down to the next distributor in the leg who also qualifies for this bonus. At that point the bonus can be all or partially blocked. In other words, it pays down to a certain point and then stops. Mr. Webster and I have a very different definition of “infinity.” I find it rather amusing to listen to the various pitches some distributors offer when presenting their “infinity” bonus. They emphasize how easy it is to qualify for the bonus (usually there is only a small recruiting quota). But, of course, this advantage is solely based on the illusion that you are the only one that has this advantage! If it’s so easy for you to qualify for this bonus, then it’s just as easy for all those in your downline to block your infinity bonus. In a worst case, if everyonequalified for it, no one would earn anything from it!

I’ve heard many people claim that it is possible to earn an “infinity” bonus on people over 100 levels deep in their organization. Think about what that implies. This would mean that you would have to have someone on your second level with a downline over 99 levels deep who has not qualified for the maximum infinity bonus! I suppose it is possible — theoretically.

Recently there has been a flurry of two and three level pay plans (usually employing an “infinity” bonus on the third level). While they may have noble intentions (more up front money for the “little guy”), they are entirely deceptive in their claim that better-than-average earnings per distributor ratio will last more than a few short months. These deals love to compare the earnings potential compared to a list of their competitors based on a two or three level downline. That’s because this would likely be the only scenario in which their plans would pay more!

There are only two possible paths a 2-3 level program can take. They get really big, or they don’t. If they don’t, that’s not good. If they do, then it is inevitable that their leading distributors will develop large downlines. And what do you think happens when the top distributors look at their genealogy of 10,000 people and realize that 9,500 of them are completely out of their pay range. What happens when their $30 per distributor earnings ratio drops to under a buck, and they figure out that if they had the same group in a six or seven level plan they’d be making three or four times the income? What happens is exactly what has happened to literally every 2-3 level plan in MLM history over one year old — their leaders leave and the program crumbles, or they add more depth to their pay out! (Voyager, Changes, Outback Secrets, and Personal Wealth Systems are just a few recent examples of one outcome or the other).

What about programs that claim to have little, or even no personal volume requirement? Isn’t that great? You don’t have to buy anything as long as your downline does! But again, this is based on the illusion that you are the only one with this advantage. Isn’t your downline being told they don’t have to order anything too! So now everyone sits around waiting for everyone else to order something.

Another great example of this same kind of illusion are programs that allow you to enroll yourself or a spouse on your own first level. They tell you all about how you can now build under the second level position and earn from both positions on the same downline. What they don’t tell you is that everyone in your downline gets to do the same thing! Now your six level plan just became a three level plan! As everyone else double-dips, just like you, they are forcing potentially huge amounts of sales volume out of your pay range. Sure, you get paid on two positions — but on about half the volume!

(Note: due to the irrelevance of levels in determining commissions, the binary plan is exempt from this discussion — although most binary plans have a myriad other illusionary advantages, but that’s another article).

Speaking of binaries, there is one recently popular gimmick that’s worthy of discussion and that’s this “daily pay out” nonsense. My main peeve is that many such deals are actually claiming that getting paid three or four times a week means you are going to get paid three or four times more than a weekly paying plan. A few years ago, this same baloney used to be said about weekly paying binaries compared to monthly paying traditional plans. Once it became obvious to so many that you were really getting paid the same amount monthly, only divided up into smaller, weekly chunks, this absurdity ended. Now were being told daily pay outs result in more income than weekly due to the same ridiculous logic. In fact, the more likely effect if a significant increase in administrative expense on the part of the company — thus the very real possibility of lower actual pay outs!

And speaking of pay outs, I’ve noticed the Australian 2-up compensation plan is back for another round of resounding failures. This plan, which seems to make a resurgence about every three or four years, is the epitome of the word “gimmick.” It’s a classic example of a plan that looks great on paper, but actually pays very little to very few. Yes, the percentages are bigger, but what they don’t tell you is that you are actually getting paid those whopping pay outs on a small fraction of your total downline. The rest you earn nothing on, making it, over all, the worst paying plan in history. Which explains its literally 100% failure rate. But, alas, yet another group of “visionaries” have recently come along claiming they’ve discovered the secret to making the 2-up work (or, in one case, they just gave it a big fancy name and then flat out lied about the plan’s true identity).

There are gimmicks within the product category as well. How many times does the “smoking cure” fad have to make it’s loop though this industry before people realize it’s a gimmick! Think, people! If there really was an herbal substance that permanently cured people of their smoking habit, it would be front page news all over the world, the FDA surely would be trying to classify it as a drug (so the drug manufacturers could make a killing off of it), the tobacco industry would be spending billions to destroy its credibility, andevery MLM company in existence would be knocking it off! Not to mention all the brand name versions of it that would be flooding the store shelves.

Same goes for baldness cures, anti-aging creams, libido increasing oat pills, IQ enhancers, and other such bunk. I’m still waiting for some MLM company to offer X-ray glasses!

Another marketing gimmick that is at least original (I never saw this one much before last winter) is the “guaranteed income” or the “reward” for finding a better MLM program. These offers have more catches than Willie Mays. For example, one scheme currently operating claims they will guarantee you an income of $5,000 within 120 days or they will “continue to execute our program on your behalf, at our expense, until you do earn $5,000.” What does that mean? It means that if they fail miserably and don’t earn you a dime, they’ll just keep on trying. Think about it, folks. For a company to guarantee an income to every distributor that ever joins, they are in essence guaranteeing a downline to every distributor. This is, obviously, a mathematical impossibility.

One company is now offering a “$10,000 Reward” to the first person who can show them a pay plan that pays better than theirs. What is so ironic is that there plan is a classic Australian 2-up, which means that almost every plan pays better than theirs!

Portfolio programs are one of the most amazing phenomenons to ever cycle through this industry. This is where someone tries to get everyone into a group of MLM programs, either all at once or in a series. No matter how many of these schemes fail, over and over and over, all for the exact same set of reasons, people will still go out and try it again. And again, and again. Do you want to know how I know that no portfolio scheme has ever worked. Well, for the same reason I’m pretty sure dinosaurs are actually extinct — because there aren’t any! Other than the most resent batch of start ups, show me one that is working. There have been dozens, perhaps hundreds, that have come and gone.

The primary reason portfolio deals don’t work is that each program they place you into either requires a product purchase to qualify for a check in that program — or they don’t. It’s got to be one of the other, right? So, if each program requires, let’s say, $100 per month, and they place you into ten programs, you have to spend $1,000 per month to earn a check from each one! Now, if they don’t require a monthly purchase, then every sits around waiting for everyone else to order something — and no one orders anything. No sales volume, no income. One hot portfolio scheme is distributing a cassette tape where one of the founders admits to all the reasons why these deals have never worked before, then rather than explaining how they corrected those challenges he describes the exact same system as all those who have failed!

Show me a list of professional network marketers who have focused on one MLM opportunity for more than ten years and I’ll show you a list of millionaires. Show me a list of MLM portfolio participants who’ve earned even a modest full time income for more than even one year and I’ll show you a blank sheet of paper.

In next months issue… The biggest, nastiest, MLM gimmick of all time — the downline building scheme! (This one deserves a whole article to itself!)

Folks, there have been professional gamblers who have spent their entire lifetime trying to perfect the perfect “system” — and failing at it — for as long as there has been gambling. There have been those who market get-rich-quick schemes through the mail claiming to have discovered an easy, sure-fire way to wealth for as long as there has been mail. And, there has been MLMers claiming to have found the perfect income building system, concept, or product for as long as there have been MLMers. If there was such a thing, we’d all be obscenely rich and the entire Earth would be saturated with 6.5 billion MLMers.

It’s not because there isn’t!

What there is is an industry with many, albeit a minority, of hard working, devoted, loyal, professional network marketers who haveearned their incomes with sweat, honesty, and a lot of patience.

We need more of them, not more games and gimmicks.

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The Art of the MLM Deal

January 5, 2013 Leave a Comment

By Len Clements © 1996

Have you ever wondered how so many “heavy hitters” in this industry make such obscene incomes in such a short period of time, while you work your butt off for months only to produce a $250 check? After all, you are duplicating their methods and systems, right? You’re mailing out the cassette tapes, you’re on the training calls, you’re paying for the ad co-ops, you’re doing the three-way calls, you’re attending the meetings, you’re handing out the product samples like candy on Halloween night — so if that’s how they did it, why isn’t it working for you? 

Maybe it’s because — that’s not how they did it. 

Please understand right now that there are “Leaders” in this business (a term I prefer over “heavy hitter”) that do achieve substantial success, starting from scratch, in a relatively short period of time using all the basic techniques described above — because they are exceptionally good at it. Let’s be honest, some folks are just better at network marketing than others. However, one of the greatest aspects of this industry is its way of leveling the playing field. Even those that are not very good at it can still succeed, over a longer period of time, by slowly acquiring the skills necessary with the help of those who preceded them on the road to success ­ or by enrolling someone else who already possesses these skills. I in no way want to diminish the achievement of those who genuinely earned their income with effort and commitment to what they truly feel in their heart is the best MLM opportunity. If they honestly build their downline in a manner that is duplicatable by those in their downline, they are not the subject of this article. If you object to, or are personally offended by, anything that is written here, well, if the shoe fits wear it! Otherwise, throw it away. It’s not yours. 

Except for the rare phenom who, like sports stars Tiger Woods or Wayne Gretsky, achieve monumental success quickly due to sheer, natural talent, the vast majority of those who achieve five- or six-digit incomes in MLM in fewer than six months accomplished this in one of three ways: 

1. They moved a large number of an already existing downline over from another, usually failing, MLM program. Certainly not an immoral or unethical practice, as long as there is full disclosure on the part of the high earner. In other words, as long as he or she informs those they bring in that their high degree of initial success is totally unduplicatable. Of course, this disclosure is rarely provided. 

2. They are in a money game or front load program where thousands of dollars are paid up front. A $1,250 payment for a $5.00 package of material can generate a lot of up front commissions — and a lot of Cease and Desist orders from Attorney Generals. 

3. They made a deal with the company. Either they were offered some extra bonus or overrides, were provided with a large number of already existing distributors, or they are receiving a “base” payment from the company (a set dollar amount over and above the standard commission system). Or, perhaps all three. 

Now, in the case of number 3 above, one might ask, “So what?” Shouldn’t an MLM distributor have the right to market themselves to the highest bidder just like professional athletes or corporate executives? Sure. As long as there is, once again, full disclosure. 

If you make a deal with an MLM company and you subsequently tell prospects that you joined it because you determined it to be “the best” network marketing opportunity — you are lying! 

If you make a deal with an MLM company and you subsequently declare that those you bring into your downline can “duplicate” your success — you are lying! 

If you make a deal with an MLM company and you deny that you did, obviously, you are lying! 

Not only that, but what does this say about the company itself? If they are going to do this for you, how do you know that they are someday not going to do this to you? Think about it. Doesn’t this practice of corporate dealing mean that the company itself is also recruiting? It is very unusual for a wheeler an’ dealer company to place their “bought” leadership more than two or three levels deep beneath the company. Usually these “leaders” go front line. There’s a good reason for that. All the sales volume moved by those first level to a company are totally non-commissionable. There is no upline to the sale to pay commissions to. If a plan pays, let’s say, 10% down six levels (60% total), then even the volume that moves on the company’s second level would only require that they pay 10% of it in commission, thus saving them from paying the other 50%. Companies could easily afford to pay a “leader” two or three times the normal pay out and still end up saving money by placing them directly below the company. So, essentially, you are in competition with your own company for the best talent! How can you ever expect to recruit a heavy hitter if you can’t compete with your company’s deal? 

Also, it would seem to imply that the opportunity is not great enough to attract talent and leadership based on it’s own merits. If it’s a genuinely great opportunity, why would they have to bribe people to join it? 

If you were looking for a good MLM program to join, and a good upline sponsor to join under, wouldn’t you want to get involved with one that honestly felt they were in the best MLM opportunity? Or, would you want to be sponsored by someone who was just looking for the best deal? Sure, I suppose it’s possible that both could be true. But what are the odds that, out of over 1,500 MLM programs in the U.S., the one that they truly felt in their heart was the very best MLM opportunity for themselves and those they enroll just also happened to be the one that offered them a great deal? Petty slim. In fact, of all those out there who are known for deal making, most are pretty weak programs. 

Do only rinky-dink, desperate companies offer deals? No way. There are at least three good MLM companies that I know of personally that really don’t need to make these screwy deals to attract leaders, yet they do anyway. While others make a point, rather proudly, that they don’t do deals. Interestingly, what appears to be three of the hottest, fastest growing companies right now are among those that refuse to make deals! Perhaps it’s because true professional networkers, those who deserve the title of “leaders,” don’t join the company that offers them the best deal, they look for the best MLM company. And the best companies are the ones who get only the best. 

Have I ever proposed a deal to an MLM company? Yes, I have. And they accepted it — and I did not go forward with it. The little angel on my right shoulder wouldn’t shut up, and the little devil on my left shoulder decided to give up. 

Have I ever been offered a deal? Several times. One company paid me a $2,000 monthly base income for what was supposedly my compensation for being their “National Training Director.” After several months of watching the president and VP wander around the country doing training while I sat at home, I finally got it through my thick skull that I was simply bought off. I resigned from that program. Within 30 days I had offers on the table from two well known MLM companies. One offered “double the compensation plan” and the other offered to move their largest distributor leg into my downline. Another declared to me, literally within minutes of arriving at their home office, that they don’t do deals. All they can offer is a great network marketing opportunity. That’s the company I joined. (And, again, there are other good companies that do business the same way). Now, I can claim, with a clear conscience, that what I built was built from scratch using the same techniques that my downline can use, and in an MLM program that I sincerely believe is a great opportunity (there’s no such thing as “the best” since “the best” would be different for each person depending on a myriad of personal factors). 

I’m often asked by prospects if I “made a deal” with the company. That’s a good question. You should also be asking that question to your prospective upline hitter. You should also be concerned if your company is making these deals. You shouldn’t have to compete with them for MLM leaders. 

Besides, if your MLM company is a truly great opportunity, it shouldn’t have to pay people to join it!

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The Hype Cycle Revs Up

January 5, 2013 Leave a Comment

And Up … And Up … And Up

By Len Clements © 1999

In late 1996 I wrote an article simply titled “The Hype Cycle.” I suggested then that if we could measure “hype” and then construct a graph of its occurrence, intensity, and duration, it would likely appear much like a sine wave – a wavy horizontal line intermittently dipping above and then below a certain median point. Each rise in the level of hype was followed by a sharp drop, usually due to some industry shaking regulatory strike on a major MLM company. All the rats in the industry would then go away for a little while, leaving the rest of us to compete on a more level playing field. For a while. Slowly, eventually, once the heat was off and the smoke had cleared, they would creep their way back in. Until the next big hit, then the cycle would repeat.

So, what is “hype?” Messieurs Funk and Wagnalls define it accordingly: “To increase artificially; to deceive; to publicize extravagantly.” Do many network marketers practice such activity? A loaded question, obviously. But still an interesting one in that the current rage of hype being heaped upon our industry has maintained a definite pattern to it, only now the regulatory hits are not knocking it back down. And this most recent, ever rising wave is dredging up a mountain of sludge and debris onto our happy little beach that we all have to play in.

In fact, if we were to take a look at the hype cycle today, it might look something like this:

Note, as I mentioned earlier, that each peak is immediately followed by a sharp dip. This is usually due to one or two prominent MLM companies being made examples of by various regulatory agencies, followed by the aforementioned lull (rarely are the attacked companies the most guilty, they’re just the most visible). After the big guy gets punished for being too rowdy, everyone calms down and plays nice for a little while. Most take on a very conservative, low hype approach. No one else wants to get caught in the web, plus the actions taken against the target companies usually result in a clear definition of what not to do or say and most try to follow the model.

Unfortunately, like a punished child who promises never to misbehave again, the tendencies gradually return. Everybody’s cool, most are playing by the rules, no one is getting in trouble, and the hypsters get lulled into a sense of security. They start taking a few liberties. They start pushing the envelope. They begin to be a little more aggressive in how they present their compensation plan, what people are earning (or how much they could earn), and what the benefits of their products are.

For those of you who were around during the mid-70’s, you may recall prominent MLM programs such as Holiday Magic, Culture Farms, Koscot Interplanetary, and Unimax. All were eventually deemed to be illegal pyramids and closed down. But one company back then fought the “pyramid” label. In fact, they spent millions of dollars and four hard years to defend themselves against an attack by, not just a state attorney general, but the Federal Trade Commission. Fortunately, Amway won that battle and to this day they offer a model of what both state and federal authorities look for in a “legal” MLM program — and what you can say about them. What’s curious, though, is how well most companies abided by that criteria around 1980 and ’81. I know that 1982 saw a resurgence of at least some amount of hype because I remember being taught how to practice it. Then, in 1983, Herbalife was blasted on both a state and federal level, primarily due to product and income claims, and 1984 through early 1986 was real quiet again. Hardly any hype. Then came United Sciences of America (USA), perhaps the most hyped MLM opportunity in history (and arguably the record holder for first year growth). While USA was not actually “shut down,” it was gone by the end of 1987. This was due in part to a barrage of negative press concerning their over zealous promotional campaign. National Safety Associates (NSA) also began to share the burden of anti-hype scrutiny about that time as well — and 1988 and 1989 were real quite years (relatively speaking, of course — network marketing has never been completely void of hype). Then in 1990 things started to heat up. In 1991 practically every windshield in America has a little card on it exclaiming they could earn “$10,000 within 6 to 18 months from today” if they joined Nu Skin. Photocopied checks, grossly exaggerated income projections, and curative or anti-again product claims were pouring through the U.S. Postal Service (again, Nu Skin was not nearly the most guilty, just the most visible). Most of us surely recall what the result was — Nu Skin was slaughtered in the press and sustained hits from both federal and state regulatory agencies. The next few years the newly reformed Nu Skin was the industry model that most companies followed (although, even they are back to pushing the proverbial envelope with their Big Planet division). Photocopied checks, exaggerated income promises, medical claims, and the like were as close to nonexistent during 1992 and 1993 as I’ve ever remembered it. And sure enough, 1994 it returned. It reached what I thought was surely it’s peak in 1995. Yet, in 1996 it may have reached record levels not seen since the pre-Amway v.s. FTC era. I predicted then that if history repeats itself yet again, somebody was about to get killed.

Well, somebody did get killed. A lot of somebodies! Boston Finney, Destiny Telecom, Jewelway and International Heritage were the most prominent of the group (the latter three each claimed well over 100,000 distributors). As of this writing, some operational, but wounded survivors include TravelMax and FutureNet. Although none could claim the prominence of an Amway, Herbalife, or Nu Skin, surely the combined impact of all of these regulatory attacks, along with many other attacks at the state level on several minor players, would create the same motivation among MLM companies to clean up their act and not follow the tactics of these target companies. Yet, I see one example after another of companies not only implementing the very same hype tactics and questionable compensation methods, they’re far worse that those who were attacked!

The hype cycle likely has reached such monumental proportions due to the massive proliferation of MLM opportunities entering the market and the resulting increase in competition. To compete in the MLM marketplace in 1999 you almost have to practice some amount of hype. You place yourself at a marketing disadvantage by telling the truth (a sad, and perhaps cynical comment, but one that is unfortunately quite true). I’ve had discussions with various MLM leaders and corporate-folk who are, to varying degrees, guilty of hype and I keep hearing the same explanation/excuse: “Our truths are not as good as their lies!” Frankly, although I certainly don’t condone the practice of excessive hype, from a strictly business standpoint I can almost see their point. How can a good, honest distributor compete with those who claim their company is signing up “4,000 distributors per day,” or their comp plan pays “$1,000 with just 25 distributors,” or their product “reverses the aging process 20 years.” All of these statements are right out of material I’ve received in just the last few weeks. Offer after offer claims I’ll make tens-of-thousands of dollars within “a few short weeks.” I’ve got a pile of material here with not only exaggerated income promises and projections (both illegal), but direct claims of income by the distributors themselves — including the resurgence of what was just a few short years ago considered one of the most taboo items one could possibly offer: photocopied checks!

In the past the hype was primarily directed towards compensation plans and income, where as the trend today is now heavily weighted towards outrageous product claims. Isn’t it fascinating how decades old pharmaceutical companies with access to some of the greatest scientific minds on Earth and billion dollar research and development budgets can’t find effective treatments for arthritis, cancer, diabetes, or baldness, but little start up MLM companies can? Isn’t it amazing that someone who discovered a microscopic crystal that makes water freeze at room temperature, improves your car’s gas mileage, increases the effectiveness of skin care products by 85%, and cleans your clothes without laundry detergentisn’t making front page news all over the world and isn’t accepting his Nobel Prize, and is marketing this miraculous technology through two start up MLM companies (the first of which was shut down by their state AG)? Isn’t it just a little curious that there are people being injected with Human Growth Hormone (HGH) and paying $300 per dose, several times a month for it, and several MLM companies, all about the same time, discovered a way to increase HGH levels in the body and “reverse the aging process 20 years” for $90 per month by simply swallowing a tablet?

Does anyone else see anything wrong with this picture!?

There also seems to be a glut right now of “downline building” schemes and fluff programs with grossly overpriced token products. “Gimmick Marketing” is all the rage. Today, everyone has some “revolutionary” new comp plan, product or service, or marketing system. They don’t! This is a 53 year old business, folks. Everything has been tried. Everything you see out there is a variation of stuff that’s already been done. Over and over. We have half a century of precedent to look back on to know what works and what doesn’t work. It’s not a secret. We don’t have to guess or experiment anymore. And history is telling us – in a loud, booming voice – that traditional, merit-based companies offering legitimate products of value work, and almost, but not quite, everything else has or will fail.

Unfortunately, those traditional, merit-based, network marketing companies offering legitimate products of value either have to try to compete with this bunk, or tell people the truth — that success in their program will take time, commitment, patience, hard work, and a financial expense that might even cause them to operate at a loss in the beginning. Of course, if you do you stand a good chance of being out-hyped by your competition. Hype is designed to recruit you, not inform or educate you. Hype is used to destroy realistic expectations, not create them.

But, there is hope!

I recently ran a series of “anti-hype” display ads in several prominent MLM trade publications. The ads were practically a negative pitch – but they were honest and realistic. I expected the number of responses to drop, but the quality of the lead to increase. Amazingly, the total response rate has increased by over 50%! I’m becoming more and more convinced that the hypesters are the over-zealous, over-aggressive minority in this industry. There are still a LOT of good, professional network marketers out there who still understand that, sure, you can keep to the high road and get out-hyped. But, those prospects you lose will inevitably discover the truth sooner or later. And when they do, they are going to remember those that were honest and realistic with them in the past. And, the next time around, those people will have all the credibility.

Help us end the hype cycle.

Be the one that they remember.

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