Anti-MLM Zealots – Part I

December 27, 2012 Leave a Comment

Dean VanDruff
By Len Clements ©2005

       I love Multilevel Marketing. I’ve been involved, full time, for over 14 years, and I’ve managed to make a very good living at it – and I’ve never front loaded anyone with product, I’ve never flashed my check, I’ve never mislead anyone into attending an opportunity meeting, I’ve never sold training or tools for a profit, I’ve never made an outrageous product claim, and I’ve never lost a single friend in the process. I have, with hard work, commitment, and patience managed to ethically and honestly build a downline sales organization that has afforded me enough residual income to “exit the rat race.” However, according to some, I don’t exist.
       There are certainly some networkers among us who might be considered “zealous” as well. Perhaps overly so. But for every person attempting to convince a jaded, wary world that MLM is true, and good, there are at least an equal number who immediately dismiss it with prejudice. And, yes, some of them can get a little overzealous as well.
       Anti-MLM Zealots tend to come in two flavors: Ignorant or vindictive. In other words, they’ve either never actually participated in MLM themselves (thus have adopted someone else’s opinion as their own, or simply guessed at their conclusions), or they have participated and failed at it. Would you take marriage advice from a guy who was recently divorced? Or, worse, has never even had a girlfriend? Would you take golf lessons from someone who shot in the 120s, or who never played golf – no matter how much they claimed they had “studied and analyzed” the game?
       In fact, there are four individuals who have made it a point (and in some cases, it seems, their life’s mission) to be a thorn in the side of every MLMer in an effort to save the other 283 million Americans from a fate such as mine. Although these Four Horsemen of the Apocryphal are small in number, thanks to the internet their words are available to millions, and they are doing some damage (do a Google search for “MLM” — the top three results are anti-MLM sites). Whether you realize it or not, many of those who are not responding to your marketing campaign are victims of the anti-MLM propagandists. To many they seem to make sense.
       Do they? I certainly don’t think so, and I’ll be telling you why here in this publication over the next several issues. I think it’s about time these naysayers be taken to task. Their words have lingered unopposed long enough. They’re wrong, and here’s why…

What’s Wrong With Multilevel Marketing? – Dean Van Druff

       Dean Van Druff, the author of the well traveled, rambling, disjointed essay “What’s Wrong With Multilevel Marketing?”, is perhaps the most prevalent of the four in spite of making the weakest argument. Mr. Van Druff goes so far as to state that “MLM will never work, even in theory” in the face of the blatant fact that MLM is a 64 year old industry with numerous profitable companies and thousands of successful distributors.
       The ignorance of most Anti-MLM Zealots is clearly evident in their reporting of basic MLM related facts and figures, and Van Druff provides a litany of them. I should point out that I am not at all implying he, nor anyone opposed to MLM, is dumb. Ignorant means to ignore readily available information, thus resulting in a lack of knowledge, not intelligence. For example, throughout Van Druff’s 12 page essay he makes several observations about MLM that are simply inaccurate, such as, that we are a 25 year old industry, which would have been off by 30 years even in 1990 when his essay was originally written. This could be explained by Van Druff’s own reluctant but eventual admission that he has had no personal experience with MLM and did little, if any, research into the subject previous to putting his “theoretical analysis” on paper.
       Besides the historical inaccuracies mentioned previously, Van Druff also claims “many high level MLM promoters have been shut down, the ‘executives’ incarcerated.” He later claims that the founder of FundAmerica (which he misspells) was “arrested for having generated some 90% of revenues selling ‘distributorships’ versus product.” Although FundAmerica was declared a pyramid scheme, the founder was actually arrested on fraud charges. In fact, it is extremely rare for anyone promoting even a blatant pyramid scheme to actually serve jail time, and most legal actions against MLM companies are civil, not criminal. The few criminal cases involving incarceration (three that I know of over the last 25 years) did not involve multilevel marketing companies. They were, in fact, blatant pyramid schemes.
       Van Druff again shows his ignorance by asking the question “If (an MLM product) is so great, then why isn’t it being sold through the customary marketing system that has served human society for thousands ofyears?” Yes, he actually said that in his article, and its wrong on multiple levels. First, I can think of only one “marketing system” that has served human society for “thousands of years” – word of mouth. The marketing system used by MLM companies. Let’s forgive his hyperbole and assume he meant store shelves. Has Mr. Van Druff ever researched what is involved with getting a product on a store shelf? Obviously not, for its a daunting, expensive, extremely competitive challenge. It also involves millions of dollars in advertising to get those products off the shelf. Where as word-of-mouth is not only the most powerful form of marketing, it’s the least expensive (that’s a pretty good combination). But then, this is one of the most fundamental, basic, and most touted benefits in regard to marketing a product via MLM. Yet, Van Druff appears oblivious to it. This is the epitome of ignore-ance.
It gets worse.
       Van Druff also claims that some MLM companies attempt to address the saturation issue “by limiting the number of people you can sponsor, say, to four.” Really? Actually, no. No such limitation has ever existed in any of the several hundred MLM programs I’ve reviewed over the last 20 years, nor do I suspect it has ever existed. He’s probably talking about matrix plans where you are limited to the number of people you can place on your first level, but not the total recruited, and he just doesn’t understand what he’s talking about. He also claims MLM distributors “usually sell through prefab parties or home demos.” Of course, anyone with any actual experience in MLM would know that such activity is uncommon today in all but a few old-school MLM programs (although it is making a comeback).
       He goes on to describe a “shadow pyramid” where people are induced into buying “motivational tapes, seminars, and videos”. Of course, we all know he’s talking about only one, albeit very large, MLM company. And even then its upline distributors (not the company) who are making the profit, and on a direct sales basis, not MLM, and such purchases are clearly stated by the company as being totally voluntary.
       He also claims the MLM company itself profits by “conning” recruits with a “distributor fee.” What he is ignorant of is the easily obtainable and verifiable fact that, by law, MLM companies must sell their sales aids, promotional tools, training, and distributor kits/fees at cost! No significant profit can be made from these items, and they can not be commissioned as part of the MLM compensation plan. Sure, some MLM companies push the envelope a little on this, and yes, some push it a lot. But the vast majority do not. Furthermore, that $25-$50 annual distributor fee we all are “conned” out of typically covers such things as maintaining our sales organization, the paying of commissions to our downline sales reps, the paying of sales taxes to all 50 states, data entry services, customer support, warehousing, and various other administrative functions that would likely cost hundreds, if not thousands of dollars per month if we were to hire someone to do them for us.
       Van Druff then takes on “loony product claims.” While I concur with his overall criticism (some are pretty loony), his theory as to how MLMers “effectively skirt the Federal Trade Commission” is by using “word of mouth testimonials, supposed ‘studies’ done by scientists, fabricated endorsements (etc)…”. If Van Druff would have invested even ten minutes of research into this topic, he could have easily discovered that, indeed, the FTC already prohibits curative or treatment claims by all of the means he lists, including personal testimonials. In fact, the FTC has made available (for years) guidelines for product claims in their document “Dietary Supplements: An Advertising Guide for Industry” We are just as forbidden from promoting our products in all the ways Van Druff describes as any other marketer of products.
       Van Druff arrogantly professes that “the law generally condemns MLM” and even goes so far as to claim that all MLMs are illegal! Of course, Mr. Van Druff is utterly and completely wrong. Our state and federal government makes those laws, and our courts decide who breaks them. And, based on decades of legal precedent involving hundreds of cases, our government and our courts have ruled that MLM is legal. Van Druff’s opinion, much to his chagrin I’m sure, doesn’t count. Van Druff then borders on the absurd by implying there is some grand conspiracy by MLM “experts” to “propagandize, lobby and defend” MLM. (Defend ourselves? How dare we?!!!). He theorizes (but states as a matter of fact) that the MLM industry has used “so much money from it’s victims” to hire these nameless lobbyist experts who have managed to pull the wool over the eyes of state and federal regulators. Considering, once again, there are over 1,500 MLM companies in the United States, over 7 million distributors, and MLM has existed for over half-a-century, those must be darn good lobbyists! Of course, the truth is, few MLM companies or distributors are involved in defending the industry on a regulatory level. That job is left to the MLMIA and the Direct Selling Association, which is a national trade organization representing all direct sales companies (MLM or otherwise).
       When I inquired as to whether or not Van Druff has had any experience with MLM, he responded by directing me to a section of his web site (which I had read) where he states his analysis was “theoretical.” He then mockingly attacked my intelligence and investigative skills for not understanding that this meant he had no experience (of course, he could have just said “no”). I guess, in Mr. Van Druff’s world, you can’t have any actual experience with things you theorize about. Van Druff references me in his article as a “lucid reformer within the MLM industry.” Flattery will get him nowhere.
       Near the end of Van Druff’s diatribe, he states “Anyone who has any experience with an MLM has strong feelings, either for or against…” Its even worse when people develop strong feelings about it who have no experience at all.

       Mr. Van Druff was just a warm up. Next issue I’ll be cleaning up the mess made by Dr. Robert FitzPatrick, author of the books “False Profits” and “Pyramid Nation.” He’s also the founder of the “Pyramid Scheme Alert” organization. Naturally, he believes all multilevel marketing companies are illegal pyramids. He’s wrong – on multiple levels. Stay tuned. This is going to be fun!
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The Four Major Major Fears of Starting Your Own Business

December 27, 2012 Leave a Comment

And How Network Marketing Blows Them Out of the Water With the Force of a Twenty Megaton Thermal nuclear Explosion!

By Len Clements © 2009

Way back in the last century (1991, actually) a survey was conducted by my research firm, MarketWave, Inc., of over 6,000 people who were not, nor had ever been, business owners. The question was a simple one: If all obstacles were removed, would you like to own your own business? In other words, if what ever was stopping you from starting a business didn’t exist, would you at least attempt it? Basically, would you prefer to be an entrepreneur, or an employee? Eighty five percent said Yes, they’d prefer to work for themselves. Which means 15% misunderstood the question on the survey. After all, if what ever concerned you enough to not attempt a business venture didn’t exist, then you’d have no fear of doing so. I mean, who wouldn’t want to be in control of their own life? To have the freedom to make their own decisions, work their own hours, and write their own pay check?

Even using the conservative 85% figure, that would mean about 200 million Americans want to start their own business, but have never even attempted it! There must be some pretty compelling reasons, we thought, so we set out to find out what they were. To no one’s surprise, it was never about preferring to work for someone else’s business, but rather the incapacitating fear of starting their own.

And it was the same four fears, every single time.

It takes too much money. They didn’t have tens-of-thousands, or hundreds-of-thousands of dollars to invest in a business (and they didn’t know anyone else who did).

It takes too much time. They didn’t want to work 80 hours a weeks for the first year or two to get their business going.

There’s too much risk. Over 56% of all businesses fail in the first two years, and they’d have to quit their job, so there was no safety net.

They didn’t know how. They’d never taken any business courses. They had no business experience. They don’t know anything about taxes, accounting, marketing, and they myriad other skills a good entrepreneur must possess.

Not all responded with all four objections, although most responded with more than one. Surprisingly, “I don’t know how” was the most common response. A lot of folks said they wished they had taken the plunge earlier in their lives, but they just weren’t the Mavericks they once were. They had a mortgage to pay and a family to feed. They felt is was – too late.

Now comes the fun part.

Would you ever consider going into business for yourself if; the total start up costs were under $500, the total time investment could be as little as 5-15 hours a week, you could continue to work in your present job until the income from your business was sufficient to earn you at least an equal income, so there is little risk, and best of all, there were numerous consultants available to you who are experts at running this business, who would train and advise you personally, for an unlimited number of hours, for the entire life of your business, absolutely free! Not only that, but there is another company that will take care of all your research and development, labeling, inventory, shipping, payroll, various taxes, most legal questions, and so on. And, this company will do this for you every month, for the life of your business, for around, oh, $25.00 a year?

Right now, your probably remembering the old adage “If it sounds too good to be true…” Fine. But, hypothetically, would you consider it if all this were true? “Well, sure…” you’re probably thinking, “…but there’s got to be a catch.”

Not only is there no catch, I didn’t even hype the pitch by one iota. These are exactly the conditions in which thousands of successful network marketing ventures have begun.

Sure, some overly zealous networkers may tell you how rich you’re going to get, how easy it is, and how fast it will happen. Please note, I didn’t say that! Network marketing is a serious business, no less than any other you might consider earning your living at for the rest of your life. The reality is, network marketing is hard work, it takes time, and you’ll probably lose some money in the beginning. The difference is, most of the hardest work is done by someone else, your work is done when you choose to do it, it typically takes a few months to turn a profit (some accomplish this in the first month) rather than a few years, and what amount you might lose at first has one, two, maybe even three fewer digits compared to the start up loses of most conventional businesses. Yet, you can still reap the tax benefits of operating your own business, and you have just as much, if not more income potential as most conventional businesses!

Imagine becoming financially independent in one to three years without having to spend thousands of dollars each month, without having to work long hours seven days a week, without even having to quit your job during the development stage, and without having to get a business degree, or hire someone who has one?

 If you are considering starting your own business, and you’ve got access to, let’s say, $50,000 in start up funds (a very modest assumption), imagine how profitable you could be, and how quickly, if you didn’t have to hire employees, you didn’t have to lease an office and/or store front and/or warehouse, you didn’t have to pay sales or payroll taxes, you didn’t have to spend one penny on R&D, graphics design, or development of promotional material, and you didn’t have to hire an accountant, lawyer, or business consultant. And, imagine how much more money might go into your pocket if you didn’t need business partners to help you finance and run the business. Think about it, and try not to become giddy.

Now for the really fun part.

Imagine buying a McDonald’s franchise for the modest sum of one million dollars. The business fails. You call up McDonald’s corporate and ask for a “Return Authorization Number” so you can get your franchise fee back along with a reimbursement check for your unsold supplies and stock. While imagining this scene, also imagine the sound of sirens wailing in the background. That would either be the paramedics coming to assist the poor corporate officer who you’ve just induced into a fit of hysterics, or an ambulance coming to take you to a really nice, soft room.

In network marketing, not only is this not an absurd scenario, it’s the law! One of the aspects of a legitimate, legal network marketing company is the ability of a failed distributor to get a full refund (usually less a 10% restocking and processing fee) on all product and marketing material that is in resalable condition. So, if pursued conservatively and intelligently, there is a monumental reduction in risk relative to conventional business start ups, yet with a comparable or even greater profit opportunity.

Those of you who are already actively involved in network marketing, be aware that the vast majority of your “outer circle” prospects (those who’ve never been involved in network marketing) do have at least the desire to own their own business, as opposed to working for someone else. You don’t have to talk them into the benefits of something they’re already dreaming about having. But, they also have some very powerful, legitimate fears about starting their own business. You’ve first got to open their mind to the idea that there is still a realistic way to achieve that dream, and then define, or perhaps defend, the concept of network marketing (gratuitous plug: my “Case Closed” cassette tape is designed to accomplish both of these steps for you). Only then should you introduce the benefits of your particular network marketing program. Think of it like this: before you can pour fresh, hot coffee into a thermos, you must first open it, then pour the old, stale coffee out, right? Think of your business-phobic prospect as a sealed thermos full of cold coffee.

Now, if you are considering starting your own business, or you want to but have always been apprehensive, open your own mind to network marketing. Think it’s too good to be true? I challenge you – find the catch! If you’ve never pursued a network marketing venture it must be for one of two reasons: you just didn’t know about it, or you have a prejudice against it. And that’s exactly what it is, a prejudice. You have prejudged this business based on what someone else has told you about it (usually someone who has failed at it, or who has also never been involved themselves). In other words, you’ve chosen to adopt someone else’s opinion of this business. Don’t let other people do your thinking for you. Make your own decision based on your own evaluation.

Check this business out. Really do your due-diligence. And when you are done, I would defy anyone, even the most devout skeptic, to not experience a significant paradigm shift.

I dare you to look and not be intrigued!

 

 

 

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Ponzi & Pyramid: Brothers in the Scheme Family

May 11, 2009 1 Comment

And Why Network Marketing is No Relation

By Len Clements © 2012

Had Charles Ponzi and Bernie Madoff switched birthdates, Ponzi would likely have been sentenced to luxury apartment arrest for perpetrating a “Madoff Scheme”. Indeed, Ponzi bilked investors out of a mere $15 million back in the 1920s (about $154 million in today’s dollars), and even managed to pay a good chunk of it back. Madoff madeoff with about $50 billion – that’s with a B – in literally today’s dollars! This makes Mr. Madoff Guinness eligible for the world record as largest Ponzi Scheme in history – well, until around 2016. That’s when something called Social Security will officially meet the definition.1

The guy2 who popularized the pyramid scheme was probably named “Ogg” (yes, with two g’s) and drew his circles on a cave wall.

Although doomed at birth by the same disease, called mathematitus, pyramid and Ponzi schemes are in fact a very different organism.

A Ponzi scheme differs from a pyramid in two primary ways. First, a Ponzi usually has a single administrator (perpetrator) who acts as the hub for all transactions. A pyramid scheme is usually initiated by someone, but then he initiates others to perform the same recruitment process. Eventually everyone in the scheme not only invests into it but does so with at least the intention of enticing others to invest as well. A Ponzi has one prep and many victims. A pyramid has many perps and many victims, and most participants are both.

The second, and most key distinction between a Ponzi and a pyramid involves the amount of each investment that is paid back to the participants. In both schemes the proceeds promised to each investor is always greater than their original investment, of course, but how this is accomplished is where the chasm between the two schemes widens by miles. In a Ponzi, for every dollar paid in there is more than one dollar paid out. In a pyramid there is usually a small portion kept by the promoter (his “administrative fee”) and the rest, but never more than one dollar total, is used to pay off previous participants. For example, Charles Ponzi promised a 50% return on investment within 45 days. So if Paul gave him $1,000, he needed to come up with another $500 within 6-7 weeks to cover his promised $1,500 return. How he did that was by finding Peter, another $1,000 investor, and using half of his investment to pay off the first investor (as in “Robbing Peter to pay Paul”). But now the second investor will be expecting a $1,500 payment, so Ponzi had 45 days to find another $1,000 investor. His investment, added to the remaining $500 from the previous one, allowed him to pay off the second investor. Although now, with no money left in hand, and needing two more $1,000 investors to pay off the $1,500 promised to the third investor, he had no problem finding them since the first two happy investors were giddily telling everyone they knew about the success they just had with Ponzi’s amazing investment opportunity3. So if 100 people paid Ponzi $1,000 each ($100,000 total) he, personally, would have to come up with $150,000 to pay them all off and make everyone happy. In a pyramid scheme the total amount promised in payments is never more than the total amount paid in. For example, in the “Airplane Game”, a classic pyramid scheme from the 70s and 80s, a participant paid $1,500 to participate. Once they had filled their 2×3 matrix (two “co-pilots”, four “crew members” and eight “passengers”, or 14 total participants) they become a “pilot” and cashed out for $10,000. However, 15 participants (including the “pilot” himself) generated $22,500 into the scheme, well more than was needed to pay off the “pilot”. Yes, a chunk of that $22,500 would also be used to pay off the two “co-pilots” when they promoted to “pilot”, but by then they would have each brought in eight more $1,500 investors. Here’s another way of defining the difference: If every participant in a Ponzi scheme were to simultaneously demand only their initial investment back, the funds would not be there to pay anything at all to most of them (as Madoff’s victims discovered). However, if this were to happen in a pyramid scheme, sufficient funds should still be in the bank (or, more likely, stuffed in a grocery bag under the bed) to cover most repayment demands (less that “administration fee”).

Let’s put this in networker marketing pay plan terms, if only for a moment. If a plan actually paid 20% down seven levels, a 140% total pay out, that would likely be a Ponzi scheme regardless of the value of the products sold. The plan pays out more than it takes in. If a plan paid 10% down five levels, a typical 50% pay out, it cannot be a Ponzi scheme since it does not pay out more than what it takes in (no more than 50 cents is paid out of every dollar paid in). However, if there is no product involved, or the product could have no value to a bona fide end user who is not participating in the scheme, then it could still very well be considered an illegal pyramid.

And that’s where legitimate multilevel marketing companies break away from the pyramid/Ponzi branch of the “income opportunity” family tree. In fact, if we were to create a chart similar to the “biological classification of organisms”, multilevel marketing programs wouldn’t even be in the same Kingdom or Phylum, let alone be the same Genus or Species. Where the branching occurs would be all the way up at “legal” and “illegal”. Much like the presence or absence of a spine will determine an organism’s Phylum (us humans are vertebrates), so does the presence or absence of a bona fide product of value in our comparable classification chart. Indeed, it is the very backbone of a strong, legally sound MLM opportunity.

Although rare, some MLM plans have goofy pay out structures where the various percentages do add up to over 100%. If true, this could be deemed a Ponzi scheme. However, it never is. The excessive pay out is always an illusion. Usually the company is applying these percentages on points, not dollars. This is often called “Bonus” or “Commission” volume (BV or CV), and the points are typically around half of the wholesale dollar value. For example, it’s easy to pay 10% down eleven levels (110%) when a $20 product applies only 10 points to the pay plan (i.e. they’re only paying these commissions on half the product volume). An MLM program is hardly ever even accused of being a Ponzi scheme unless the accuser is simply ignorant of the definition.

Pyramid scheme is another issue. As we have seen from myriad legal precedent, it is not the MLM model, nor even the type of compensation plan, that gets a company in the crosshairs of the SEC or FTC (or worse, ABC, CBS or NBC). It’s the type of product they are offering, or more specifically the motive for buying it. Yes, the complete absence of a product will cause more red flags to wave than a Russian parade, but pyramid promoters today rarely make their scheme that obvious (although, “gifting” programs would qualify). The vast majority of illegal pyramids – which are usually disguised as legal MLM opportunities – offer a mere token product that is purchased only to meet a quota, or one that is of value only to a distributor. For example, if your company has a private labeler crank out a basic, low quality fruit juice, then marks it up to $50 so they can afford the product they are really selling – “the most lucrative pay plan in MLM history” – you might be a pyramid scheme. If your company pays a bonus on the sale of sales aids, marketing tools (such as a web site) or opportunity specific training – all items only a distributor would buy that have no value to anyone else – you might be a pyramid scheme. If you’re selling a product that can realistically be resold, and has value to, a non-distributor, and that’s the only thing you can earn multilevel commissions from, then you’re very likely not a pyramid scheme. And, based on published statements directly from the FTC and several states, this would still apply even if most of those products were being sold to only distributors. Distributors can be customers, too. Again, it all boils down to their motive for buying the product. Are they buying it just to meet their qualifications? Not good. Because they love their company’s products and actuallywant them? Very good.

As I said, pyramid schemes today try to camouflage themselves to appear as MLM opportunities because they want to trade on our industry’s legality and legitimacy. This has become ironic in that their very efforts have created a guilt by association that has now causes our profession to become legally suspect. Rather than us raising their image, as they intended, they have dragged ours down. And now some regulators, and virtually all media, will at first glance see all ethical, professional, and legal MLM businesses as suspect. Basically, they’re profiling. Imagine if all bank robbers were to start dressing up as priests so they won’t raise the suspicion of bank security. Eventually, and quickly, every priest that walked into a bank would become more suspicious! That’s what’s happened to us.

There are pyramid schemes, there’s its cousin the Ponzi scheme, and there are multilevel marketing opportunities. Most associate a pyramid with a Ponzi and via versa. Alas, only the one with the least amount of common DNA, only multilevel marketing, suffers a guilt by association with both.

 

1. With $785 billion collected from 163 million workers and $585 billion paid to 50 million recipients, it’s still not quite there – yet.2. And it probably was a guy – check out my article Silent Sirens3. Which Ponzi claimed was based on profits earned from international postal reply coupons.

2.  And it probably was a guy – check out my article “Silent Sirens” at www.marketwaveinc.com/articles.asp.

3.  Which Ponzi claimed was based on profits earned from international postal reply coupons.

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Product Return “Gotcha’s!”

January 10, 2009 Leave a Comment

By Len Clements © 2008

As the annual convention for the Distributor Rights Association (www.mlm-dra.com) and the Multilevel Marketing International Association’s (www.mlmia.org) first Distributor Conference fast approach, it got me thinking about all the ways that MLM companies design their written policies (and unwritten tactics) to protect their own interest. After all, the Distributor Agreement we all signed represents what the distributor agrees to do. Distributors never ask the company to sign a company agreement. So, naturally, the regulations and policies described in these agreements are pretty one sided in favor of the company.

Fortunately, most MLM companies don’t abuse this power, and they show great discretion and some latitude in applying their policies. They recognize that their distributor force is their lifeblood, and they try not to disenfranchise and discourage them.

Unfortunately, some don’t get it. Product return policies, and more importantly practices, are one area where the company’s true attitude towards their distributors are exposed. No company, in any industry, likes to give back money. But in many cases that return can eventually be profitable. Good will, trust, positive image and reputation are created by making people happy. Lack of a return can result in a far greater cost. One famous (now infamous) MLM company refused the return of product to about 20 people, who all filed complaints with the state AG. Those complains triggered an investigation of the company resulting in its eventual closure and a criminal indictment against the owner. The total amount of refunds requested by these 20 people was $8,000. It was probably the costliest eight grand an MLM company ever saved.

Here are a few ways some companies can getcha’ when you try to return product.

1) Most company policies state that the products can be returned if they are in the current product line. So every 30-60 days they make small, token changes to the formulations making most of the inventory in circulation “outdated” and thus ineligible for return.

2) The company recommends that the product be opened and inspected, cleaned, or loaned out, and then refuses to except it back because it is no longer in “resalable condition.” A couple major water/air purification companies used to do this. They would recommend that the water filter units be opened and “flushed” before attempting to sell them, and/or they trained their reps to use the very effective “puppy dog” marketing approach (where you lend the unit to a prospect for a week, they get attached to it and buy it rather than have you take it back). Of course, once the unit is used in this manner it becomes, well, used. And you can’t return it.

3) They accept returns within a short period of time, say 15-30 days, then stonewall the process until it’s beyond the return period. Either they’d claim the RA number wasn’t valid, they never received your written request, you sent the products back to the wrong address, you call to get an RA number and you’re put on hold until you give up, your call is never retuned, etc..

4) By returning your entire inventory your distributorship is automatically terminated and you may never reinstate it. Of course, most people who return everything are probably quitting anyway, but not always. And even if they are the fear of never being allowed back can be dissuasive (fear of loss is a very powerful motivator).

5) The company applies the ol’ “70% rule.” That is, they state in the P&Ps, and many times right on the order form, that “70% of all previously purchased inventory must be resold or consumed” before another order can be placed. Naturally, the distributor orders anyway regardless of how much inventory is still remaining. Then when you try to return your inventory the company says, “But wait… you agreed not to place any orders unless at least 70% of your past orders were gone, so we’re only accepting 30% of your inventory back” (which may still be subject to other discounts as described below). If you explain that you actually still have most of your inventory, they will counter by claiming you then violated policy by continuing to purchase more.

6) Here’s the most common tactic (the other five are, fortunately, not common practices): In virtually every distributor agreement it says that the products can be returned less a 10% restocking (admin, handling, etc.) fee, and “less any commissions paid.” The distributor usually assumes this means less any commissions paid to him or her – and many times that is what it means. But sometimes it means less the commissions already paid to your upline on those products! So if the plan pays, let’s say 50%, then you are really going to get a 40% refund (50% commissions paid plus 10% restocking fee) not a 90% refund. The phrase “less commissions paid” is rarely clarified as to which method will actually be used.

7) Then there’s this classic – which has only happened once, to my knowledge. And this is absolutely a true story (that will be hard to believe).

The CEO of an MLM company noticed that quite a few bottles of their weight loss capsules were being returned only partially used. So he sent a notice out to all distributors that since the entire 30 day supply of the product had to be used before the results could be fairly judged, the company was no longer accepting returns of this products… unless the bottle was returned empty!

No need for the DRA’s assistance on this one. Most distributors found a way around this policy all on their very own.

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GasUpUSA: Points of Concern

January 12, 2003 Leave a Comment

By Len Clements © 2003

GasUp USA claims to offer a pre-paid gas card that provides a “21% savings” on gasoline purchases, as well as a discount benefits package, and most recently telecommunication services.  While the corporate web site seems to emphasize the benefits package and long distance service a bit more than the gas card (and more and more so as time goes by), the overwhelming emphasis in the field seems to be on the idea of getting cheaper gas.  Clearly that’s the focus of the program.  After all, the company is called “GasUp USA” (here on called “GasUp”).

Basically, the program works like this:  You enroll as a “Member” for $174.98 ($159.99 plus a $14.99 “check processing fee”), which is renewable annually.  It costs $99.99 to enroll as an “Independent Representatives” (IR), which gives you the right to sell memberships and build a downline.  However, if you enroll as a member as well, the $99.99 IR fee is waived.

The membership entitles you to a fairly comprehensive but typical benefits package offering various products and services (discounts on hotel rooms, rental cars, doctor visits, grocery coupons, legal service, free credit card protection, and much more).  As a member you also have the ability to purchase prepaid gas cards that allegedly save you 21% at the pump.  Members can only use the membership benefits, but can’t sell memberships or earn downline commissions.

As an IR you can enroll other IRs and sign up members and they are all placed in your downline.  Bonuses and commissions are based on a binary compensation plan.  You earn up to $100 for every nine members that fall below you (with a minimum of 3 in one leg) plus a free gas card.  GasUp claims their binary is “non flushing,” meaning all unpaid downline volume carries over with no maximum limit.

GasUp launched on July 1st, 2002 and claims to have 78,000 members (as of 1/17/03).1

The two greatest concerns I have deal with the legality and the financial viability of the program.

Pyramid Concerns

The question here, as it always is when dealing with this not so cut and dry issue, is;  Can the last person in make money from all income sources? In other words, are there any types of compensation related to GasUp that are directly tied and dependent upon the recruitment of distributors (IRs).

Technically, the answer is no.  But here’s where it’s not so cut and dry.  Many quasi-MLM programs have been attacked or shut down by regulators for being illegal pyramids that had perfectly legitimate products of value.  Jewelway and Equinox come to mind.  The challenge relates to the motive for buying the products.  Did the reps really want the products, or were they just buying them as a token act to meet a quota in the comp plan?  If only reps are buying your product, then you would have to recruit to make money.

The only reason I see that someone would buy a GasUp membership is either to get the discount benefits package, or the discount on gas.  However, comparable benefits packages sell for less than half the GasUp membership fee elsewhere.  I’ve found one almost identical offered for $199 for five years (rather than $174.98 for one year).  In fact, selling benefits packages at an inflated price to support an MLM comp plan has already been legally challenged – and failed.  There were a rash of such program in the early 90’s, the most notable of which was called Consumer’s Buyline (CBI).  CBI offered a similar package for $270 per year, and they were one of the cheapest.  However, they were declared an illegal pyramid because such packages at the time were normally going for around $35 per year, so it was viewed (by the AGs of several states) that, although the package itself may have had true value, it was only being purchased by reps who needed to qualify for income.  Same with FundAmerica in the late 80’s.  They had sold 95,298 memberships and had 88,960 distributors (an average of 1.07 members per reps).2  

So while the $174.98 price tag is dubious on it’s own, there is another aspect to the membership – the alleged gas discounts.  The problem here is, this isn’t really a discount on gas, it’s a discount on cash!  The “gas card” is really just a debit card that can be used on any item the gas station sells.  You could use it for auto servicing, tires, candy, beef jerky, milk, or what ever else is in the station’s store.  This debit card comes loaded with a $25 balance, and you buy it for $19.75.  So, when you fill your tank and the pump says $25.00, you pay the station $25.00 – but you bought that $25 for $19.75.  So you didn’t get a 21% discount on gas from the station or gas company, you got a 21% discount on cash from GasUp USA.

Basically, the program is designed as follows:  If someone pays $174.98 cash to become an IR/member, then gets 9 others to pay $174.98 cash (for the right to obtain $25 in exchange for $19.75), they earn $100 cash, plus $25 (for the free gas card).  So, what exactly is the product?  It appears this entire transaction (between GasUp USA, the IR, and the members) is simply an exchange of various forms of cash.

Now, would someone pay $174.98 just for the benefits package (with no interest in the income opportunity)?  Arguably not.  Throw in the right to exchange $19.75 for $25.00, and allow members to do that eight times a month, and you’ve got a deal!  That’s like getting a $504 rebate on your membership ($5.25 profit per card, eight times per month, times 12 months).  That’s a $329 profit and you haven’t even used the benefits package yet.  But then, whether or not discounted cash validates the membership has yet to be tested in court.

But it may soon.  The Attorney General’s office of Kansas issued a warning to consumers on Nov. 22nd 2002 calling GasUp a “pyramid scheme” and citing that the benefits package “appears to be readily available to consumers (elsewhere) at no cost.”3

On December 6th of 2002 the Idaho AG’s office issued a “Consumer Alert” siting GasUp reps in that state were claiming GasUp was “reviewed, approved and endorsed” by the Attorney General himself.4  The alert not only adamantly denied any such approval or endorsement (no AG of any state would ever do this for any company), it went on to include a short primer on what factors they look for in determining whether a marketing program violates Idaho’s pyramid law.

Another legal red flag involves GasUp’s no refund policy.  What are commonly referred to as the “Amway safeguards” (based on the FTC vs. Amway case of 1979)5, which all responsible MLM companies attempt to abide by, include a full refund policy (less a standard 10% fee).  Stated in red letters on the on-line enrollment form is the statement: “All Sales are final.  GasUpUSA is unable to offer refunds.”6

Finally, there is much legal precedent that simply paying multilevel commissions on “memberships” is legally problematic.  Especially when those members, who are not participants in the income opportunity, are structured into the downline matrix right along with the reps themselves.  In such cases, income is not derived from the retail profit of a sale to an “end user” but rather entirely from overrides on the downline.  In GasUp, there is no provision for retail profit.  You don’t buy a membership at wholesale, mark it up and resell it at a profit.  Reps buy a membership for the same price as non-reps, and they all go into a 2-wide matrix structure (such is the downline hierarchy in a binary compensation plan).  For example, in the case of Missouri vs. Membership Marketing (a/k/a Five Star Plus)7, the Attorney General sited the fact that “there is no resale outside the matrix.”  In the case of Illinois vs. Unimax8 (a membership based pyramid scheme), the AG made the case that “commissions earned by marketers are contingent not on sales of any goods or services (outside the comp plan)… only on bringing new individuals into the Unimax plan. The greater the number of subscribers a marketer sponsors, the greater his monthly commission check will be.”  Note the AG here again takes issue with non-rep customers (subscribers) holding positions in the downline right along with distributors (marketers). 

Ponsi Concern

Ironically, the very thing that may (emphasize may) get them off the hook on the pyramid issue, the gas card, raises the greatest potential legal challenge of all.  It could easily cause GasUP to be declared a Ponsi scheme.

[For a detailed description of a pyramid and a Ponsi scheme, and the difference between them, go to http://www.marketwaveinc.com/articles/pyramid.asp]

Put simply, a Ponsi scheme is one where the payout is greater than the income for each transaction, thus requiring an endless and ever increasing supply of participants to maintain the scheme.  For example, Charles Ponsi, back in the 1920s, offered a $1,500 return on a $1,000 investment.  The $500 difference came from the next investor’s $1,000 payment, and so on.

I don’t want to get bogged down in a technical analysis of the binary pay plan, but trust me when I say (because I have done an extensive technical analysis of the binary pay plan) when one doesn’t “flush” volume, it essentially pays infinitely deep.  Most plans base their stopping point on a certain number of levels, say six.  Volume below that level is outside the pay range of the plan.  Binary plans base their stopping point on sales volume, typically $5,000 in each of two legs, which in most cases comes out to about six levels of people, so not a lot of difference, just different methods of arriving at the same goal.  That being, to avoid paying infinitely in depth – because if you did you’d go bankrupt!  Some binary plans in the past have already tried this “no flush” gimmick.  Sure enough, the larger the national sales force got (i.e. the company’s downline) the higher the total payout skyrocketed (I’ve been involved as a consultant in specific cases where this happened, so this isn’t theory).  Then, along came the non-flushing binary with the “cap” on payout.  The now defunct SkyBiz was one of the first.  They had a 70% cap on their payout, so although they bragged about not flushing volume, they effectively created the same depth limitation by capping the overall payout itself rather than the volume or the levels you are paid on.  GasUp USA does the exact same thing.  It’s just smoke and mirrors.

So if GasUp is paying out 70% of the membership fee in commission this would potentially leave them with a gross profit of $48.00.  Therefore, it would seem that after the ninth card is purchased by the member (sometime early in their second month), GasUp USA would be operating at a net loss.  Even if the plan actually pays less than 70% now, it is mathematically inevitable that it will reach the 70% cap since they are not “flushing” the excess volume.  Since it would behoove the member to take full advantage of the eight card maximum purchase per month, GasUp USA would be exposed to a potential $456 per member loss, per year ($504 – $48).  This isn’t even considering the up to $750 per month in free gas cards that an IR can earn (creating a potential additional net loss of $9,000 per year).  What other revenue source is in place to compensate for losses of this magnitude?  GasUp claims they exist – in the FAQ section of the corporate web site, where they attempt to address this questions specifically – but fail to mention exactly what they are.

It gets worse.

The discount benefit package has a wholesale cost to it.  I tried to find out what that is from the “American Benefits Counsel,” the organization that GasUp claims is supplying the package.  The only problem is, “American Benefits Council” (note the different spelling of the last word) doesn’t supply such benefit packages and they had never heard of GasUp USA until recently when they started getting calls asking about them.  They are also considering legal action against the “American Benefits Counsel” for trademark violations9 – assuming such an organization even exists (an extensive web search using the word “Counsel” failed to locate such a company).  However, according to research done by Corey Augenstein (MLM Insider)10, such packages typically wholesale for under $15 when bought in bulk.  What ever the amount, that must also be deducted from the gross profit on memberships.

There’s more.

According to the GasUp application the $99.00 charge to be an IR only (without a membership purchase) was “at cost.”  The fee was waived if the enrolling IR also purchases the membership.  But, if it costs GasUp $99.00 per year to administer a distributorship, how is that cost eliminated just by eliminating the fee?  Assuming the “at cost” claim is truthful (a generous assumption), then an IR’s membership would provide GasUp with an annual gross profit of $60.95 ($159.99 – $99.00).  But, we still have to deduct that 70% pay out!  That’s a loss of $51.00 even before the first gas card is purchased!  Subtract the $504.00 in annual loss on the card and GasUp is in the red $555.00 per member.

Of course, very few, if any, will sign up for $99.00 and not buy the membership.  To even have it on the application is window dressing.  But still, is there a $99.00 cost to GasUp, or isn’t there? Curiously, the “at cost” claim was recently removed from the on-line application.  However, it is symptomatic of an illegal pyramid for an MLM company to make a profit on distributor fees, sales aids, or enrollment kits (else the company is making a profit from recruiting).  If the $99.00 IR fee is still “at cost” then everything I just described is accurate.  If it’s not, then their claim was deceptive in the past, and they’re making a profit from distributor fees now.  It’s a no win situation.

GasUp makes a rather lame effort to address this “how can we do this” question in the FAQ section of their web site11.  Here’s what they say:  “This (the gas card) is a promotional item that is taken advantage of by a relatively small number of our customers, but is viewed as an attractive option from a marketing standpoint.”  I guess they deserve credit for being candid.  But really, what did they just say?  First of all, the ability to exchange $158 for $200 every month is exercised by a “relatively small number” of members?  That’s pretty hard to accept, isn’t it?  Especially considering it was such an “attractive” option when the member enrolled.  Elsewhere in the GasUp web site they state, “You ask 10 people if they want to save money on gas, and 10 people will say yes.”  I agree.  So why would a “relatively small number” of those who signed up for this actually do it?

They further state: “Although it is attractive from a marketing standpoint for consumers, the gas card bonus is of more interest to our representatives in their compensation payout and the overwhelming attraction to consumers is the extensive array of consumer benefits in the consumer services package that we sell to the retail consumer.”  But, IRs and non-IR consumers have identical membership privileges.  Is GasUp suggesting that IRs are not heavily emphasizing the ability to trade up $158 for $200 every month to consumers?  Or that consumers are not overwhelmingly attracted to this aspect of the membership?  But they do have an “overwhelming attraction” to overpaying for a discount benefits package that they could get from numerous other sources cheaper? Come on.

Even if we assume GasUp’s explanation is accurate – that is, they can afford to trade $200 for $158 because so few members ask them to – what if the average IQ of their 78,000 members suddenly rises 50 points and they do?

Where is the difference coming from?  How can GasUp afford to do this?  According to GasUp, “We look upon this as a marketing expense, traditional retail companies spend millions on advertising. We plan to spend millions helping people save on gas.”  This rationale has typically been used by other MLM programs to explain the pay out in their comp plans – that is, it’s an expense in lieu of advertising.  I’ve never heard of a company deliberately building in a net loss on one of their main products and calling it a marketing expense.  But I do agree with their statement – it’s going to cost them millions.

If, indeed, they are paying out more than they are taking in, then they will need an infinite number of new members to pay off the previous members.  Right now, GasUp is very likely profitable.  In the beginning they get the full annual membership income, and the expenses are burned off over the year. With only about half of the annual expenses paid out so far on the earliest members (those who signed up in July), and most memberships less than three months old (they averaged 331 new members per day their first 134 days, and 508 their last 66 days), GasUp is likely rolling in cash.  However, based on the most optimistic scenarios (like the one described below) GasUp will start losing money on the average membership sometime during the second six months.  There’s already anecdotal evidence of a cash flow squeeze by the recent 16.7% increase in membership fees.  Previous to Jan. 1st, the membership was $149.99.  Although the company’s 24 hour recorded opportunity call still sites this price (17 days after the price hike), the cost now actually totals $174.98.

Let’s be very conservative and assume GasUp is only paying out 50%, and the average member only buys one-fourth as many cards as they are allowed (so we’re assuming they voluntarily choose to forgo $31.50 in free cash every month – that being, six of the eight cards they’re allowed to buy).  Here’s what would happen:

Income

Membership $159.99

24 Gas Cards (2 per mo.) 474.00

Total annual income $633.99

Expenses

Annual IR “cost” $99.99

50% payout on membership 80.00

24 Gas Cards (2 per mo.) 600.00

Total annual expense $779.99

Total net loss $146.00

As of this writing GasUp claims to have almost 78,000 members since their launch in July of 2002.  Even if we further assume, absurdly optimistically, that 100% are members and none are IRs thus eliminating the $99.99 IR administration cost completely (or, we assume it’s actually far less than the stated $99.99), GasUp is still bound for a first year loss of over $3.5 million!

If we assume, worst case, they are paying out 70%, it really costs them $99.99 to administer an IR for a year, and virtually all members are also IRs, and members take full advantage of the eight card purchase limit per month, GasUp will lose over $43 million their first fiscal year.

Or, split the difference and they lose about $23.3 million.  No matter how you cut it, at their current pace, they’re going to lose millions.

And all of this isn’t even counting the day to day operating expenses (I’m assuming the $14.99 annual check processing fee is a break even deal), the cost for the benefits package, or the up to $750 per month in free gas cards that can be earned in the comp plan.

The only other revenue streams available to GasUp are small fees charged to maintain the gas card, and whatever small profit they make from reselling a newly offered long distance and cell phone service.  But these would likely make up only a small fraction of the loss. 

But then, this all also assumes GasUp management doesn’t wait until the inevitable point where cash flow peaks, then just as it begins it’s slide down the other side of the bell shaped cash flow curve, dump the whole scheme and walk away.  I’m not saying they will, nor do I have any information that suggests that’s the plan.  It’s just the one that would make the most sense, at least financially.

Management and Company Concerns

Would GasUp management do such a thing?  I have no idea.  What I am pretty sure of it what constitutes libel – so let me be very clear about this:  I define “scheme” and “scam” quite differently. An illegal scheme is one where it’s founders and operators may be genuinely unaware of it’s illegality, and may have true and honest intentions.  They’re not bad people, they’re just ignorant of the law.  Then, their are those who run scams.  These people are very much aware that what they are doing is wrong, and don’t mind hurting others to effect their own financial gain.  Is GasUp a scheme or a scam?  Again, I have no idea.  I’m not a mind reader.

Having said that…

GasUp “management” appears to be a team of one – Mr. Eric Dalius.  In the “Company & Leadership” section of the corporate web site,12 there is only a brief bio of Mr. Dalius, GasUp’s founder and CEO (the first five-plus months the company was in business, the company profile page read only “Coming Soon”).  His bio states that he earned a bachelor’s degree in marketing from Penn State University and has 13 years experience in network marketing.  He also claims to have had great success in the areas of mass-marketing, telecommunications, nutritional products, internet services, and travel. Prior to network marketing, Mr. Dalius worked with a Fortune 500 telecommunications company and was a top sales representative.

What his bio fails to mention is that he was fired from that company (MCI) in May of 1995.  According to a suit filed by MCI, Dalius and others defrauded MCI and infringed on it’s trademark by selling free calling cards as part of a kit for a nutritional products company.

Also in 1995 Mr. Dalius was investigated by the U.S. attorney general’s office and his office and home were search and records seized by the FBI.  He was co-owner of a company called Telecom Solutions which was accused of wire and mail fraud.  Some cards sold by Dalius’s company were inoperable.  Others were offered at a rate of 1,030 minutes for $100, or 9.7¢ per minute (a great rate at the time).  However, the cards were really for only 30 minutes and the 1,000 minutes were a “bonus” that was “subject to availability” – which Telecom failed to mention on the order form.  The company was also accused of refusing to pay refunds to customers that claimed they never received their card or the card didn’t work.

In January of 2000 Eric Dalius was formally indicted by a federal grand jury on fraud charges related to Telecom Solutions.  According to the indictment Telecom accepted money for calling cards before they ever contracted with a long-distance carrier (eventually, AT&T and LCI did provide service, but cut off Telecom for non-payment).

In April of 2000, before a U.S. District court, Mr. Dalius admitted to conspiracy to commit fraud and wire fraud.  He was fined $38,000 and sentenced to one year in a work-release center.13

The Pennsylvania Better Business Bureau reports that GasUp has resolved all complaints presented to it. The complaints “have alleged failure to deliver the promised card and inaccuracies about the company’s promotion as stated on the website… failure to credit consumers’ accounts and also dissatisfaction that the company’s phone line is constantly busy.” GasUp has responded in most cases by providing refunds (in spite of their own “no refund” policy).14

GasUp corporate recently announced that they were changing banks.  In a public announcement they claimed they had “out grown the operating parameters of our current financial institution” and in addition their move to take GasUp global had forced them to “ally with a banking institution that can handle banking procedures of the magnitude in which we are currently dealing.”  This was offered as part of an explanation as to why checks would be a week late.

Their bank was Patriot Bank.15  When I called them to ask about GasUp I was informed they do not discuss client relationships, or ex-clients in this case.  So I called back later and posed as a potential business client.  I inquired as to their limitations and global capabilities and was curtly informed that Patriot Bank has been in business for almost a century, has almost a billion dollars in assets, is publicly traded on the NASDAQ (symbol: PBIX), and were perfectly capable of handling the banking needs of “Microsoft” were they a client.  Curious.  They could handle the banking needs of Microsoft, but not GasUp USA?

After speaking with GasUp’s current bank, First Union (soon to be merged with Wachovia Bank)16 I discovered that they are not conducting an “internal investigation” of GasUp and they are (at least as of Jan. 16th) accepting for deposit GasUp commission checks, contrary to internet rumors. 

However, according to a confidential “corporate update” e-mailed to GasUp field leaders, as of December 24th Patriot bank has frozen the funds of GasUp USA allegedly to cover any potential charge backs.  This likely explains why commission checks are now almost four weeks late.  The update alleges that there will be a court hearing on Friday, January 17th, in an effort to have the funds released.

Based on my experience over the years as a consultant to start up MLM companies, it is a standard practice during the prelaunch phase to become a member of the Better Business Bureau (a simple and inexpensive process) and to trademark the company name and slogans.  Curiously, now almost seven months after their launch, GasUp USA has done neither.

GasUp did hire Gerald Nehra17, one of the most reputable MLM attorneys in the country.  Last October Mr. Nehra resigned as their attorney siting only a “conflict of interest.”  Maybe that’s why he’s one of the most reputable attorneys in the country. 

Conclusion

Until a lot more questions are answered, and the smoke clears from the legal arena, I would strongly recommend that GasUp USA be avoided.

And yes, I did attempt, more than once, to get my questions answered directly from Mr. Dalius.  He has failed to respond.

 

1. http://www.gasupusa.com
2. http://www.mlmlaw.com/library/cases/mlm/feddistrict/canguyen.htm
3. http://www.ksag.org/contents/news-releases/2002news/gasupUSA.htm
4. http://www2.state.id.us/ag/newsrel/2002/pr_dec062002.htm
5. http://www.mlmlaw.com/library/cases/mlm/ftc/amway.htm
6. https://www.gasupusasecure.net/signup.asp?pagename=
7. http://www.mlmlaw.com/library/cases/mlm/state/momember.htm
8. http://www.mlmlaw.com/library/cases/mlm/state/ilunimax.htm
9. http://www.worldwidescam.com/gasupabc.htm
10. http://www.mlminsider.com
11. http://www.gasupusa.com/faq.asp?pagename=
12. http://www.gasupusa.com/about_us.asp?pagename=
13. http://pqasb.pqarchiver.com/mcall/  (search for “Eric Dalius”)
14. http://www.easternpa.bbb.org/report.html?compid=B5000946
15. http://www.patriotbank.com/
16. http://www.wachovia.com/welcome/?targetHost=www.firstunion.com&targetPath=/
17. http://www.mlmatty.com

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