Pyramid Nation – Robert FitzPatrick

      FitzPatrick’s newest work (2002) is a 62 page booklet titled “Pyramid Nation: The Growth, Acceptance and Legalization of Pyramid Schemes in America.” Oddly, the cover art depicts Pieter Brueghel’s (1525-69) rendering of the Tower of Babel, which bares only a vague resemblance to a pyramid.
Let’s begin by dissecting the title itself.
      “Pyramid Nation.” The title and cover art is misleading, at least geometrically. MLM downlines are, in fact, diamond shaped. Ironically, network marketing is the only form of business that does not form a pyramidal company hierarchy.
      “Growth.” Really? Is FitzPatrick admitting that after 68 years of existence, this supposedly saturated industry is, indeed, still growing? This, of course, totally contradicts the very backbone of practically every Anti-MLM Zealot’s primary argument. It is also quite true!
      “Acceptance.” Yes, MLM is gaining more and more acceptance over time. FitzPatrick is right again. In so many words, he then tries to explain this away by suggesting we’re just all getting better at brainwashing people, we’re getting lazier in our investigation of the opportunities we pursue, more ignorant of what defines illegal schemes, and more lax and less attentive in our regulatory duties. The whole time ignoring the easiest and most obvious reason. MLM is acceptable.
      “Legalization.” The word implies MLM is in the process of being legalized. Yet, MLM has been formally recognized as a legal form of business and compensation model in all 50 states for over 25 years. MLM simply can’t get any more legal!
      FitzPatrick first takes on the FTC for it’s “failure to oversee multilevel marketing companies.” But only a single page flip away he states that “between 1996 and 2000, the Federal Trade Commission has prosecuted more pyramid schemes than in the previous seventeen years.” Keep in mind that to FitzPatrick “multilevel marketing companies” and “pyramid schemes” are synonymous. He backs up his point by dropping names such as Equinox, Jewelway and Five Star Auto Club, among others. He suggests that the only reason the FTC hasn’t prosecuted the other 2,100 MLM companies is not because the others have done nothing wrong (the most logical and obvious reason), but because the FTC has become complacent and inattentive and simply hasn’t got around to them yet.
      FitzPatrick later states that our “return on investment” (he means the income from our business) comes directly from purchases and “fees” paid by new sales reps, but not from product sales to “end-users.” First, to pay bonuses from distributors “fees” is illegal, and has been the catalyst to many state and federal prosecutions. That’s why virtually all MLM companies don’t do that (although pyramid schemes disguised as MLM companies do, but FitzPatrick chooses to ignore any such dichotomy). He also fails to accept the reasonable – and legal – position that distributors can be “end-users.” Indeed, several states have statutes that specifically recognize personal consumption by distributors as legally commissionable, and the FTC has clearly stated that they hold the same position (more on this in the next installment). It is, and with rare exception has always been, the position of regulators that who is buying the products is not as important as why they are buying them. If an MLM company is selling most of their products to distributors who actually want them, and would have purchased them anyway (even without an income opportunity attached), no problem. If they are buying the product as a token purchase just to meet a quota in the compensation plan, and that’s the only reason they’re buying the products, big problem. That’s exactly what got Equinox and Jewelway shut down.
      Most of FitzPatrick’s case is at least based on something. He’s a smart and articulate guy who has a masterful way of making a puff of smoke into a mushroom cloud. But occasionally he comes out of left field with astonishingly ignorant comments such as “MLM… attracts millions of people to this high risk and unprotected status of… independent distributor.” Wow. How could he not be aware that MLM ventures involve a fraction of the start up costs of conventional businesses? Perhaps four or five digits less! Or that an MLM distributorship is the only type of business where a failed businessperson can return their inventory and sales material for a 90% refund (try getting your franchise fee back from McDonalds, or returning all the appliances and fixtures from your failed restaurant). Or that MLM companies provide many services to distributors that conventional business owners would pay thousands of dollars a month for, such as collecting and paying sales taxes, product R&D, warehousing, customer administration, and much more – for around $25 per year. MLM is one of the lowest risk business ventures a person could possibly pursue!
      Next FitzPatrick describes the daunting qualifications employed by most MLM programs to reach the highest paying rank in the compensation plan. “Only a small number can ever achieve the volume or required positions in their downline, and hence only they will ever qualify for the high commissions on each level.” Here’s a great example of FitzPatrick’s subtle wordsmithing. Notice he says “high,” not “highest.” The difference is, one’s wrong, one’s right. By anyone’s definition, “high” payouts can be achieved well before the very top rank is achieved. He’s talking about how challenging the qualifications are to reach the highest pay stage, yet implies such quotas must be met to achieve “high” commissions. Furthermore, achieving the toughest to meet quotas to achieve the most rewarding stage in the commission structure is standard and acceptable procedure in every type of sales profession. Those that achieve the greatest success should be the most greatly rewarded. What rational person could challenge that? Yet, FitzPatrick oddly presents this as an inherent evil of MLM.
      To be fair, he made the above point within the context of how, contrary to conventional sales programs, many MLM plans reward those furthest away from the actual sale than those in the levels directly above the sale. Many (not most) plans do this. He’s right. He then goes on to say this “defines the company as a pyramid recruiting scheme, not a sales company.” He’s wrong. This definition is entirely the invention of FitzPatrick’s cohort Jon Taylor (we’ll get to him later). No local, state or federal regulatory agency has ever even attempted to apply this aspect of a compensation plan to their anti-MLM prosecutions.
      As I’ve mentioned in previous installments, how an Anti-MLM Zealot defines basic MLM facts and figures tells us a lot about their actual knowledge of the subject. According to FitzPatrick, “Avon… does not use the MLM business model.” Yes, they sure do. He also believes “The MLM business model was developed by the Amway Corporation in the late 1960’s.” Not even close. Wachters was employing a multilevel compensation system as early as 1936, and was popularized by Nutrilite in 1945. Even Shaklee and Neolife launched before Amway did – which was in 1958! Also, as any MLMer with even a moderate understanding of the field would know, downlines are, once again, not pyramid shaped. Yet FitzPatrick states that the “deepest level (will) always consist of 50% of the entire organization” (emphasis mine). This is never even remotely true in actual practice since the organization is more diamond shaped, and due to the limited number of first level positions under most people it tends to form a tall, skinny diamond. Therefore even the widest lever (usually somewhere in the middle levels of your downline) often times doesn’t hold 50% of your downline. What’s more, FitzPatrick’s statement assumes a perfect geometric progression (2 by 2 in this case) which is an absurd assumption. Ironically, our use of such geometric progressions are the target of most Anti-MLM Zealots who also claim it is absurd and will never actually happen. So if this wholly theoretical event will never even come remotely close to occurring in the real world, why offer it as evidence?
      Once gain, as in his previous book, FitzPatrick spends much time making his case for the “ultimate collapse” of every MLM organization, and “guaranteed” losses to every distributor. But a network marketing company’s sales organization is nothing more than a large downline, yes? There are dozens of MLM companies over ten years old. Herbalife is 23 years old. Mary Kay Cosmetics is 41. Amway is 46. Shaklee will celebrate its fiftieth anniversary in 2006. When is this “ultimate collapse” going to occur, I wonder? Indeed, FitzPatrick later states that “companies using the MLM system… can endure for decades.” He actually states that this collapse occurs annually! Which begs the question, if the company’s downline continues to endure, why couldn’t this same enduring scenario be applied to your downline? And if this perpetual cycling of drop outs and replacements should be considered “cumulatively” as he suggests, then why, after over half-a-century, have we not in fact saturated the entire U.S. market? (not a rhetorical question, and one I’ll specifically address in a later installment). And if my losses were “guaranteed” I now feel prouder than ever that I overcame those kinds of odds. I bet a lot of you feel pretty good about defying those “guaranteed” losses.
      Anti-MLM Zealots love to focus on a few of the baddest bad-boys throughout MLM history in an effort to create the illusion the other 2,100 companies operate the same way (with only their “pyramid” shaped brush to connect them). So naturally, FitzPatrick spends a lot of time on Equinox. Here are two of his more astonishing statements:
      “The (Equinox) settlement resulted in shutting down the company, the payment in restitution of about $40 million to victims, and the banning of the company founder from the MLM business forever.”
      “(this case) confirms that pyramid sales schemes are so firmly entrenched that it is now largely beyond the power of the government regulators to control them.”
There is only one sentence separating these two diametrically opposing statements.
      His depiction of the Equinox settlement is accurate. And remember, the FTC is “failing” to oversee the MLM industry, and us distributors are “unprotected.” Then the very next page he claims the “key factor” that lead to the decision to settle rather than getting a court ruling was “the prohibitively high cost of prosecution.” Hmm. I wonder if the fact the founder agreed to a lifetime ban from MLM, to shut down the company, and to pay $40 million in restitution to his “unprotected” distributors, as opposed to tying it up in court for years and eventually paying most of it to lawyers, might have been the “key factor.” He then goes on to claim Equinox was “manipulating the media” then provides only one example, the #1 position on Inc. Magazine’s 1996 list of fastest growing privately held companies (an audited, financial fact), which was immediately proceeded by a paragraph about how Equinox was “raked over the coals” by ABC’s 20/20.
      Sometimes it almost seems as if several people ghost wrote FitzPatrick’s book and never compared notes.
      FitzPatrick states that “the vast majority of (Equinox) sales reps” suffered “enormous losses.” Yet, in the same sentence sites their $195 million is sales in 1995. Equinox’s pay plan averaged about a 35% pay out. That would mean Equinox paid out over $68 million to their sales reps in 1995! He later sites the recent sales of Amway, Nu Skin and Herbalife which total almost $6 billion worldwide. Meaning they paid out well over two billion dollars to their distributors – a part of the equation FitzPatrick always seems to forget to calculate.
      Since the FTC settled with Equinox and never received a “definitive court ruling,” FitzPatrick claims the “Equinox model remains shielded.” He then informs us that, indeed, its top distributors have already cloned a new company under a new name. He’s right. And that company was also shut down by the FTC last year.
      Anti-MLM Zealots routinely site how we torture our positive industry data, but have no qualms about making love to their own negative statistics. FitzPatrick is no exception. He states that the U.S. MLM industry moves between $5-10 billion in wholesale product annually, and that less than “one-half of one percent” (.005) ever earns a net profit. Upon reading this I was struck by how he was only able to quantify our annual sales to within $5 billion dollars but somehow managed to calculate our industry’s success rate to three decimal places. And since the average compensation plan pays out about 45% of wholesale that would then mean, based in FitzPatrick’s figures, this industry also paid back $2.25 billion to $4.5 billion annually in commissions! Furthermore, on the very same page FitzPatrick states that “The MLM business model is not taught or researched at any major business school in the country” and that “No empirical data on its operations are compiled by the government…” then goes on to say “The industry is freely allowed to make outrageously misleading claims” to enroll new distributors. So, if we don’t have any actual research to back up our claims, where does FitzPatrick get his, I wonder? And if we are “freely allowed” to make misleading claims, then why was Equinox (and others) cited for “deceptive trade practices”? Such “outrageously misleading claims” have been the crux of many regulatory actions. What’s more – we do have the research to back up much of our industry data! There’s extensive research done by the DSA, DMA, and MLMIA, as well as this publication. My own company MarketWave has been tracking industry data for 14 years.

      We’re only half way through FitzPatrick’s “Pyramid Nation” and there’s still his essay “The 10 Big Lies of Multi-Level Marketing” to cover. I’ll wrap up my rebuttal to his works, at least until he cranks out another book, in the next segment. Wait until you hear his depiction of what the FTC thinks about our earning income from our downline’s personally consumed product – and what the FTC actually said! I’ll be putting this oft-debated issue to bed once and for all. Then the real fun begins as we take on Ruth Carter and her cohorts over at MLMSurvivor.com. I planned on this being a one segment piece, but they’ve provided me with so much great material we may not be finished with them until 2006! And there’ll be so much more after that.
Stay tuned!

False Profits – Robert FitzPatrick

       Another prominent MLM opponent, Robert FitzPatrick, has gone so far as to co-author two books on the subject. His primary work is a 216 pager called False Profits, and subtitled “Seeking Financial and Spiritual Deliverance in Multi-Level Marketing and Pyramid Scheme.” I think Mr. FitzPatrick mistitled his book. It should have been called “An Expose’ of the Airplane Game.” Indeed the first half of the book is nothing more than an elegant rant about the classic pyramid scheme of the 70’s and 80’s. Even when MLM is discussed it is usually within the context of our alleged “capitalization on New Age, Mysticism and Transcendentalism.” Dr. FitzPatrick often blurs the lines between present day network marketing and the New Age influence of 80’s style pyramid schemes, which in my over 14 years of full time study and participation, I have never seen practiced by anyone (although New Age philosophy did permeate a small number of legal MLM organizations in the 70’s and 80’s). FitzPatrick, himself an avid student of “New Thought philosophy” and a graduate of several personal development and enlightenment courses, focuses heavily on “New Age philosophy” in False Profits, which he claims plays a “central and defining roll” in enrolling and inspiring distributors. He claims that all MLMs rely on the “core beliefs” of the New Age community. That being, “wealth comes not from frugality, hard work or ingenuity, but from being in the right place at the right time. And faith will take you to this mystic and magical place.” So, what if we (like I, and so many of my peers) apply frugality, hard work and ingenuity to their MLM business? If FitzPatrick was only denouncing the way many of us promote and conduct our MLM business I’d have to agree with him, to an extent. I don’t like the way some people pitch and practice MLM either. But why throw away the present just because you didn’t like the wrapping paper?
       FitzPatrick accuses MLM of wrecking the American Dream of millions of would be entrepreneurs. “It (MLM) leaves in it’s wake a trail of cynicism and disempowerment, no small wonder as recruits observe billions of dollars landing in the laps of tiny elite groups at the top.” Where, I wonder, does FitzPatrick get this stuff? Most MLM recruits are in and out of the business so fast that their experience could have little impact on their psyche, and the majority of those I’ve known who’ve spent some time working their MLM business, gave it their all, and failed, simply moved on to other entrepreneurial ventures. And what about all those thousands of people like me who are making only supplemental or good living incomes and fall somewhere in the middle of their company’s hierarchy? Throughout virtually all of FitzPatrick’s work it’s as if this substantially larger demographic didn’t even exist.
       It’s interesting to note that only a page later in his book, FitzPatrick states “… no one makes a substantial income in the MLM system.” So now, not only do all those like me not exist, but neither do those elite few at the top. I’m really not trying to exploit poor semantics here. “No one” means NO one, doesn’t it? So which is it?
       FitzPatrick, an obviously scholarly and intelligent man, demonstrates his ignorance of MLM with statements such as; There are 5-10 million distributors in the U.S. selling $10-$20 billion in goods, “mostly to each other.” It seems odd that such an “expert” could not narrow down such basic data to within at least a 25% margin of error. In a later section of his book FitzPatrick does acknowledge that his numbers work out to an average $2,000 per year in sales per distributor, but then notes that this would leave a “profit” of only about $50 per month, then curiously drops the point as if to imply that would be the total income. However, FitzPatrick completely fails to consider that most compensation plans pay about 8% of downline volume to each distributor in commission. How does one write a book about multilevel marketing and when challenging its income potential ignore multilevel overrides?
       And are we selling all this product “to each other?” No, we sure aren’t. Virtually all contemporary MLM companies today have no requirement or system in place where higher ranking reps supply those below them with product. That’s how many old-school MLM companies used to do it before affordable and practical computers. No MLM company still does that. Not one. Even in 1997 when FitzPatrick wrote his book, his comment would have been obsolete by a couple of decades. Curiously, FitzPatrick makes several references to distributors warehousing and passing on products to other distributors, yet later acknowledges that “most MLM companies distribute via computer thus freeing distributors from having to personally stock and deliver inventory.” In seems as if FitzPatrick occasionally forgets his own earlier arguments only to contradict them later.
       In the same paragraph he goes on to say “The larger of these operations have already reached their saturation points in the United States… who has not been solicited? Who has not tried it?” Earlier, FitzPatrick asserts that his analysis of MLM will be based on, among other things, “logic.” Let’s do the same. If everyone has been solicited, or even tried MLM already, then how did so many companies that have launched in the last few years, such as Freelife, Usana, New Vision, Tahitian Noni, Xango, Isagenix and so many others, acquire tens of thousands of new reps? Is FitzPatrick suggesting these are all ex-distributors from other companies?
       FitzPatrick goes on to say that MLM “catapulted into economic expansion in the late 1980’s” due to the New Age movement. In fact, MLM exploded in the very early 80’s primarily due to a very favorable court ruling in the FTC vs. Amway case in 1979 (which essentially validated the legality of MLM) and economic conditions very favorable to MLM – such as the highest unemployment rate since the Great Depression.
       His lack of knowledge of the subject matter is never more evident than when he states “One of America’s fastest growing MLMs, Nutrition For Life, which was founded by marketer Kevin Trudeau sells the inspirational cassette tapes of the largest publisher of New Age catechism materials, Nightingale-Conant, as one of its core products.” First, NFLI was not founded by Trudeau (NFLI launched under the name Consumer Express in 1984 and Trudeau was hired as a marketing director in 1987). Second, the majority of the Nightingale-Conant catalog could hardly be considered “New Age catechism material,” and thirdly, the Nightingale-Conant material was only a fringe part of the more than 300 consumable products offered by NFLI and for only about two of their 19 years of business. What’s more, this “fastest growing MLM” filed bankruptcy and went out of business six years after False Profits was first published.
       Or, how about this statement: “…what ever the (MLM) product happens to be, it is presented as largely incidental.” I wonder how distributors for such companies as 4Life, Matol, Cell Tech, Tahitian Noni, Legacy, or Xango would feel about that assertion considering their entire companies are based on one primary product. There are numerous MLM companies today whose distributors are fanatical about their products (in many cases to a fault) and who recognize that income is based on a percentage of sales volume. It’s common knowledge today (not to mention common sense) that massive product sales volume is the key factor in generating significant income.
       Exaggeration, hyperbole and semantic manipulation are all signs of a weak argument, and FitzPatrick resorts to such tactics on a number of occasions. For example, he sites that there are “countless” examples of MLM creeping into “the most sacred of places” – religion. Then he accounts for only three. One was a blatant pyramid scheme (not an MLM operation) back in 1988 called Corporate Ladder, and another was Pat Robertson’s short lived KaloVita company and his “prosperity theology.” FitzPatrick is so desperate to come up with a third example that he throws in Robert Schuller only because his Positive Thinking tape set was once sold as part of an MLM company’s product line.
       Another example can be found in his discussion of Richard Poe’s book Wave 3 where Poe offers many examples of MLMers making one-half million dollar per year incomes. First he notes that Poe does concede that “only the rarest few in the industry achieve this level of success,” then refers to this as an “admission of often paltry financial returns from MLM.” How does acknowledging that very few make half-a-million per year get twisted into “often paltry returns?” What about all those incomes (and thousands who earn them) that fall between half-a-million and paltry? Oh, I keep forgetting. We don’t exist.
       In his effort to portray pyramid schemes and MLM as “Kissing Cousins,” FitzPatrick comments: “Periodically, appearing under new names then running their brief and inevitable course, these schemes now emerge bearing the more respectable, legal veneer of multilevel marketing while leading ever increasing numbers of people down the same dead end.” But there are dozens of MLM companies over ten years old. Herbalife is 23 years old.  Mary Kay Cosmetics is 41. Amway is 46. Shaklee will celebrate its fiftieth anniversary in 2006. Brief and inevitable dead end? Really?
       In total, only eight MLM companies are even mentioned by name in False Profits and only four are discussed in any detail. Even then we only hear anecdotal evidence based on the experiences of a handful of failed distributors (once again, there are currently over 2,000 MLM companies in operation in the U.S., and over 10 million distributorships). FitzPatrick acknowledges that the Airplane Game is the “center piece” of his book and devotes a substantial portion of it to a detailed personal journal of his experience with it. Of those MLM companies mentioned, the vast majority of his attention is on Amway. He is highly critical, and relates numerous examples, of tactics that were virtually exclusive to Amway (aka Quixtar, aka Alticor), then couches his comments in language that suggests such tactics are universally practiced throughout the entire MLM industry. What attention is devoted to other MLMs is mostly made up of a rehashing of Nu Skin’s troubles back in 1991 and ‘92 with little mention of the extensive and model reforms they have made since then.
       But then, this is a common foible in every Anti-MLM Zealot’s argument. That being, the actions of a few high profile regulatory or media targets is indicative of how the other 99% of MLM companies operate.
It’s not.
       Robert FitzPatrick’s writings provide so much fodder for this series that I can’t cover it all in one issue. His essay titled “The 10 Big Lies of Multi-Level Marketing” and newest booklet “Pyramid Nation” reveals far more and better examples of Dr. FitzPatrick’s utter lack of understanding as to the true nature of network marketing today.
       And if you’re wondering about such issues as “inevitable saturation” or “99% of all MLM participants fail” or any of the other tired, almost cliché’ Anti-MLM Zealot mantras – oh, we’re getting to them.
       The renovations begin later. This is just house cleaning.