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Pyramids in the Air

Malka Forster

A Look at Multilevel Marketing and Direct Sales

Wednesday, January 15, 2014

Salvation! Or so she thought.

Shoshana, a frustrated stay-at-home mom with few marketable skills, looked on helplessly as her family sank deeper into debt. “No entry-level job paid enough to even cover child care costs,” she says, “let alone make a dent in the mountain of promissory notes we’d built up.”

Then a phone call from an elementary-school-classmate-turned-vitamin-seller seemed to offer a way out.

“Put in just a few hours each day, and you’ll make thousands of dollars monthly,” the friend promised, casually noting that she was already driving a company car and had enjoyed an all-expenses-paid vacation in theBahamas.

The only hitch? A “small” starter-kit investment of $1,500, which was nonrefundable.

“I had these visions of debt-free, stress-free living,” Shoshana recalls. “I was too blindsided by the dollar signs to admit that I wasn’t cut out for sales, and the likelihood of me succeeding in this venture was a hundred to one. Now, three months later, I’m left with a lifetime supply of green-tea metabolic boosts — and $1,500 deeper in debt.”

 

Too Good to Be True?

Multilevel marketing (MLM), also known as network or referral marketing, is a direct sales strategy that evinces both rave reviews and a great deal of disdain. With MLM, salespeople earn income not only from selling a particular product, but also from enrolling other people as sellers — people like Shoshana.

In its most austere form, the MLM model is a pyramid, where the bulk of one’s income comes from recruiting. Those at the top — the pharaohs — stand to make it big. The “downline” — the later recruits who face an already saturated market and fewer potential new recruits —  may struggle to eke out a profit.

Monsey native Yoely Weiss was one of those unfortunate rookies who found himself at the lowermost layer of the massive pyramid ofAmway,America’s biggest and arguably oldest MLM company. He was drawn into the business in the 1970s. “At some point, you’ve already speeched everyone you know to death,” he says. He dropped out after several months.

Respected consumer protection bodies warn that a pyramid scheme is unsustainable.

The US Federal Trade Commission (FTC) writes: “Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They’re actually illegal pyramid schemes…. When a plan collapses, most people — except perhaps those at the very top of the pyramid — end up empty-handed.”

The FBI website also lists pyramid selling as one of the most common fraud schemes plaguingAmerica. But the line between a prototypical pyramid scheme (illegal in most developed countries) and a lawful MLM model is gossamer, and legal loopholes abound.

 

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