google-site-verification: google5425b40e3588859b.html, pub-3038320404840626, DIRECT, f08c47fec0942fa0 The High Failure Rate of a Pyramid Scheme
  • Sarah Rose

The High Failure Rate of a Pyramid Scheme

I was 22 when I was first approached by a multi-level marketing (MLM) company that shall remain unnamed. The opportunity was presented as such: work part-time, on your own schedule. Convince three of your friends to join, and you won't have to do much work. Be in control of your own time and determine your own future. Retire by the time you're 30 (or 35, or 40, they all promise young retirements and lives of extreme luxury).

The particular opportunity that presented itself to me sounded okay, and the woman trying to recruit me was convincing. My only real hangup was that I didn't want to sell fairly useless shit to my friends, family, or even adjacent acquaintances. Multi-level marketing companies are also known as pyramid selling, network marketing, and referral marketing. MLM's make money through a non-salaried workforce that sells the company's products or services, builds and/or "mentors" a team of sellers beneath them, and thus earn money through a pyramid-shaped, or binary compensation commission system. Some of the most popular MLM's out there include Amway, Mary Kay, Herbalife, Avon, and Infinitus.

Obviously, these companies have been around a while so the structure must work. What nobody says when recruiting members though, is that the structure only works for a tiny percentage of folks at the very top of the pyramid. If the MLM pyramid were the food pyramid, the top 1% would get all the candy and sugary good stuff while everyone at the bottom would be stuck with steamed Brussels sprouts and half cooked Bulgar. Or perhaps more accurately, those at the bottom would be left with nothing.

The dream MLM's sell to those they recruit is fairly straight-forward: come "join our team," "work under my mentor," "own your own business," "gain financial freedom," "work on your own time," etc. The dream is a bit tantalizing, like something that's almost too good to be true (or, ahem, IS too good to be true).

In reality, the MLM model makes it nearly impossible to earn money, which is why so many people fail. The Case (for and) against Multi-level Marketing By Jon M. Taylor, MBA, Ph.D., Consumer Awareness Institute states, "Failure and loss rates for MLMs are not comparable with legitimate small businesses, which have been found to be profitable for 39% over the lifetime of the business; whereas less than 1% of MLM participants profit. ...MLM as a business model is the epitome of an 'unfair or deceptive acts or practice.' It is even worse than classic, no-product pyramid schemes (for which the loss rate is only about 90%) and 'pay to play' chain letters. For promoters to present MLM as a 'business opportunity' or 'income opportunity' is a misrepresentation."

Multi-level marketing companies rely upon new recruits to sustain current members. As the number of participants increases, the opportunity to recruit a large downline diminishes for those at the end of the chain. If there are tens of thousands of people at the bottom of the pyramid, it's literally impossible to enroll as many recruits as the few at the top already have. It's saturation, pure and simple. Further, participants need to enroll a set number of recruits before profit is even possible. Say the set number is 25, the chances of success are roughly one in 25, which is only a 4% probability of financial success against a 96% chance of loss. The odds are not in your favor.

You may have noticed too, that the people most vulnerable to pyramid schemes are people who may not have access to other money-making opportunities. People in small or remote towns, for example, or stay at home mothers. I was approached a handful of times right after a bad breakup. It was like the MLM's could smell my woe and knew they had a better chance of recruiting a sad person than a happy person.

Stay at home moms are popular MLM participants because they want paid work that's flexible, and because they usually have a wide network of people to bring on board. Lately there's been a huge surge in MLM's recruiting immigrant women, giving them false hope of achieving the "American dream" by selling essential oils or face creams or protein powders. Worse yet, many women market their MLM using photos of themselves and their families. On Instagram, they'll use hashtags like #leanin, #thefutureisfemale, #bossbabe, or #momboss, which misleads people who might think these women own their own business (nope), or are financially successful (the odds are, probably not).

Although each MLM company dictates its own specific financial compensation plan, most MLM's pay their participants through two revenue streams: the commission of sales made by participants directly to customers and the commissions on sales made by distributors under the participant who recruited them. The people someone recruits to join an MLM are called "down line" distributors, and the person who recruits every down line distributor gets a portion of anything they sell. While it may seem fairly easy to recruit someone to join an MLM, it's actually pretty difficult, which is why the vast majority of people who join MLM's don't make any money.

For example, THIS breakdown of UK-based Arbonne consultants found that only 12% of reps (or about 2,600 people) earned any money at all from Arbonne, meaning that 88% of reps either made no money or worse yet, lost money. Only 1% of Arbonne reps make a living wage, a stark contrast from Arbonne's marketing claims like the one below:

"Imagine the freedom to live the life of your dreams by starting your own successful business. That's the beauty of our business model. So many of our Independent Consultants have done just that, and have transformed their careers, their lives ... themselves.They have created a better work-life balance because they choose when to work and when to play. With the right leadership, tools and effort, you can too."

Similarly, Herbalife distributors face similar dire odds. In 2018, half of their distributors made less than $370 a year, 10% made about $7,000 and only the top 1% made more than $100,000. Herbalife itself was fined over $2000 million by the Federal Trade Commission, which demanded that Herbalife restructure itself to "start operating legitimately." The FTC mailed a first round of checks in January of 2017 to people who ran an Herbalife business in the United States between 2009 and 2015, and who paid at least $1,000 to Herbalife but got little or nothing back from the company.

Another gross things MLM's do when confronted with the reality they don't work for most people is say things like, "Not everyone is cut out for this," or "Those people who failed gave up too easy or didn't work hard enough," or "You'll get out of it what you put into it." All of these turn the blame away from the MLM and place it squarely on the individual.

The woman who tried to convince me to sign up for her MLM met me at a coffee shop one day and asked me to list the reasons she should invest in me. She then spoon-fed me the answers she wanted to hear, for example, "What would you say if I asked you what your dreams are for the future? I would say something like, 'my dream is to retire young and with the financial freedom to be active in the lives of my kids and spouse.'" And while I don't have a child or a spouse, I understood her gist: she wanted me to fantasize about what a bunch of money could do for my life.

She closed out our meeting by turning over a pamphlet and defending the moniker, "pyramid scheme," by drawing a triangle and claiming that corporations are also structured like pyramids, except corporations own you and your time. The real difference that she failed to point out is that corporations *often* pay their employees a living wage, provide health insurance and other benefits, and generally don't require employees to purchase the employee handbook before they begin.

P.S. MLM's can be tricky and tangentially convincing. If you're looking to make quick, easy money, it doesn't exist. Watch John Oliver's hilarious take on MLM's HERE. Watch the 2016 documentary Betting on Zero, as it investigates the legality of pyramid schemes HERE. Watch Dave Ramsey debunk all the myths of Network Marketing HERE.


Sarah Rose