Multi Level Marketing and Network Marketing explained - vital information for the potential new MLM recruit.
MLM and Chain Letters - just what is the"illegal" part of MLM?
Some anti-MLM website authors loudly proclaim that MLM is "illegal". MLM is currently NOT illegal in most western countries. But contained within its sales structure is a simple enough concept which IS illegal to use alone for financial gain. Its application within MLM is responsible for making many MLM millionaires and even a few billionaires. It is also responsible for sending many millions more people into their own financial black holes.
The fact is, even with the artifice of "retail selling" of real product, the recruiting structure of MLM is still exactly the same as the structure that drives illegal chain letters and pyramid schemes - a geometric progression based scheme that allows all distributors to recruit unlimited numbers of new distributors. Without the use of this otherwise "illegal" recruiting structure, MLM is left as a "traditional" distributor of products - and, most importantly, with virtually no-one to buy those products.
A Geometric Progression is a simple mathematical principle. It's what drives Chain Letters and it's what drives MLM. The creation and perpetuation of Chain Letter schemes is illegal in most countries of the world. Let's look at why this is so.
A person writes a letter such as the example (a real life example), here . Note that the author does suggest towards the end that problems will arise. In a pretence at honesty he also, rather thoughtfully, provides some of the reasons why his own scheme will not work. You should believe him in this. (For a brilliant satire on chain letters such as this, click here).
Imagine that the letter was sent successfully to just ten people as suggested, and they each in turn successfully sent it on to ten people. The person who sent it originally would receive $10.00 and each of the ten people he sent it to would get their $10.00. Eleven people have now collected a total of $110.00 between them. But there's now a total of one hundred people looking to make their $10.00 each. For each of them to collect $10.00 they must, in total, send letters to a total of 1,000 people. At the next level a hundred thousand people become involved, then 1,000,000, then 10,000,000, then 100,000,000. Consider that each of these people is a “recruit” to the scheme. The total number of people (recruits) involved is the SUM of the numbers shown below:
This Geometric Progression Recruiting Scheme is represented ideally below:
Level 1: 10 (11 people involved)
Level 2: 100 (111 people involved)
Level 3: 1,000 (1,111 people involved)
Level 4: 100,000 (101,111 people involved)
Level 5: 1,000,000 (1,101,111 people involved)
Level 6: 10,000,000 (11101111 people involved)
Level 7: 100,000,000 (111101111 people involved)
Level 8: 1,000,000,000 (1111101111 people involved)
Level 9: 10,000,000,000 (There are nearly 7,000,000,000 people in the world).
In principle, the sender simply asks for money from the receiver whilst giving nothing but the idea of sending more letters to ask for money from others, who then repeat the process endlessly. There is nothing actually sold and no value given for the transfer of money. The only reason why people would send out ten letters is to get $10.00 back for the $1.00 they sent away to the person up the line who sent them their letter. Everyone spends just $1.00 to receive $10.00. Magic stuff !! Actually, it is a very good example of how to exploit the very human quality of greed. People inherently like the idea of getting something for almost nothing. It's the only reason they might choose to participate in a scheme of this nature.
There is nothing inherently wrong with a geometric progression, but there certainly can be something wrong when it is applied to a pseudo business enterprise for the sole purpose of financially exploiting people.
Let's look at the activity that should occur at Level 8 above. One billion people want to send out ten billion letters. But who should they send them to? As there are only about seven billion people in the world, and 1,111,101,111 are already in the scheme, ideally there would be some 6 billion people left who haven't as yet received a letter. These people will no doubt receive a letter, but the other 4 billion letters can't be delivered to anyone. Each of the six billion people who did receive their letter pay their $1.00 to their upline. They then have a problem. There's no-one left in the world who hasn't received a letter. So at the finish, the great majority of the world's population (some 6 billion people), would get no return on their $1.00 investment in the scheme.
There is a very important question one should ask about the above Chain Letter scenario. How would anyone know exactly who had received a copy of the chain letter and who had not as the scam progressed? Of course, with no one monitoring this, it would be impossible to know. Read on.
The common denominator in both Chain Letters and MLM is the use of the Geometric Progression growth scheme to "recruit" people into a greed-perpetuated scam. Even with the many mathematical variations applied when used in MLM, the principle behind the old "chain letter" still underlies all the sophistication and "success" of today's MLM sales organisations. For this reason, MLM should be illegal.
MLM schemes do not apply any recruiting limits to a distributor. Distributors are "stacked" at specific levels under the person, and the subsequent people, who recruited them. The classic MLM scheme promotes a new distributor to recruit "five people who recruit five people who recruit five people", but each can recruit as many as they might like. There are many variations on this geometric progression recruiting theme, but the principle never changes. All MLM's use a geometric progression based recruiting scheme which causes people to be enticed to make "great" money from the efforts of "unlimited" other people. The recruiting aspect of MLM operates in exactly the same way as an illegal chain letter - with the promise of being able to make lots of money with little outlay, all from the efforts of others. MLM calls it leveraging other people's efforts.
Of course, MLM has fought a powerful legal battle over many years to remain in existence. The major difference between an MLM and an illegal chain letter or pyramid scheme they say, is that an MLM ostensibly provides products of value for sale, whereas a chain letter offers nothing of value.
Most MLM products are purchased and used by the distributors involved. This process is where the big money comes from for MLM companies. Not from selling product, but from selling "selling rights" for the product to people who qualify themselves by purchasing products.
Purchasing product cannot make you money unless you re-sell the product. But in MLM you can "recruit" a purchase of product. Under company rules, distributors will buy lots of product in order to qualify themselves to benefit financially from the purchases of other distributors they hopefully might recruit in the future.
Of course, some people are recruiting geniuses. Most people are not. Some people are retailing experts. Most people are not. Therefore, most people who join MLM lose money and gain cupboards full of products.
All people who join MLM and buy any product for any reason help make the company richer. The recruiting geniuses make lots of money. The good retailers make some money.
Most people just payout to belong, with the hope that what they are being told will make them rich. Just like they would if they were participating in a chain letter.
The governments of yesterday understood that it was mathematically impossible for the geometric progression principle to work fairly for all when it was applied to a "business" opportunity. Apart from anything else, the person who started it all would logically get much more money than anyone else for the same amount of effort. So many governments outlawed Chain Letters. But they didn't outlaw the geometric progression sales scheme principle entirely. It's probably fair to say that many of today's legislators wish this over-sight had been rectified way back then.
So, the big question remains, "If Chain Letters are illegal and MLM is broadly based on the same principles, why isn't MLM illegal also?"
Only the legislators can truly answer this question, but you will find some additional information at Robert Fitzpatrick's website.
Basically, the legal system has allowed MLM companies with products of value to continue to exist, with the major proviso seeming to be that income should be generated for distributors by retail sales more so than by recruiting. Because residual MLM income is generated by recruiting, abuse of this legality seems common. The laws exist, but MLM companies do not feel obligated to explain them in plain language to their distributors. MLM companies, through the Direct Selling Association of America now want to change the laws to make "product-driven" MLM's legal.
The arguments rage on, Distributors sue MLM's and each other, the courts hand down judgments and MLM's come and go like clockwork.