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MLM DEFINITIONS and LEGITIMACY – What MLM Is – and Is Not

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MLM DEFINITIONS and LEGITIMACY – What MLM Is – and Is Not 2-1 The Case (for and) against Multi-level Marketing By Jon M. Taylor, MBA, Ph.D., Consumer Awareness Institute Chapter 2: MLM DEFINITIONS AND LEGITIMACY – what MLM is – and is not Chapter contents: recognized in the compensation plan – which motivates the behavior of Summary of chapter 2-1 participants. This definitional model makes Examples of Definitions of MLM by others 2-2 possible a clear distinction between (1) Needed: An accurate, research-based definition of MLM 2-6 legitimate direct selling or home-based The four CDCs of recruitment-driven MLMs 2-10 businesses, (2) classic pyramid schemes, that cause the harm and clearly and (3) recruitment-driven MLMs – or what I distinguish between MLM and call ―product-based pyramid schemes‖ legitimate direct selling (since they are likewise structured as Harmful effects of recruitment-driven MLMs 2-23 endless chain recruitment schemes). Table 1: Characteristics and effects 2-26 As I shall explain, there are inherent Of product-based pyramid schemes flaws in any MLM, assuming an endless chain What is the difference between Ponzi 2-26 of recruitment and a pay plan that is schemes and pyramid schemes? recruitment-driven, top-weighted, and MLM‘s problem with legal identity 2-27 Are all MLMs pyramid schemes? 2-28 financed primarily by incentivized purchases What would a ―good MLM‖ look like? 2-28 of the participants themselves. I have looked Conclusions: including a hypothesis 2-30 for exceptions to this generalization in the 350 for MLM legitimacy MLMs I have analyzed, but have found none. Appendix for Chapter 2 MLM operates on the same principle as 2A: Examples of MLM compensation plans 2-31 a chain letter, in which a person receives a 2B: Explanation of compensation plans 2-33 letter with a list of names on it, mails a dollar 2C: Definitions of other relevant terms 2-34 to everyone on the list, adds his/her name 2D: Does MLM qualify as a legitimate form 2-37 to the bottom, and then forwards it to friends of direct selling? — a 7-point checklist and relatives to do the same - in an endless 2E: Definitions of or related to illegal 2-38 chain of such letters. In such schemes, it is Pyramid schemes in state statutes mathematically certain that the vast majority 2F: Comparative analysis of direct sales, 2-46 will lose money. Chain letters are illegal. no-product pyramid schemes, & Just like the chain letter, MLM assumes recruitment-driven MLMs both infinite markets and virgin markets, neither of which exists in the real world. Chapter summary Thus, MLM with its endless chain of recruitment, is inherently flawed, unfair, and One of the biggest problems with multi- deceptive. And fifteen years of worldwide level marketing (a.k.a., ―network marketing‖, feedback tells me that MLMs are also or ―MLM‖ for short) is the wide variety of extremely viral and predatory. This is definitions of what is – and what is not – advantageous for the founders, TOPPs (top- multi-level marketing. We will consider a of-the-pyramid promoters), and the MLM sampling of definitions and then discuss a company itself, but works to the detriment of much more objective definition based on new recruits. comparative research on structural characteristics and analyses of over 350 MLMs (MLM programs). This research has yielded four (and in © 2011 Jon M. Taylor most cases five) causative and defining characteristics (―red flags‖) that can be 2-2 When discussing issues about the at how others define it and then bring legitimacy of MLM in this book, I am using together what light can be shed on the the word ―legitimate‖ in the broadest sense; subject from legal and regulatory sources i.e., ―conforming to recognized principles or and from recent research. accepted rules or standards,‖1 as opposed We will first look at the definitions of to narrow legal definitions, which may or multi-level marketing offered by others may not conform to accepted standards in business practices. This chapter concludes with likely the Examples of Definitions of MLM only accurate real-world, research-based, and consumer friendly, definition of the by others – with commentary business model which is termed ―multi-level From Wikipedia (March 2010): marketing:‖ Multi-level marketing Multi-level marketing (MLM) is a (MLM), (also called network purported income opportunity, in which marketing, direct selling, persons recruited into a pyramid of referral marketing, and participants make ongoing purchases of pyramid selling) is a term products and services, and recruit that describes a marketing structure used by some companies as part others to do the same, and they still of their overall marketing strategy. The others, etc. – in an endless chain of structure is designed to create a marketing recruitment and personal consumption, and sales force by compensating promoters in order to qualify for commissions and of company products not only for sales they bonuses and to advance upward in the personally generate, but also for the sales hierarchy of levels in the pyramid. of other promoters they introduce to the Product purchases become the means of company, creating a downline of disguising or laundering investments in distributors and a hierarchy of multiple what is in fact a product-based pyramid levels of compensation in the form of a scheme. pyramid. The products and company are usually Based on my research that will be marketed directly to consumers and explained in later chapters, I would add the potential business partners by means of relationship referrals and word of mouth following: marketing. Typically, prospects are lured into the ―Independent, unsalaried salespeople scheme with exaggerated product and of multi-level marketing, referred to as income claims. And because the pay plan distributors (or associates, independent is heavily stacked in favor of those at the business owners, dealers, franchise owners, highest levels in the pyramid, the vast sales consultants, consultants, independent agents, etc.), represent the company that majority of participants spend more than produces the products or provides the they receive and eventually drop out, only services they sell. They are awarded a to be replaced by a stream of similarly commission based upon the volume of misled recruits, approximately 99% of product sold through their own sales efforts whom are likewise destined to experience as well as that of their downline organization. loss and disappointment. Independent distributors develop their organizations by either building an active A problem of definitions. Much customer base, who buy direct from the confusions exists on the subject of what is – company, or by recruiting a downline of and is not – multi-level marketing (MLM) independent distributors who also build a customer base, thereby expanding the and how it can be distinguished from illegal overall organization. Additionally, pyramid schemes. We will begin by looking distributors can also earn a profit by retailing products they purchased from the 1The New Merriam Webster Dictionary, Springfield, company at wholesale price. MA, 2008 2-3 MLM spokesmen clearly crafted this Would you like a technical definition? definition, which Wikopedia uncritically Network marketing is a system for distributing accepted in lieu of definitions of consumer goods and services through networks of advocates that would highlight the inherent thousands of independent salespeople, or flaws in MLM. For example, no mention is distributors. The distributors earn money by selling goods and services and also by made of the endless chain of recruitment recruiting and sponsoring other salespeople and a pay plan that is recruitment-driven, who become part of their downline, or sales top-weighted, and financed primarily by organization. Distributors earn monthly incentivized purchases of the participants commissions or bonuses on the sales themselves. These critical features will be revenues generated by their downline. explained later in this chapter. Here‘s what network marketing is and is not: Network marketing, or multi-level From author Richard Poe: marketing (MLM), isn‘t illegal, Network marketing is not defined in fraudulent, or unethical. any standard dictionary of business terms. Network marketing isn‘t an oppor- Nor do network marketers themselves tunity to get rich quick off the agree on what it means. For lack of any payments of others who join the or- clear standard, I suggest the following ganization. That‘s a pyramid scheme. definition: ―Any method of marketing that Network marketing isn‘t a pyramid allows independent sales representatives to scheme, which is illegal and unethical. recruit other sales representatives and to Network marketing isn‘t an draw commissions from the sales of those opportunity to get rich quick. Period. recruits.‖2 Network marketing isn‘t built on simple mathematics where many This overbroad definition would take in losers pay a few winners. That‘s also many sales organizations that are not a pyramid scheme. considered MLM, such as some insurance Network marketing isn‘t just for and real estate agencies. And as with the salespeople. Wikopedia definition, no mention is made of Network marketing isn‘t expensive. the inherent flaws in any MLM system - the Unlike most other business endless chain of recruitment and a pay plan opportunities, the start-up costs are that is recruitment-driven, top-weighted, and low, almost always less than $500 financed primarily by incentivized purchases and often under $100. of the participants themselves. Network marketing isn‘t a way for companies to sell huge amounts of Zig Ziglar (with Dr. John Hayes) inventory to distributors. Network offers his ―technical definition‖ of what marketing isn‘t a way for distributors to sell stuff that nobody he claims network marketing (MLM) is – wants or uses. and is not. Below is an Network marketing isn‘t a license to interesting definition put forth sell products and services at by Dr.
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