MLMs and Pyramid Schemes

By Nicole Beaver



Last issue I discussed the dangerous ableism that alternative medicine presents to the mentally ill and disabled. This issue, I want to talk about multi-level marketing schemes. You have probably heard the word before since the topic has become hotly debated with various lawsuits being presented as well.

What is a Multi-Level Marketing Scheme? According to Investopedia, Multi-Level Marketing (MLM) is a strategy that some direct sales companies use to encourage existing distributors to recruit new distributors. In MLM schemes, there can be hundreds or thousands of members worldwide. Still, few earn any income from their efforts, indicating a possible pyramid scheme. 

While many MLM practices are legal, the Federal Trade Commission (FTC) has been investigating MLM companies for decades and has found many with questionable methods. Pyramid Schemes are another keyword pair you may have heard of before as well but know little about. The New York State Office of the Attorney General outlines that a Pyramid Scheme is “a fraudulent system of making money based on recruiting an ever-increasing number of “investors.”” The first promoters recruit these investors (or consultants) who, in turn, hire more. The scheme is called a “pyramid” because, at each level, the number of investors increases. The small group of promoters at the top require a broad base of investors to support the scheme by providing profits to the earlier investors. In all pyramid schemes, the selling of a product itself is much less important than the recruiting of new investors. The company, to survive, needs people to donate their money to “invest” into it with the promise of seeing said money coming back double in profits by selling products from home. If this sounds like a get-rich-quick scheme, that’s because it is. 

Now, of course, there are differences between legitimate Multi-Level Marketing Companies and Pyramid/MLM Schemes. As the Office of the Attorney General states, “a legitimate multi-level marketing company emphasizes reliable products or services. A pyramid scheme uses products or services to disguise its quest for collecting money from the investors on the bottom levels to pay other investors further up the pyramid.” However, legitimate ones are, unfortunately, fewer and farther between as it is easy to mask illegal financial fraud by using an MLM. MLM schemes are doomed to fail because their success depends on the ability to recruit more and more investors. Since there are only a limited number of people in a given community, all pyramid schemes will ultimately collapse. The only people who make money are those few who are on the top of the pyramid–the CEOs and “founders” of these schemes who rake in cash. This gets even scummier when we take into consideration that, if recruitment is the main focus of MLM schemes and products are used to disguise the scheme, what happens to those who purchase the products? 

Monat recently faced a lawsuit because of claims that its products cause “significant hair loss,” “scalp irritation,” and “scalp injury” (according to court documents obtained by local Las Vegas news outlet KTNV). Erin Ostby, who once sold Monat as one of the company’s market partners, told Women’s Health she had to cut off her hair because the damage was “so thin, and it was stringy.” Rodan-Fields, a company specializing in skincare, also faced a lawsuit recently. Their “lash boost eyelash enhancer” product supposedly contains a chemical called isopropyl cloprostenate, which is used in medication to treat eye conditions, such as glaucoma. When misused, the product causes “serious side effects, including change(s) in iris color, eyelid drooping, itchy eyes, eye/lid discoloration, thinning and loss of eyelashes/loss of eyelash hair, eye sensitivity, eye infections, and vision impairment.” 

Finally, Vector Marketing is known for “spamming students in every way, shape, and form possible to recruit new reps. You may have seen Vector on campus a few times. They send non-stop emails, letters, make constant phone calls, and even attempt to contact potential recruits through Facebook and other social media channels. The spam is so bad that a group of college students across the nation actually banded together in 2003 under the name of “Students Against Vector Exploitation” (SAVE) to expose their “unethical” business practices. The Gauntlet talks about how Vector Marketing “sales reps are either paid per appointment or given a commission based on their sales ā€” whichever sum is higher. They earn $17.25 per appointment if they don’t sell a product, or 10% commission on what they sell that week. If they sell more knives, their commission can rise to 35 percent. Vector’s critics say the high price of CUTCO products makes the knives difficult to sell, meaning an employee is likely to earn only the base pay.” 

So, what can you and others do about MLM Schemes? First and foremost, you need to know what to look for, so you’re not fooled by them. While this article outlines and names strategies they use to watch out for, there are so many more to identify and more springing up. The FTC has a webpage dedicated to identifying pyramid schemes and lists that warning signs, which include: 

  • Your income is based mainly on the number of people you recruit, and the money those new recruits pay to join the company ā€” not on the sales of products to consumers
  • You’re required to buy lots of inventory
  • You’re forced to buy other things you don’t want or need to stay in good standing with the company

I also encourage readers to watch John Oliver’s expose on MLM schemes, available on YouTube for more information.