Recession Spawns MLM Scams Disguised as
"Safe Havens" and Financial Rescue
by Robert L. FitzPatrick
Apr 19, 2010
Unemployment is rising. Loans are hard to get. Foreclosures are skyrocketing; small business owners are closing their doors. Into this sad situation comes multi-level marketing (MLM), claiming to offer consumers a "fall back" or rescue. They call it "direct selling" and they claim it is "recession-proof."
The problem is, the "income opportunity" peddled by most multi-level marketing companies is not direct selling. Direct selling during a Recession is a possible income opportunity, but it is certainly not a safe haven. It is not recession proof. In fact, it is among the hardest jobs in the world, with huge turnover and very little profit potential. What product would people need to buy from a friend or neighbor - at higher prices - than they can readily buy in stores or online? And how much does it cost in time and money to do the marketing, selling, delivering, and servicing?
In reality, the "direct selling" offered as "network marketing" is just the age old "endless chain" trick. You pay money to the MLM for the right to sell the MLM opportunity to others who pay money for the opportunity sell the MLM opportunity to others who will pay money to do the same. What is the opportunity, you ask? It's the opportunity to sell the opportunity! Get it?
To make a profit each person needs many more people below them. This is also called a pyramid scheme. Later investors pay earlier ones, with each level growing geometrically. The pyramid money is disguised as fees, marketing and sometimes inventory. In nearly all cases, the "inventory" is higher priced than similar goods in stores, yet the direct selling industry claims consumers will buy more when the economy goes down! In fact, they claim people make money in direct selling when times are good and when times are bad! This may sound familiar. It is exactly the same claim made by billion-dollar-fraudster, Bernard Madoff. He too said his investors would profit from his scheme, in good times or bad.
The fact is that the true "product" that is being purchased in most direct selling schemes is the right to sell the opportunity to others. The opportunity to sell the opportunity!
As to the clam that the money is really for "products" and "business costs", not just the opportunity to sell the opportunity, the question must be asked: why would unemployed people, who may be facing home foreclosures, buy expensive and relatively unknown products during a Recession? And, as to why "direct selling" increases during a Recession, the related question must be asked: why would consumers buy more of these higher priced products during a downturn?
Unemployed consumers can be persuaded to buy high priced products ranging from weight loss pills to chocolate - if they are told they will get all their money back plus a big profit when they recruit others to do the same! In other words, this is a classic money transfer dressed up to look like a business. The money a few will get comes from the losses of many others "below" them. At the end will be the vast majority who will not - and cannot - find enough new "buyers." The promise that everyone can find a "safe haven" in this money transfer scheme is a cruel lie.
The result of falling prey to an "endless chain" recruitment scheme will be even greater losses for thousands of people who spend their remaining savings, or take on more debt, to join a MLM scheme.
The Direct Selling Association (DSA) has been selling the bogus idea of a "safe haven" and recession-proof business to the media. Some journalists have bitten the hook. Recently the New York Times took the bait and reported bogus figures about "median income" levels of MLM participants. However, it did at least include a warning about recruitment schemes and included the Pyramid Scheme Alert website as a resource.
However, the New York Times refused to correct the mistaken numbers about "median income". The Times defended the figure on the grounds that it accurately reported what the Direct Selling Association told them! The DSA is not a government agency. It is a lobbyist and PR promoter of multi-level marketing.
The article stated, "The barriers to entry (in direct selling) are fairly minimal. Start-up kits - required by most companies - cost about $99 on average... The median income from direct selling is $2,400 annually, according to the (Direct Selling) association, but those who recruit and manage others can earn significantly more."
These two figures - $99 "on average" to start up and a "median income" of $2,400 - are spectacularly misleading.
--True start-up costs (the fee is just the first cost) can be in the thousands and may require monthly inventory purchases and even more costs for "marketing and motivation."
-- As for income, 99% of all MLM participants lose money. The $2,400 figure of "median income" (half of all MLMers would make more if that is the "median") is pure fiction.
-- For half of all direct sellers to earn $2,400 (median income), as the DSA told the NY Times, the total sales of direct sellers would have to be far more than $100 billion! And, all the MLMers would have to be retailing all their products!
-- The DSA misleads with numbers about "retail" sales, but almost any number used would be fake. Most its members do not track retail sales. This is because most MLMers don't make retail sales! They only recruit other "direct sellers." The direct selling claim is just a camouflage for recruitment scams.
Far from providing a safe haven during a Recession, MLM schemes actually widen the wealth gap; they sap resources from most people who invest and siphon the money to a small group of promoters; they entice people to try to make money off their friends' and family's losses.
In the midst of a Recession, MLM has found a great new market - unemployed people, desperate for income. Other industries are also profiting - gambling, lotteries, payday loans, and bankruptcy lawyers.