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Quatloos! > Investment Fraud > Multi-Level Marketing > Introduction to MLM

Multi-Level Marketing (MLM)

You see the ads all the time: "Make millions now, no manager" or "Work on your own, start $12,000 per week." Maybe you saw the ad in the paper, or maybe you received it by e-mail.

Yes, we're talking about Multi-Level Marketing, also known as "MLM"

MLM: Once Legitimate, Now a Scam

Once upon a time, multi-level marketing was a legitimate business which provided a way for small companies to get their unique products to consumers in small towns and rural areas which had no access to these products. At this time, the products sold themselves, and the multi-level aspect was a way of giving a small reward to those who had worked hard to build the organization. But the focus was always on the product.

Today, and especially with the growth of the internet, it is possible for consumer to get about whatever they want at competitive prices. There is simply no real need for distribution "systems" as there once was, and indeed the focus of all the programs is not on the products they sell -- which are usually either bogus or are available somewhere else to the public at the same or lesser prices. Instead, the focus now is solely on recruiting new people to either buy into the program or else to buy products that are grossly overpriced (i.e., a $1 bottle of "herbal shampoo" for $26), with the idea that those people will recruit additional people who will also buy into the program or themselves buy the grossly overpriced products.

Thus, today just about ALL of the multi-level marketing programs are scams. In today's internet economy, there is simply no need for multi-level marketing or the overpriced products that they sell -- meaning that the only thing they are selling are memberships in anticipation that future memberships will be sold in the future, which is the classic definition of a pyramid scheme, and thus securities fraud.

Because products are available over the internet to everybody at lower costs than ever before, claims that "Multi-Level Marketing will take over the World!" are completely bogus. Indeed, the fact that no MLM schemes sell significant product to anybody other than the people who bought into the programs is proof positive that MLM is a dinosaur in today's economy, and exists only by defrauding people to buy memberships in anticipation of being able to make a profit defrauding other people into the program.

Indeed, as is discussed elsewhere, many of these programs have been broken up for securities fraud and the people in them now have criminal records. So, save your Quatloos and avoid MLM schemes.

Stars! Stars!

Like many advertising campaigns, many MLM programs now attempt to associate themselves with celebrities. "Zig Ziglar goes MLM!" read one spam e-mail we received.

Note that the celebrities didn't make their money in MLM. Nor will you.

Buying Into the Program

So you are being "hired" to sell products, and you have to buy into the program? This is a sure sign that it is a scam. If the product is worth a darn, the company will make its money selling the product. No program that requires you to buy into the program is real, meaning that all our scams.

If you have to buy into the program, forget it! It is not a real program.

Sales Material

Often MLM scams have sub-scams within the main scam of buying Distributorships. One of these scams is the purchasing of advertising materials. Think about it: A company wants you to sell their product but they want you to pay for the advertising materials? Especially with the huge profit margins that the Top Guy makes with these programs, they should at least pay for your brochures and tapes. If a company requires you to pay for advertising or marketing materials, it is a sure sign that it is a scam. The very worst programs will even require you to buy the "samples" of the product that you have paid to be able to sell!

Training Seminars

A scam-within-the-scam is the "training seminars" offered (sometimes required) by the MLM programs. These "training seminars" offer little training, but are mostly rah-rah seminars to boost enthusiasm -- and to make big bucks for the promoters. We have often seen people encouraged to take out thousands of dollars in credit card debt to go to these seminars, with the promise that they will make so much selling the MLM program that they will quickly pay back the credit card debt (this is almost never true).

These training seminars can cost thousands although the company ought to be paying you to attend and learn how to sell its product. No company which requires you to pay for your own training seminar is a real program.

Only The Top People Make Money

The hard truth is that only the guy who sets up the program, i.e., the Big Cheese at the very top, makes any really good money with these programs. Everybody who is selling for the Promoter typically gets screwed.

Nonetheless, the promoters of these programs will often have pictures of themselves standing next to their mansion, yacht, executive jet, whatever, to show their success. Yes, these are real and they did make money by selling programs. Unfortunately, they made this money by cheating and defrauding the people under them to sell these programs for them -- you never see a distributor with anything other than a bunch of credit card debt.

The Drop Out Rate

The "Drop Out Rate" of MLM programs is enormous -- 98% will drop out immediately, meaning that only 2% will continue with the program over any long period of time. The Promoters will tell this 2% that they are the "successful" ones -- what this means is that they have become "successful" scamming other people (who will probably spend their money and then drop out, possibly a big personal loss to them but a profit to the Promoters).

The Promoters know the Drop Out Rate, and know that by far most people will buy in, but then never sell anything and quit, which is one of the reasons why MLM programs are criminal schemes.

The Promoters also tell those who stay in that they are the "well-motivated and lucky ones". This is 100% false. The people who never sold anything and dropped out are the lucky ones, since they will not be liable for securities fraud or any of the related criminal penalties that goes with promoting somebody else into the program. It is the people who stay in the program who are risking some prison time and a felony conviction for selling an unregistered security.

One of the biggest problems of MLM is that they are marketed to people who are down-and-out and desperate, and who can ill-afford to lose their money by purchasing memberships in these bogus programs.

You Gotta Believe!

Promoters tell prospective Distributors that to be successful "You gotta believe!" in the program. This is part of a brainwashing/programming effort to lead you to believe that you will fall into that (falsely) "successful" 2% if you believe in the program and the products that it sells. Thus, active Distributors will defend to great lengths their program and their products, to the point of slandering naysayers, spamming "negative" or competing sites with e-mail to shut them down, threats of physical harassment, etc., etc., not to mention often buying the products themselves in substantial quantity.

But the proof is in the pudding. It is an interesting phenomena of MLM that the hardcore and brainwashed Distributors who defend the products the hardest, almost always quit using those "great products" completely when they move on to the next program!

The point of this is that the 2% of "successful" Distributors have usually been brainwashed and programmed so that they really believe the junk they are saying about the junk they are selling. But that doesn't make it any less junk.

Building that Downline

The promise of MLM is that if you are "successful" (in defrauding others) that you will create this big "downline", i.e., multiple layers of sellers under you, which will quickly lead you to riches and allow you to retire forever with a never-ending stream of seven- or eight-figure revenue.

This promise is totally fraudulent, for at least the following reasons:

  1. As discussed above, the 98% drop-out rate means that you probably will never build a significant downline.

  2. None of these programs last very long (Amway seems to be the sole exception), meaning that as soon as the program croaks your revenue stops.

  3. The odds of anybody in your downline making any money are incredibly small (smaller than yours!), meaning that they will probably "drop out" and be mad at you for getting them into a program where they lost your money -- the upshot being that these people will certainly not follow you to your next program (which will be necessary when your existing program finally collapses), meaning that you will have to build a completely new downline with every new program!

For all these reasons, your chances of long-term residual income with MLM is zero. Even if you are successful, the best you can hope for is a lot of hard work defrauding others to build your downline, some short-term profits until your program collapses or is shut down, and then a lot more hard work defrauding even more people into your next program, and so forth and so on until you get sick of it and drop out of MLM completely.

Buying Your Own Products

To the extent MLM programs sell any product, it is usually purchased by people who -- frustrated by their ability to build a downline and pressured by their recruiters -- will themselves buy mass quantities of the product as an attempted badge of "success". Thus, newbies on the lowest levels will max out their credit cards and buy lots of worthless product themselves in a vain attempt to move on to the next level. Usually, this works only if there is a "buy in" to the next level (more Quatloos for the promoters!) but never means success to the poor sucker buying the products, although he or she will end up with a closet full of vitamins, shampoo, phone cards or whatever -- and usually a lot of credit card debt too.

Fake It 'Til You Make It

Buying your own products is just one aspect of the MLM method of "Fake It 'Til You Make It", meaning that even if you are having zero success, you should act like you are very successful and have already made the Big Time. Many programs will tell people to start living a high lifestyle (on their own credit cards, of course), go lease a new BMW, etc., etc., so that people will believe that you are successful and they will then want to be in the program too.

The problem of course is that only a small percentage are successful in MLM, and these only for the short time until their program collapses. Their debts and BMW leases, however, are long term and require monthly payments to maintain. We have spoken with a few people who were encouraged by Promoters to lease expensive cars, and then were forced to actually live in those cars because they couldn't make the rent (and of course the cars were eventually repo'd from them too, leaving them homeless).

Additionally, the "Fake It 'Til You Make It" is just more fraud on the people you are trying to bring in. Acting like you are making the Big Bucks when you are not is blatanly dishonest -- but all part of the MLM scheme of cheating people.

Heavy-Hitters

A variation of "Fake It 'Til You Make It" is the "Heavy-Hitter" who bounces on the scene and seems very rich, and then acts as a "closer" of new recruits. Whether or not the "Heavy-Hitter" will actually have any money is subject to serious doubt: He may be one of the people living out of his leased BMW! More likely, he has been hired on a pure salary basis by the Promoters to act as a cheerleader and "closer" for prospective Distributors.

The "Heavy-Hitters" usually circulate from program to program, and are often the "Heavy-Hitter" in several MLM programs at the same time. A good way to identify these scam artists is to inquire as to what other programs they are in now, and have been in the future. If they have been in several other programs, you know that you are facing a "Heavy-Hitter", which when you get down to it is just a professional MLM scam artist (and, again, probably on a flat salary no matter what BS they tell you).

At seminars, you will frequently hear the Heavy-Hitter buildup: "Maybe Mr. Such-And-Such" will be here today!" The excitement is such that when Mr. Such-And-Such finally appears, you'd think Moses just came down from the mountain. It is all hype: The Promoters know exactly who will be at these seminars, and they plant people in the audience to make statement such as these, so that Mr. Such-And-Such finally does make his appearance, people attribute to him the credibility of the Messiah. Don't fall for this ruse.

For reference, the "Heavy-Hitter" is not unique to MLM. Casinos have for many years employed "Shills", being people who are hired by the casinos on salary and given a bunch of chips, and sent into the casino to mingle with the other gamblers and spin a few stories of the casino's big payoffs (which may or may not have occurred) -- and of course to gamble the (casino's own) chips and thus encourage others to gamble with the same enthusiasm and similar better levels.

The "Heavy-Hitters" perform the same function with MLM, often coming in to tell false stories about themselves hitting it big with the program. You can admire their gold pinkie rings, and their expensive leather shoes. But avoid these people, and just chuckle at the stories they sell. And be sure to ask them about the lease program on that BMW they are driving!

Fending Off Criticisms

You may see your program mentioned in an unfavorable light, such as on 60 Minutes or 20/20 or some other investigative news program. The Promoters will tell you something like "Their job is to bring down good companies . . .." Bull! Their job is to point out scams, and if your program has been featured on one of these program you can pretty much be sure it is one (if it is an MLM program it is a scam whether it is featured on these programs or not).

Survival Mode

After you have made big investments into the MLM program (or maybe several), are strung out on your credit cards, and the program isn't working out, then you will go into what is called "Survival Mode", where you finally give up the (false) dream of big riches with MLM and start trying to figure out how to hold off your credit card companies while getting back to a normal lifestyle.

Unfortunately, we don't have any special advice to offer. The only thing that we can say is that suicide shouldn't be an option (ex-MLM'ers unfortunately have a very high suicide rate), and that you should simultaneously seek credit counseling, and maybe adult education for re-education for a better job.

Refunds

The worst programs will promise you some sort of refund if it all doesn't work out. These are the worst programs because the refund programs are usually contingent on this-or-that, require long forms and long waits, often the refund is only 30% or so of what you spent, and usually the refunds are illusory (meaning that they company will never pay out the refund to you). The MLM programs which offer refunds do this to create the illusion that there is "no risk" to you -- and this is a 100% fraud because as discussed, you odds of actually getting your money back is infinitesimally small.

At least the companies which don't offer refunds tell you this up front so that you are not suckered into believing this nonsense.

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