April 22, 2014
Seven Common Misconceptions About Multilevel Marketing & Pyramid
Schemes
William W. Keep, PhD
Dean, School of Business
The College of New Jersey
1) Multilevel marketing (MLM) distributors typically earn company compensation based
on their product sales.
False. Multilevel marketing companies typically compensate participants based on personal
purchases and purchases made by distributors in their downline. With company compensation
triggered by distributor purchases and not retail sales, the MLM model is actually quite different
from traditional direct selling. In addition to purchase-driven company compensation, MLM
companies point to the possibility of distributors generating income by selling products to non-
distributors (e.g., friends, neighbors, etc.) and in some cases to other distributors. MLM
companies that encourage or even require such sales may then fail to document the amount of
income earned from these product sales. According to previous court cases, a lack of significant
product sales to non-distributors can be one possible indicator of a pyramid scheme.
2) MLM companies that are actually pyramid schemes have either upfront distributor fees
or sell “sham” products (i.e., products that do not perform as promised).
False. Pyramid schemes come in all shapes and sizes. Some have fees; some do not. Some have
sham products; some have real products; some have no products at all. Products sold by MLM
companies found to be pyramid schemes have varied from providing proprietary products
available only from the company to branded products from national manufacturers. In all cases,
however, pyramid schemes compensate participants primarily from purchases and/or fees related
to recruiting new distributors and not primarily for product sales to non-distributor customers.
3) Federal and/or state regulators will quickly take action against any MLM company
thought to be a pyramid scheme.
False. In 2013 a court closed Fortune Hi-Tech Marketing (FHTM) for operating a pyramid
scheme, based on Federal Trade Commission analysis. FHTM had operated for ten years and had
two former state Attorneys General as advisors help reinforce the message of legality. Other
prosecutions of FTC-alleged pyramid schemes, while posing as proper MLMs, have also
occurred after operating for many years; e.g., FTC v. Equinox International (1999), an ostensible
MLM firm that agreed to a settlement to close its doors (including any international operations)
and pay $40 M in consumer redress after operating for at least 10 years. Part of the problem is in
gathering sufficient evidence about how the company actually makes money. In addition, state
and federal regulators have limited budgets for stopping all consumer frauds. While the most
obvious non-product pyramid schemes may be closed quickly, product-based pyramid schemes
may take many years to identify.
4) Two MLM distributors working equally hard in the same company will have about the
same probability of success (i.e., hard work = success in an MLM company).
False. Hard work helps in every endeavor. However, the underlying economics of the MLM
structures means that two distributors working equally hard, participating in the same training,
April 22, 2014
and investing equally in products and support can face very different competitive environments.
One may have dozens of nearby distributors also selling the exact product and business
opportunity while the other may have few. As a result, two distributors working equally hard will
not have the same chance for success. It is this difference that makes the path to success in an
MLM company impossible for a new recruit to identify. Some upline distributors claim that
purchasing leads or attending seminars will directly increase a distributor’s chance of success,
adding value to his or her hard work. Unfortunately, the profit made by upline distributors from
selling leads and offering seminars raises questions about their motivations. It is clear that even
an MLM distributor who tries and fails can generate profit for upline distributors.
5) An MLM company with these policies cannot be a pyramid scheme: 1) a 10-customer or
retail sales rule, 2) a 70% rule, and 3) a product return policy.
False. In the late 1970s Amway successfully defended itself against a pyramid scheme charge by
pointing to three company policies intended to ensure retail sales, prevent inventory loading, and
allow product returns. Since then many companies have adopted similar policies. However,
MLM companies have not adopted uniform policies; actual policies vary greatly. These policies
can be ineffective, unenforced, and even unenforceable; thus they provide no guarantees against
an MLM company actually being a pyramid scheme.
6) Claims made by current MLM distributors regarding potential earnings and product
performance are bound to be true because false claims are prohibited by law.
False. Of course, making any false or misleading statements in trade or commerce, including
about a product or earnings in a business opportunity, is illegal and if documented, can bring
enforcement litigation. Messages between a distributor and potential recruits, however, are less
easy to document and have a lower chance of being noticed. In 1951 the Food and Drug
Administration obtained an injunction against Nutrilite, the first modern MLM company
“prohibiting 15,000 door-to-door salesmen from making ‘extravagant therapeutic claims’.” In
2012 Herbalife, a large public MLM company warned, “there can be no assurance that our
distributors will participate in our marketing strategies or plans, accept our introduction of new
products, or comply with our distributor policies and procedures.” Because of the large number
of distributors it seems that MLM companies cannot fully trust, and even seek to take distance
from, what their distributors may be saying.
7) If a multilevel marketing company is actually a pyramid scheme plenty of victims will
come forward to complain.
False. Research by the Federal Trade Commission shows that among victims of the ten most
common consumer frauds, pyramid scheme victims are by far the least likely to complain.
Because failure may be incorrectly presented as failing to work hard (see above), victims of
pyramid schemes may blame themselves. Or, they may be embarrassed for being snookered into
the pyramid scheme fraud in the first place. Either way, pyramid scheme victims often simply go
away without complaining and without sharing their story with others.
