Multilevel marketing (MLM):
True opportunity or false promises?
A conversation with Robert Fitzpatrick
By Ravi Dykema

You know what multi-level marketing is. You’ve probably bought vitamins or soap or salt or long-distance phone service—or even stocks—through an MLM. A friend sells the product, it seems like good quality, and what can you do? You do him a favor and buy. Next thing you know, your friend is trying to get you to become a "distributor."

MLM is "a business model in which an unlimited number of distributors can sell a company’s products. "Each distributor has the opportunity to gain override commission payments on the sales of as many as six levels of sales reps below (downliners)," says Robert L. Fitzpatrick, author of False Profits: Seeking Financial and Spiritual Deliverance in Multi-level Marketing and Pyramid Schemes. Sales people are compensated not only for selling the product to retail customers, but also for enrolling new sales people. In fact, says Fitzpatrick, what MLMs really are about is enrolling investors, rather than selling product. More than 7 million Americans are involved in MLMs, which do an annual business of $10 billion, according to Fitzpatrick.

Consequently, he says, "The time has come to question and challenge the legal basis of the MLM industry. If we do not morally and legislatively address MLM now, we are in danger of institutionalizing destructive and fraudulent pyramid schemes as legitimate free market operations."

A longtime urban activist and community development worker, Fitzpatrick is a former reporter who has started and organized two national trade associations, organized international symposia, publishes an international journal for the graphic arts industry and is a consultant to national trade associations. He spoke with Nexus publisher Ravi Dykema from his home in Charlotte, NC.

NEXUS: Let's begin with a story of one typical person who was involved with an MLM.

RF: I’ll tell you about a woman I’ll call Jean who is in her 50s. She is a prominent, well-known, highly respected counselor and workshop facilitator. She was solicited to go to an MLM meeting for a company that sells products that are promoted as extremely environmentally clean, non-polluting, hypo-allergenic, produced without animal testing. At the meeting she was told not only that these products are good for the environment and good for people, but also that the multi-level marketing or network marketing system was spiritual system. It was described as a non-competitive system of people helping each other, as opposed to individual, private acquisition. In other words benefits accrue to each person to the degree that they help other people. It was described as a new system for distributing income, which breaks the cycle in which the wealthy seem to be getting wealthier and the poor getting poorer. Here was a way to achieve security and stability in a job market outside the heartless, insensitive, ruthless corporate world.

So Jean became quite excited about this at the recruitment meeting. She was invited by someone she knows and trusts, and the recruitment speakers were speaking her language, describing a new system which sounds wonderful. It resonates with the values that she believes are the best values around which to build a life.

NEXUS: What do they want her to do?

RF: They want her to simply spread the word to her sphere of influence. In other words, they described it as the easiest thing in the world, to share this new message with people who already know and trust her. They were not asking her to go and do cold-calling. All they told her she needed to do was to share this great opportunity with family, friends and acquaintances. Then they told her that the real beauty of this is that she would not have to build her new herbal cosmetics business one person at a time, as she does with her counseling practice. This system would exponentially grow, they said. It would expand on its own, so that all she really had to do was plant the seed. The message that she would deliver to people, they would in turn deliver to their circle of friends and relations. And those in turn will do the same, so that the potential for expansion and growth, as was shown at this meeting on a chart, is enormous.

NEXUS: How do they describe that "enormity?"

RF: She was told that with a down-line potential of 1,000 people, she could be receiving an income of as much as $10,000 a month, without having to continuously work hard.

NEXUS: Fast-forward six months. What’s happening? What’s she doing?

RF: She’s calling and writing everybody she knows. She’s developed a form letter that she’s sent to most of her friends. She’s brought it up at the workshops she conducts. She’s approached every person who is currently a client or ever has been a client. She’s brought it up at her church. She’s spoken to her family members, her neighbors. NEXUS: Is she having fun doing this?

RF: No. What she discovered is that she is not earning what she had been lead to believe she would.

NEXUS: Why not?

RF: Because the people she recruits don’t recruit others. Some made small purchases and then didn’t re-order. The requirement of the system is that she had to achieve a certain volume of product sales in order to make a higher commission and buy her own products at a lower price.

NEXUS: In other words you need to be selling volume in order to get a discount on the product going to you and your down-line.

RF: Yes, a commission level that would really make her expected income probable. She wasn’t reaching that number. As many as she would enroll, that many were dropping out, even though she was putting in as much as 30 hours a week or more, when you add her phoning, follow-up, mailings, attendance at meetings, networking and weekend workshops.

NEXUS: Attendance at what meetings? She belongs to someone else’s down-line, the person who recruited her, the person who recruited them, and so on. Meetings are held by the sponsoring up-liners to train and motivate her and inspire her.

NEXUS: And is it fun? Is she rewarded by going to the meetings?

RF: She’s been told that you need to do this to keep the energy, to keep herself highly informed, to hear success stories from other people. She’s also purchased materials. She’s purchased tapes to listen to in her car. She’s purchased videos to watch of mass rallies, large annual conventions of the organization in which the top up-liners are featured and their incomes are reported, their lifestyles are described, and awards are given.

NEXUS: How much has she invested in inventory and in airfares to her conventions?

RF: Over the last six months, she has probably invested $3,000 to $4,000.

NEXUS: And how much has she made?

RF: A couple hundred dollars each month. $1,200 over six months. She’s also encountered some hostility and anger from some people with whom she had close relationships, clients, people she knew well. Some people told her to her face that they resented it, and they felt she was a violating the professional relationship or the friendship they had. Her business suffered. Her family relationships have suffered, and she’s distraught.

NEXUS: What do the trainers at the meetings or at the conventions or on the motivational tapes tell her she should do with these feelings?

RF: They say that the message is so good that if someone does not understand it, she hasn’t done a good enough job presenting it. Perhaps she hasn’t shown enough passion and enthusiasm for it. So they recommend more motivation training, more sales training and networking with people who are successful.

NEXUS: So now fast-forward to the end.

RF: Well, the process of losing money and the process of alienating friends led her to drop out. She also sensed an over-reaching, obsessive focus on being wealthy. She began to see at these meetings a lack of spirituality, a lack of the values that she thought drove the system. The dollars, the volume, the income and what people did with the money, were presented as the rewards for all the work. It began to discourage her. This is really not the way she had run her life. She’s always been a prosperous person. But she had never run her life based only on earning and spending money.

NEXUS: Did she lose her new MLM friends?

RF: Yes, immediately.

NEXUS: Is this an unusual story?

RF: In my experience, for the one story of a person who succeeded and made $10,000 a month in an MLM, you would have as many as 2,000 people who would represent the other picture. I just spent some time with the Small Business Administration here in Charlotte. They say that 93% percent of people in multi-level marketing make less than $200 a month. Now when you say you make $200 a month, that’s gross income, and what that really means is that you lost money. But only one out of 200 people in Amway, according to their own figures, ever even make the level of what they call direct distributor. That’s the person who gets to buy directly from the company. Most MLMs have a volume level that you need to hit before you can really build your down-line and get the commission level. So only one in 200 people even hit that number at Amway. That’s just the bottom level. So, if you step back from multi-level marketing and look at it not anecdotally but as a macro-system, you see that only a small number of people ever make any profit whatsoever.

NEXUS: People I know in these organizations would say they get a really great product that heals you or does something good for you. It’s better than what you can get in the stores, and you’re buying it at a great price. If they use it and don’t end up developing a down-line, so what? What’s wrong with that?

RF: I certainly hear that often. And people say that only for a time. Later, when you ask, "Are you still buying that product?" they usually say "no." What they really are saying to you is that they came into it for its income potential. It is a rare product offered through multi-level marketing that’s not available somewhere else at a better price. Across the board, multi-level marketing does not present products at a lower price. It doesn’t present unique products; it doesn’t present better products.

NEXUS: Can you run through a few examples?

RF: Long-distance telephone service, vitamins, food supplements, skin care. Now just in those four categories you have the majority of the multi-level marketing system. None of those products are unique, better or cheaper. I say that because I’m a consultant in the distribution field. I work with companies that are designing distribution systems. They ask me, "Do we sell it direct from manufacturer to customer? Do we create a network of distributors underneath us? Do we use mail-order catalogues? Do we sell it to retail stores? What you find about multi-level marketed products, in most cases, are in matured categories. There are hundreds of vitamin companies. How do you get your vitamin into the market? You can’t even get it onto the shelf of a grocery store. You couldn’t get it into a health food store. They have more brands than they could ever need. So you add to the product this unique selling system, giving people an incentive to buy it.

NEXUS: Would you advise a company against distributing through an MLM?

RF: I would advise a company not to use multi-level marketing because it harms a large number and misleads a large number of investors. This is really an ethical or value issue.

NEXUS: How did the phenomena of MLM begin?

RF: It came from two things. First was the collapse of door-to-door selling. You can’t sell door-to-door anymore for many reasons. Transients. Everybody’s working. Nobody’s at home. Everybody’s frayed. It is impractical. It doesn’t work anymore. Second is the maturing of our economy. There are so many goods, so many brand names, so much more stuff than there are people to buy it. So the multi-level marketing system developed really to, first, circumvent door-to-door selling because you don’t have to get in the door. You start with the people who have already let you in the door, family and friends. Second, MLM attaches to the product a unique perceived value. You know in sales you always have to describe the value of a product over another product. What’s the value of Amway soap over Proctor & Gamble soap? Proctor & Gamble soap is cheaper, readily available, you know the brand name, you know it’s reliable. Why would you buy Amway? Because you add this perceived value of an income opportunity. This was the genius of the multi-level marketing founders, and the two founders of Amway were really the creators of the whole multi-level marketing system in the ’60s and early ’70s.

NEXUS: As a distribution concept, MLM sounds like a dead-end route. Why is it still so popular?

RF: This is difficult to explain, but the reason that the word doesn’t get out is the people who fail at it almost to a person are like the person I just described. They fail and say to themselves and to anyone else, "I failed because I just didn’t try hard enough. It was something lacking in me. The system was presented to me. I saw the opportunity. I saw people making money at it. I tried, but I just failed." So failure is taken on by the individual. The marketing system is designed to convince the person who has been enrolled that, first, you can do it, and then when you fail, it convinces you that you only failed because of you.

NEXUS: How many people fail at MLM?

RF: Amway itself goes through about 50 percent of its people every year.

NEXUS: Meaning 50 percent of the total number of distributors drop every year?

RF: Yes. They drop out of active status within a year.

NEXUS: When we look back at this era a hundred years from now, how do you think we’ll view MLMs after, as it appears is happening, millions of people have gotten involved?

RF: From my perspective, it is mostly negative. We have developed a deceptive selling system. You’re not buying what you think you’re buying. You are buying a good product. There’s nothing about multi-level marketing particularly associated with bad product. It’s the value proposition that has been presented to you that is fraudulent. The business opportunity that is attached to the product is the real product you bought. The product you paid for is incidental to the real product that you’re buying, which is a business opportunity. Someone very seldom comes up to you and says, "I would like you to buy this food supplement." They offer you an opportunity to become a distributor underneath them to sell this food supplement.

The negative effect of it is that we’re allowing into legitimate market activity something that has deception built into it. A lot of people are wasting their time, and losing money. In addition, multi-level marketing is a cultural phenomenon, a method of marketing that has broken down the walls between commercial and private life. In other words, it has commercialized more of our lives. I think that it has distorted and poisoned some peoples’ relationships that previously were considered sacrosanct, for example, the family, having a friend, being at a church or a social club, a class reunion, a wedding.

NEXUS: What poisoning or distorting has happened in those arenas?

RF: They have become market opportunities. They have become settings for sales. And so a relationship is becoming a commercial relationship. A family member is a prospect. A next door neighbor is a prospect. Now multi-level marketing is not the only system that can exploit these relationships, but it’s the only system that is designed to exploit those relationships, that depends upon exploiting those relationships.

NEXUS: What is particularly appealing about MLMs to people who are interested in holistic consciousness and new spirituality?

RF: Multi-level marketing has utilized the faith and the beliefs that would today be called New Age tenets or beliefs. And by those I mean beliefs that are based upon personal empowerment, a sense of a divine purpose, of a benevolent deity, for example. Companies are espousing the concept of a universe in which prosperity and wealth and good health are intended for everyone. So this is a benevolent universe, a benevolent deity. They teach that each individual can achieve these ends through spiritual methods. So the concept of succeeding in this business is presented in many meetings as a spiritual exercise, that it depends first upon your orientation, your attitude, an opening to allow prosperity and success to enter your life. When that happens, success will flow, companies tell recruits. The philosophy and the tenets that are taught coincide closely with the principles that are taught in many new age communities or new thought churches, such as Unity or Church of Religious Science. It is a system that reality can be formed by your attitude, that you can shift reality by changing yourself. That what’s intended in life is for you to be successful, happy and healthy. That poverty or illness is often a sign of resistance to the divine pattern. This is taught all the time in multi-level marketing.

NEXUS: What’s wrong with people being taught that their consciousness is a factor in their subjective experience, that if you’re having a bad time, it can be something you’re thinking, and if you change your thoughts, you might not have a bad time?

RF: Nothing is wrong with teaching that. What I’m saying is that those beliefs are being used by some companies to attract customers and sales people to the multi-level marketing system. They’ve brought a person into a system in which mathematically only a small number can succeed.

NEXUS: I’m sure there are a bunch of bad MLMs out there, and they’ve given MLM a bad name, but are there good ones?

RF: The answer is that it is not really the individual company that should be assessed as good or bad. It is the system itself which is bad, since the system itself is inherently deceptive and inherently designed as a pyramid scheme in which only a small number can ever succeed. In other words, success requires deception, since only a few can succeed, and you could never recruit people by telling them that.

People are going to say, "Well, a lot of people start businesses, for example, restaurants, and not very many of them succeed." It’s not the same. It’s not the same at all because if you bought a franchise, the law requires the franchiser to tell you how many franchises like yours there are. In other words, there’s a whole set of disclosures that have to be given. There is no such requirement in multi-level marketing. If disclosure were required and if people could really see the numbers and understand them, certainly the system would be less harmful to people. The other aspect of it is that it is an inherent pyramid scheme, a system in which people must fail below you in order for the thing to survive. If it were presented at a meeting that in order for this to keep going, a bunch of you have to come in, invest your money, and fail so that the rest of us at the top can continue operating, that would be more honest. This involves a level of deception far beyond obscuring the odds in a lottery, or even presenting the odds, which most people don’t understand anyway. This is something which I think has stretched the limits of legitimacy and honesty in business beyond what we could ever have imagined.

NEXUS: Okay, so the system is the problem, not the individual companies using the system. Are you saying that there is no way to use this current version of the MLM system ethically and healthfully, for the people and for the economy?

RF: No, actually I’m not quite saying that. I will make one important distinction. I see a few multi-level marketing companies operating legitimately, with products that are sold usually on a home-party basis, with a focus on selling the product itself, and where promises of high income are seldom made. One such company is called Pampered Chef and another called Weekenders that sells women’s clothing primarily. These are presented as modest, part-time sales opportunities.

NEXUS: What questions could a person ask to distinguish between an MLM that’s harmful and the kind you’re describing?

RF: I think there’s one key question: Are most of your products being sold only to distributors, and is the only way the distributor can make a profit through recruitment of additional distributors below him or her? Then there is an inherent mathematical limit, and if you’re continuing to sell that way, you are deceiving people within a pyramid scheme.

The second question would be: Are you being enrolled to sell the product and earn a commission, or are you being enrolled only for the business opportunity? In other words, you can tell by the way the presentation is made where the emphasis is.

NEXUS: What is the future of MLM?

RF: The future isn’t yet written about multi-level marketing. While it is growing, public awareness slowly is growing, too. And the law is not settled about multi-level marketing. 1979, 20 years ago, the FTC declared that Amway was not an illegal pyramid scheme. But there are current cases pending right now that are reviewing the Amway case and looking at the guidelines which the FTC did impose on Amway, which are routinely ignored. Several court cases are pending right now in Federal court that may reinterpret the law that regulates multi-level marketing.

NEXUS: What would appropriate regulation look like?

RF: Probably something along the lines of franchising, some kind of a disclosure statement. Within the disclosure statements might be such things as: How many people in your geographic area are currently enrolled? How many people have been enrolled over the last five years and are no longer participating? It would probably also require some disclosure of who and how many people are in your up-line. It would require some disclosures about funds for training and motivation. Are people making money from those events? What has developed in the multi-level marketing business is a second business, and in the law suit that is currently pending against Amway by a group of high-level distributors, there’s the assertion that more money is made by the high-level distributors at Amway from selling, training and motivational materials down-line than from receiving commissions on the sale of Amway goods.

NEXUS: What’s wrong with that?

RF: Nothing would be wrong with it if it were fully disclosed. Amway distributors, when they go to a rally, often have no idea that money is being earned by the person who recruited them to come to the rally. They usually have no idea that the recruiter may be making more money by inviting distributors to the meetings than they do from people buying Amway stuff.

NEXUS: Is that true in lots of MLMs or just Amway?

RF: It’s true in many MLMs. I want to add one more thing about disclosure. Perhaps most importantly, regulation would require disclosure and reporting to some regulatory body, proof that the majority of the company’s goods are sold to end-users, not distributors. Once you require a business to survive by selling product, you’ve required the company to be an actual distribution channel, not a pyramid scheme. Now a person not only could make money selling the product, they’d have to make money selling the product to people who are not also enrolled as distributors. That would change the whole structure of multi-level marketing. That would take out the pyramid aspect of it, which is fundamental. It is that pyramid business and the cover-up of that pyramid structure, with all its mathematical limitations, that drives the deception that is so prevalent.

NEXUS: How would you suggest people who persuade a family member or friend to get out of an MLM?

RF:I would say to anybody who has a close family member or friend who’s involved, it’s not easy. MLM has a psychological grip on people. It is very strong and very difficult to break. It is not broken by directly confronting and arguing with somebody. It does help to offer information gently about the mathematics of it. The other thing that I would say to people is to draw your own boundaries. Do not permit somebody to commercialize or misuse or abuse relationships with recruitment. That’s probably the strongest message you can give to someone. Tell them that they’re out of line, this is a family, we’re friends, we’re out tonight to have a good time, keep the business out of it, and I don’t appreciate your trying to leverage our relationship this way. I find that message somehow gets through to people and awakens them to what they’re doing more so than arguments about economics ever could. People get into a kind of cultural trance in MLM, because it is tapped into so many treasured myths about wealth and the American dream and financial independence, pursuit of happiness, every person being in charge of their own lives, free to pursue their own interests, and so on. These myths absolutely mesmerize people. I think there is also an addictive quality to this. A lot of people discover that MLM is tapped into some very deep-seated frustrations and fears, and has been offered as the ultimate answer to those, and so they latch onto it in the same way a person does to a drug.

NEXUS: Are they latching onto the hope that they’ll be delivered from this anxiety eventually?

RF: Exactly. They hope that the answer lies in the system; that it contains fulfillment, a sense of community, relief and respect. But the pursuit of happiness is a unique thing, it isn’t a franchise, and it requires looking in, not going to a mass rally. And it’s hard work that’s up to each person.

One thing I will say, though, is that this economy offers an extraordinary diversity of opportunity to people. As in nowhere else in the world, you can make dreams come true here in America. One of the most negative messages being presented on such a mass scale by MLM is that there’s no hope, that the only salvation is through the MLM system, that everything else you do, school teacher, nurse, is a loser’s job with dead end.

All of this smearing and devaluing of our economy and our system has done a lot of damage. The truth is there is a lot of opportunity for people, but it takes work. It takes looking inside yourself. I’m not saying that the economy offers every single person the chance to become rich. It doesn’t. But it really does offer people a chance to pursue interests. There is a freedom here that is really wonderful. But I see lots of money-making opportunities that can support people and their families sustain people in ways that they can feel good about. And I think that this message needs to be part of the refutation of multi-level marketing’s deception.

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