The Truth About Network Marketing

The Truth About Network Marketing

Stephen Barrett

Turning ordinary people into quacks

Don’t be surprised if a friend or acquaintance tries to sell you vitamins, herbs, homeopathic remedies, magnets, or weight-loss powders with claims that they can benefit your health. Millions of Americans have signed up as distributors for companies that market such products from person to person. Often they have tried the products, concluded that they work, and become suppliers to support their habit.

Multilevel marketing (MLM)–also called network marketing–is a form of direct sales in which independent distributors sell products, usually in their customers’ homes, by telephone, or through the Internet. In theory, distributors can make money not only from their own sales but also from those of the people they recruit.

Becoming an MLM distributor is simple and requires no special knowledge of health or nutrition. Many people do so initially in order to buy their own products at a discount. For a small sum of money–usually between $35 and $100–a company sells a distributor kit that includes product literature, sales aids (such as a videotape or audiotape), price lists, order forms, and a detailed instruction manual. The application form is usually a single page that asks only for identifying information.

Many MLM companies publish a magazine or newsletter containing company news, philosophical essays, product information, success stories, and photographs of top salespeople. Most companies, and tens of thousands of individual distributors, also maintain Web sites. During a recent search using google.com, “MLM” yielded more than fifty three thousand links and the phrase “network marketing” yielded more than twenty thousand.

Questionable Financial Opportunity

Network marketers can buy products “wholesale,” sell them “retail,” and recruit other distributors who can do the same. When enough distributors have been enrolled, the recruiter is eligible to collect a percentage of their sales. Companies suggest that this process provides a great money-making opportunity. However, it is unlikely that people who don’t join during the first few months of operation or become one of the early distributors in their community can build enough of a sales pyramid to do well. And many who stock up on products to meet sales goals get stuck with unsold products that cost thousands of dollars. Some companies permit direct ordering of their products, which avoids this problem.

An Amway Corporation report indicates that the vast majority of its distributors make very little money. Amway’s 1998 Business Review tabulates figures gathered from April 1994 through March 1995 from distributors who attempted to make a retail sale, presented the Sales and Marketing Plan, received bonus money, or attended a company or distributor meeting in the month surveyed. The average gross income for these “active distributors” was $88 per month. The report defines “gross income” as the amount received from retail sales minus the cost of products, plus any bonus. It does not take any business expenses into account. If this figure includes purchases for personal use, the potential profit would, of course, be less. The report also notes that “approximately 41% of all distributors of record were found to be active.”

A pyramid scheme is an illegal promotion in which many people at the bottom of the pyramid pay money to a few at the top. To maintain the process, however, the number of new participants must keep multiplying–which is impossible. When the supply of recruits dries up, the pyramid will collapse, leaving almost everyone but the earliest participants as losers.

To avoid being classified as pyramid schemes, multilevel companies must pay commissions for retail sales but not for recruiting new distributors. However, retail sales are difficult to sustain because most steady customers will become distributors in order to purchase their products “wholesale.” In 1999, the National Association of Attorneys General announced that complaints about multilevel marketing and pyramid schemes were tenth on their list of consumer complaints.

Dubious Health Claims

More than a hundred multilevel companies are marketing health-related products. Most claim that their products are effective for preventing or treating disease. Many falsely claim that their products strengthen the immune system. Some merely suggest that people will feel better, look better, or have more energy if they supplement their diet with extra nutrients. These suggestions are typically accompanied by warnings about faulty diet, food additives, soil depletion, “overprocessed” foods, air and water pollution, rising cancer rates, or other alarming issues. A few companies make no claims in their literature but rely on testimonials, encouraging people to try their products and credit them for any improvement that occurs. Most claim that their products are superior to those of their competitors.

Most multilevel companies tell distributors not to make claims for the products except for those found in company literature. (That way the company can deny responsibility for what distributors do.) However, many companies (or their distributors) hold sales meetings at which people are encouraged to tell their stories to the others in attendance. Some companies sponsor telephone conference calls during which leading distributors describe their financial success, give sales tips, and describe their personal experiences with the products. Testimonials also may be published in company magazines, audiotapes, or videotapes. Testimonial claims can trigger enforcement action, but since it is time-consuming to collect evidence of their use, government agencies seldom bother to do so.

Government enforcement action against multilevel companies has not been vigorous. These companies are usually left alone unless their promotions become so conspicuous and their sales volume so great that an agency feels compelled to intervene. Even then, few interventions have substantial impact once a company is well established.

Misguided Motivation

The “success” of network marketing lies in the enthusiasm of its participants. Most people who think they have been helped by an unorthodox method enjoy sharing their success stories with their friends. People who give such testimonials are usually motivated by a sincere wish to help their fellow humans. Since people tend to believe what others tell them about personal experiences, testimonials can be powerful persuaders.

Perhaps the trickiest misconception about quackery is that personal experience is the best way to tell whether something works. When someone feels better after having used a product or procedure, it is natural to give credit to it. However, this is unwise. Most ailments are self-limiting, and even incurable conditions can have sufficient day-to-day variation to enable bogus methods to gain large followings. In addition, taking any action often produces temporary relief of symptoms (a placebo effect). For these reasons, scientific experimentation is almost always necessary to establish whether health methods are really effective. Instead of testing their products, multilevel companies urge customers to try them and credit them if they feel better. Some products are popular because they contain caffeine, ephedrine (a stimulant), valerian (a tranquilizer), or other substances that produce mood-altering effects.

Another factor in gaining devotees is the emotional impact of group activities. Imagine, for example, that you have been feeling lonely, bored, depressed, or tired. One day a friend tells you that “improving your nutrition” can help you feel better. After selling you some products, the friend inquires regularly to find out how you are doing. You seem to feel somewhat better. From time to time you are invited to interesting lectures where you meet people like yourself. Then you are asked to become a distributor. This keep you busy, raises your income, and provides an easy way to approach old friends and make new ones–all in an atmosphere of enthusiasm. Some of your customers express gratitude, giving you a feeling of accomplishment. People who increase their income, their social horizons, or their self-esteem can get a psychological boost that not only can improve their mood but may also alleviate emotionally based symptoms.

Multilevel companies refer to this process as “sharing” and suggest that everyone involved is a “winner.” That simply isn’t true. The entire process is built on a foundation of deception. The main winners are the company’s owners and the small percentage of distributors who become sales leaders. The losers are millions of Americans who waste money and absorb the misinformation.

Laypersons are rarely qualified to judge whether prospective customers need supplements–or medical care. Even though curative claims are forbidden by the written policies of each company, the sales process encourages customers to experiment with self-treatment. It may also promote distrust of legitimate health professionals and their treatment methods. Former National Council Against Health Fraud president William T. Jarvis, PhD, calls MLM “the most effective system ever devised to turn ordinary people into quacks.”

Physician Involvement

During the past few years, thousands of physicians have begun selling health-related MLM products to patients in their offices. The companies most involved appear to be Amway, Nu Skin Interior

Design, and Rexall Showcase International. Doctors are typically recruited with promises that the extra income will replace income lost to managed care. The products usually cost much more than similar products marketed through drugstores or healthfood stores.

In June 1999, the AMA House of Delegates approved ethical guidelines emphasizing that physicians should not coerce patients to purchase health-related products or recruit them to participate in marketing programs in which the physicians personally benefit, financially or otherwise, from the efforts of their patients. The guidelines clearly frown on doctors profiting from the sale of health-related nonprescription products such as dietary supplements. However, many will continue to do so.

Recommendations

Consumers would be wise to avoid health-related multilevel products altogether. Those that do have nutritional value (such as vitamins and low-cholesterol foods) are invariably overpriced and may be unnecessary. Those promoted as remedies are generally either unproven, bogus, or intended for conditions that are unsuitable for self-medication. I do not believe it is possible to make an honest living selling health-related products through network marketing.

Government agencies should police the multilevel marketplace aggressively, using undercover investigators and filing criminal charges when wrongdoing is detected. People who feel they have been defrauded by MLM companies should file complaints with their state attorney general and with local FDA and FTC offices. A letter detailing the events may be sufficient to trigger an investigation. The more complaints these agencies receive, the more likely that corrective action will be taken.

Dr. Barrett, a retired psychiatrist who resides in Allentown, Pennsylvania, is board chairman of Quackwatch, Inc., and a board member of the National Council Against Health Fraud. His MLM Watch Web site (www.mlmwatch.org) provides a skeptical view of multilevel marketing.

COPYRIGHT 2000 Prometheus Books, Inc.

COPYRIGHT 2000 Gale Group