Joshua Dekelaita

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Network Marketing, or MLM, first began around 1947 in the U.S. with a company called the California Vitamin Company, which became Nutrilite, which evolved into Amway (1959) and then into Quixtar in 1999. Considered the granddaddy of the industry, Amway has enjoyed popularity, notoriety and infamy. The company has over $6 billion in sales annually, but they had to change their name in the U.S. because their Representatives (Reps) compromised the trust of the market.

Techniques like inviting people over for a party, then pulling out the white-board and the sales pitch—or “persistence beats resistance,” where people would hound their friends, gave this fine company a questionable reputation. Several of their top builders created separate companies to sell books and tapes to success, often with inflated prices and promises. Profits from these success tools often far exceeded the profits people were making from Amway.

We all owe Amway a debt of gratitude because they proved the industry legal and legitimate in 1979.

There is a big difference between network marketing and an illegal pyramid scam, but many people confuse the two.

Direct Selling Association

The Direct Selling Association (DSA) is an organization of over 200 companies that manufacture and distribute goods and services sold directly to consumers. On their website, their definition is:

Pyramid schemes are illegal scams in which large numbers of people at the bottom of the pyramid pay money to a few people at the top. Each new participant pays for the chance to advance to the top and profit from payments of others who might join later. For example, to join, you might have to pay anywhere from a small investment to thousands of dollars. In [an] example, $1,000 buys a position…on the bottom level. $500 of your money goes to the person…directly above you, and the other $500 goes to the person at the top of the pyramid, the promoter. If all the …[positions] fill up with participants, the promoter will collect $16,000, and you and the others on the bottom level will each be $1,000 poorer. When the promoter has been paid off, his [position] is removed and the second level becomes the top or payoff level. Only then do the two people on the second level begin to profit. To pay off these two, 32 empty [positions] are added at the bottom, and the search for new participants continues.

Each time a level rises to the top, a new level must be added to the bottom, each one twice as large as the one before. If enough new participants join, you and the other 15 players in your level may make it to the top. However, in order for you to collect your payoffs, 512 people would have to be recruited, half of them losing $1,000 each.

Of course, the pyramid may collapse long before you reach the top. In order for everyone in a pyramid scheme to profit, there would have to be a never-ending supply of new participants.

In reality, however, the supply of participants is limited, and each new level of participants has less chance of recruiting others and a greater chance of losing money."

"Some pyramid promoters try to make their schemes look like multilevel marketing methods. Multilevel marketing is a lawful and legitimate business method which uses a network of independent distributors to sell consumer products."

How to tell if an MLM is legitimate

The DSA presents 3 questions to determine a scam from a legitimate MLM.

1. How much are you required to pay to become a distributor?

If the startup cost is substantial, be careful! The start-up fee in multilevel companies is generally small (usually for a sales kit sold at or below company cost). These companies want to make it easy and inexpensive for you to start selling. Pyramid schemes, on the other hand, make nearly all of their profit on signing up new recruits. Therefore, the cost to become a distributor is usually high.

Caution: pyramids often disguise entry fees as part of the price charged for required purchases of training, computer services, product inventory, etc.

These purchases may not even be expensive or “required,” but there will be considerable pressure to “take full advantage of the opportunity.”

This company has no cost to join.

2. Will the company buy back unsold inventory?

Legitimate companies which require inventory purchases will usually “buy back” unsold products if you decide to quit the business. Some state laws and the DSA Code of Ethics require buy-backs for at least 90% of your original cost.

With this company, you have no inventory to purchase. That is all handled by the franchisees.

3. Are the company's products sold to consumers?

Multilevel marketing (like other methods of retailing) depends on selling to consumers and establishing a market. This requires quality products, competitively priced. Pyramid schemes, on the other hand, are not concerned with sales to end users of the product. Profits are made on volume sales to new recruits, who buy the products, not because they are useful or attractively priced, but because they must buy them to participate. Inventory purchases should never be more than you can realistically expect to sell or use yourself.

This company has a huge consumer base and an extremely high customer to Ecopreneur ratio. They have hundreds of people with over 10 personal customers.

A pyramid is a money game

A pyramid is a money game where people invest in the hopes of a large pay-off. If you could not sell the product to the average consumer who is not “in the deal,” it is likely a pyramid. Some companies use “pyramid preventing products.” They are really a pyramid—a money game—but they claim, “No. We sell a product. People love our $18,000 seminars.” The “product” is so price inflated that they can pay out huge commissions, but this “product” is only sold to people “in the deal” because it would have no value to the average consumer.

You start at the top and build a Team beneath you

You will hear some people say, “If it is shaped liked a pyramid, it is a scam.” Every corporate or organizational structure is shaped like a pyramid—they just call it a “corporate triangle.” You have the president at the top, then a few vice-presidents, then some regional mangers, local managers, then all the employees. Most of us are taught to start at the bottom and work our way up. With network marketing, you start at the top of your organization and build a Team beneath you.You will hear some people say, “Only the people at the top make all the money.” The people at the top are there because they built a Team beneath them. It is not some stroke of luck or timing. Here you get paid for your results. Period.

A few numbers about MLM

For a breakdown of statistics in the direct sales industry, please go here: http://www.dsa.org/pubs/numbers/#PRODUCT Did you know that 82% of the people in direct sales are women or that 87% of the people who participate are part-time or that over 73% of sales take place face-to-face?Most traditional products in MLM (skin care, nutritional, home care, etc) are able to pay out commissions of up to 50% of the cost of goods. The rule of thumb in the industry is that for a product to work in an MLM, you need a 7 times mark-up. So that if the product costs $10 to make, it would retail for at least $70.If they tried to do that with their panels, they would price thereselves out of the market. They pay 16% commission plus $500 on each install and beat everyone in our market on price.One of the beauties of this system is that you actually enjoy true residual income. If someone signs a 25-year FRA, that income will come in every month, automatically, every time they pay their rental bill. You don’t have to remind them to order their product. They have been paying an electric bill every month before they met you…you simply offered them a solution to lock in their rate and produce clean renewable energy.

How did MLM get such a negative reputation?

Over 2,000 new network marketing companies launch each year. Ninety-five percent go out of business. That represents a lot of disappointed people. Most companies are started by a top rep who leaves their prior company for various reasons (ego, disgruntled, lack of appreciation, etc). They figure, “Corporate is just a bunch of order takers anyway. I built this company! I will do it better!”Building a successful Team and building a corporate infrastructure are two distinct skill sets. Most of these people start with the best of intentions, but they leave behind a trail of broken dreams.The industry has gone through several evolutions. When it first began, there was a major focus on personal growth. Zig Ziglar, Jim Rohm, Jim Britt, Tony Robbins, etc all came from an MLM background. During the 80’s and especially the 90’s, the industry turned to more of a money focus, and apparently lost its soul.There are some great companies and leaders, but the industry has been waiting for a breakthrough, multi-billion dollar company with a galvanizing mission to establish lasting credibility in the eyes of the market.