Multi-level marketing is counter-cyclical: Sign of a pyramid scheme?

17 01 2008

Multi-level marketing is counter-cyclical: Sign of a pyramid scheme?

Posted by: in Money Ripoffs and Scams

Filed under: Ask WalletPop, Entrepreneurship, Ripoffs and Scams

In order for multi-level marketing companies not to qualify as pyramid schemes, you’ve to believe that people participate to acquire products. Skeptics, including myself and WalletPop’s Tracy Coenen, believe that in many cases, the products simply serve as cover for a scheme that’s not different from a chain letter in any meaningful way.

The strength of multi-level marketing recruiting efforts in times of economic weakness and uncertainty seem to reinforce my belief that these “business opportunities” are tiny, and often nothing, more than endless chain recruitment schemes.

In 2002, Entrepreneur columnist Michael L. Sheffield responded to a reader who was worried that her network marketing business would suffer in step with the general economic malaise that was gripping the country at the time:

… If you’re serious about your network marketing business, then, believe it or not, a recession could be the best thing that’s happened to you in a while. Shaky economic times have historically produced a renewed awareness of the need to make more money. You’ll find people who were previously uninterested in your business are suddenly looking for new financial opportunities. They want a business that doesn’t require a lot of capital, grants them to establish their own hours and offers rewards that can grow faster than capital or labor stipulations.

That’s certainly logical. But the products that most network marketing companies sell — expensive vitamins, cosmetics that cost far more than drugstore products, and $42 a bottle Tahitian Noni Juice — would seem to be extremely vulnerable to an economic slowdown.

Mr. Sheffield doesn’t even mention this, and it’s easy to comprehend why: Network marketing success is not about selling products on their merits; it’s about getting desperate people to buy products they can’t afford in the hope of recruiting others to do the same so they can earn commissions. That’s why it follows a totally different economic cycle than conventional product sales.

Mathematically, only a tiny percentage of people can succeed in a business that isn’t based on selling something to people outside of the system. In biology, shut systems are generally not sustainable for a long period of time — When evaluating a possible business opportunity, you should avoid shut systems like the plague.