Red Flag #1, continued – Saturation MLM Does unlimited recruiting doom participants to failure? It is not the recruiting per se that creates the problems, as recruiting is essential in many businesses (e.g., sales and executive recruitment). But unlimited recruiting of participating recruiters, each of whom is empowered and given incentives to recruit other recruiters, who are empowered to recruit still other recruiters, etc., in a network of endless chains of recruitment, inevitably dooms the majority of participants to failure and loss. This is not true of insurance agencies, direct sales, and other legitimate businesses – even recruiting businesses. Most MLM participants are mathematically doomed to financial loss. Any endless chain marketing scheme incentivizes recruitment of a downline. MLM depends on infinite recruitment in a finite population and is therefore inherently flawed, uneconomic, and fraudulent. Participants are mathematically predetermined to lose money, with the exception of a few at the top (or those who got in at the beginning) of the pyramid of participants. Therefore, making promises of rewards comparable to earlier entrants is misleading and becomes a primary device for defrauding recruits. Like territorial franchises, MLM companies could conceivably limit recruiting in a given area. But limiting the number of participants is uncharacteristic of MLM because it would dampen the illusion of the potential for huge incomes for new recruits. Such limitations would render any pyramid scheme impotent. Is saturation inevitable? In 1979,Amway successfully argued to the federal judge that total market saturation, theoretically associated with a pyramid scheme, had never happened and was not possible. However, to a person experienced in market realities, this argument is absurd. Why, for example, would a town of 1,000 people need 1,000 distributors? Ten people (1%) may be more than enough to serve the market. With unlimited recruiting, new recruits find it increasingly difficult to recruit more participants into the program. This could be termed market saturation, which is reached very quickly in MLM recruiting. So while total saturation is never reached, when enough people are brought into the scheme that prospects perceive little remaining opportunity to sell or recruit, perceived or de facto market saturation has taken place. Market saturation would lead to collapse of the scheme, except that promoters typically expand to other geographical areas or set up new product divisions to survive and grow. Recruiting MLM’s become Ponzi schemes. When MLM promoters expand into other areas to make it possible for earlier investing participants to be paid off from newer investors, the MLM can be said to have evolved from a pyramid scheme into a Ponzi scheme – which is illegal in almost all jurisdictions. Ponzi schemes are programs in which new investors are repaid, not from the sales of products or fulfillment of services, but from the investments of new investors. Ultimate collapse is inevitable as new markets become less accessible, or when perceived saturation makes future prospects resistant to participation. Some MLM proponents argue that continual dropouts justify replacement through ongoing recruitment, much as in other direct sales businesses. But this is a fallacy. Later recruits never have the same opportunity as earlier entrants due to facto saturation. The ill-fated Amway decision. In 1979 the FTC ruled that Amway was not a pyramid scheme, subject to “retail rules” – which are generally ignored (in actual practice) by MLM companies. Consumers recruited into MLM’s will continue to pay heavy prices for this decision – until federal and state enforcement agencies more rigorously apply existing laws as suggested in this paper. In spite of the confusion over definitions of what constitutes a pyramid scheme, much can still be accomplished within the present legal framework. This paper focuses on clarifying those definitions and on identifying the combination of features in the compensation plan that cause the greatest harm. The fact that an MLM compensation plan limits the number of levels upon which any distributor can be paid overrides from the company does not negate the “endless chain” feature of the scheme. The mathematical impossibility of later recruits enjoying the same financial benefit as earlier participants is apparent.
Posted on: Sun, 25 Aug 2013 00:56:26 +0000
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