Why Examine MLM?

Why a website about multilevel marketing?

One reason is the size of the industry.  According to the Direct Selling Association, most of whose members utilize some type of multilevel compensation plan, retail sales by direct sellers in 2021 totaled $42.7 billion.[1]   This is a big number, although it represents a tiny proportion of total retail sales in the U.S.   According to the U.S. Census Bureau, total retail sales in the U.S. in 2021 were $6,522.6 billion.[2]  Accordingly, direct selling represents 0.64% of all retail sales in the U.S.   And, since the DSA is not a reliable source of information about direct selling, the real percentage is probably much smaller.   The DSA does not reveal exactly how it collects and verifies its data, but its retail sales number is at best a guess.   Most MLM companies are not publicly traded and do not have audited financials.   Moreover, unless they are under a Court order (like Herbalife), most MLM companies do not track actual retail sales by their distributors.  Nevertheless, any industry that claims sales of $42 billion deserves some attention.

Another reason is that while the size of the MLM industry by dollar volume is relatively small, the number of people involved is relatively large.   The DSA asserts that there were 7.3 million direct sellers in 2021.   The DSA also maintains that there were 44.6 million “preferred customers” and “discount buyers.”   I have to use quotation marks because the DSA has its own special definitions for these and other terms it uses.[3]   For instance, while the DSA states that there were 7.3 million direct sellers in 2021, it reveals in a footnote that 16.2 million people had signed independent contractor sales agreements with direct selling companies in 2021.   The DSA explains the difference by saying that 8.9 million of the people who signed direct seller agreements were “discount buyers who purchased products for their own use but chose not to build a business.”[4]   The DSA does not reveal how it determined whether a person who signed a direct seller agreement was a true direct seller or merely a lover of the company’s products.   Nor does it reveal the attrition rates of distributors, which are known to be quite high.
Notwithstanding these ambiguities, the fact that many millions of people are involved in MLM make it an industry that should be studied.

The most important reason to examine the MLM industry is the harm it causes.   Here are just a few recent examples:

  •  In January of 2013, the Federal Trade Commission (FTC), working with regulators in the states of Kentucky, North Carolina and Illinois, shut down an MLM firm called Fortune Hi-Tech Marketing, alleging that it was a pyramid scheme and that promoters made deceptive earnings claims.  See http://www.ftc.gov/news-events/press-releases/2013/01/ftc-action-leads-court-halt-alleged-pyramid-scheme (accessed 2/7/14).   The FTC found that “the overwhelming majority of participants – more than 98 percent – lost more money than they ever made.”  https://www.ftc.gov/news-events/press-releases/2014/05/ftc-settlement-bans-pyramid-scheme-operators-multi-level   This one scheme involved 350,000 consumers and resulted in an estimated $169 million in losses, of which only a small fraction was recovered.
  • In June of 2014 the Ninth Circuit Court of Appeals upheld a district court ruling against an MLM company known as BurnLounge.   The court described BurnLounge’s bonus system as “a labyrinth of obfuscation.” It found there was a 93.84% failure rate for all “Moguls” (the BurnLounge term for distributor).
  • In 2016 the FTC announced the settlement of its investigation of Herbalife, one of the largest and oldest MLM companies and a leading member of the DSA.   The FTC filed a complaint which amounted to a blistering indictment of typical MLM recruitment and compensation practices, and a consent decree which included $200 million in restitution for victimized Herbalife distributors, mandated substantial changes to Herbalife’s distributor compensation plan, instituted onerous retail sales verification and record-keeping requirements, and imposed seven years of oversight by an independent compliance monitor at Herbalife’s expense.[1]    https://www.ftc.gov/news-events/press-releases/2016/07/herbalife-will-restructure-its-multi-level-marketing-operations
  • In 2020, the FTC filed an expert report analyzing an MLM known as Success by Health (SBH).  The FTC’s expert calculated the net profit for each “Affiliate” (the term used by SBH for distributor) by subtracting payments made to SBH (e.g., for SBH products and training) from any payments received from SBH over this time period. Based on this transaction data, the overwhelming majority – over 98% – of Affiliates are in a loss position, as payments to SBH exceeded revenues received from the firm.[5]  

There are many more examples which could be given.   The MLM industry is responsible for many billions of dollars of consumer losses.   For that reason it justifies a thorough examination.

[1]  See https://www.dsa.org/docs/default-source/industry-fact-sheets/dsa-2021g-ofactsheetv3.pdf?sfvrsn=51c6d6a5_3    All other references on this page to DSA data are to this document.

[2]   See https://www.census.gov/newsroom/press-releases/2022/retail-sales.html

[3] “When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’”    Carroll, Lewis, Through the Looking Glass and What Alice Found There (1871)

[4] More information about how the DSA has manipulated its terminology is available here:  https://seekingalpha.com/article/4535797-multilevel-marketing-how-everyone-doing

[5] Expert Report – Stacie Bosley, Ph.D. For the United States Federal Trade Commission Regarding Success By Health (SBH), a division of Success By Media Holdings Inc.  (filed January 8, 2020).