MLM - Legal And Ethical Concerns?
Posted on October 16, 2008
Introduction
Multi-Level Marketing (MLM) is a system of marketing that has been around for some time. Also known as Network Marketing, it is a method of distributing products that involves little or no mass advertising. Instead, marketing of the product is spread by word of mouth of its users.
Of course, word-of-mouth marketing is around even longer than MLMs, so what makes it different? Unlike traditional word-of-mouth marketing, the users who spread the word for the company, and gets others to buy the products, gets a commission for doing so. The person who spreads the word is called the Sponsor or Upline, while the person whom he sponsors is called his Downline.
To make the deal even sweeter, the company gives the Sponsor a commission for products the Downline of his Downline buys! Many companies allow each Sponsor a network up to 6 levels deep. Hence the name for this style of marketing - Multi-Level Marketing or Network Marketing.
Legal Concerns
Legally speaking, MLMs have been legal in Singapore since June 2000, when the government finally recognised it as a method of product distribution, rather than a Pyramid Scheme. The U.S. government (the land where MLMs first originated with a company called Amway) has slapped a whole list of conditions on an MLM system to set it apart from Pyramid Schemes.
Ethical Concerns
To me, many MLMs toe a very thin line to Pyramid Schemes. The problem does not lie with the marketing system (which actually represents a very cheap method of product distribution for the parent company). Rather, it lies with the people who promote the products. In some cases, the way the system is run by the company also makes it a form of legalised Pyramid Scheme (if there is such a thing).
Why do I say that the problem lies with the people who promote the products? The problem is with the fact that it is promoted as a means to get rich. Its promoters want the downlines at all costs - it means more money for them. In order to get the downlines, they push the business model and use hype and emotional draws to appeal to those who are looking for more income.
More often than not, the products are very expensive and marketable only to certain segments of the population (e.g. health products). In addition, many who are drawn to such MLMs are actually not prepared for the kind of sacrifices and time required for the business to work. It can take as long as 1-2 years, and thousands of dollars in expenditure before a profit can be turned in. These are the hidden stuff that many promoters did not mention, in their push for more people in their downline (and hence greater wealth for them).
Another practice many companies have (that makes for high dropout rates) is that of a maintenance. Each month, their distributors must buy a certain amount of their product to keep their downlines. With increasing expenditure and of both money and time (especially time) and sometimes alienation from friends and family (due to overzealous promoting of the products to get a downline), the distributor gives up - and all their work goes down the drain.
The final point that personally bugs me is the fact that the promoters always harp on the fact that MLM is a sure-win business model. They insist that everybody can succeed in having the MLM as a business, to attain financial freedom.
Let me put it across very plainly. Is it possible for everybody to earn money from MLM? In order for a person to earn money from MLM, you need a critical mass of downlines (as little as 256 persons or as many as 1024, if not more). Mathematically, it is a folly to assume that there is no bottom of such a pyramid network. For those near the bottom, where are their critical masses coming from?
Ultimately, there must be somebody who is taking money from outside of the MLM structure, and pumping it into the network of sponsors above. Now, I have no problem with that. There might be those who buys the products without taking it as a business (also known in network marketing circles as consumers). I was one of them (my money comes from outside of the MLM structure). However, to push MLM as a business where everybody can make money is simply unethical.
Conclusion
I personally do not have an anti-MLM pose (I used to be a consumer, but not an active MLM business leader). To me, it represents a distribution system that takes away the wealth from the big boys (the advertisers, the warehousing systems, the transport systems, etc) and put it in the consumers themselves. For those who went in early and helped the company market their products, their income will increase.
For those who come in later, however, it is a different story. My desire, for those who read this article, is to warn against the hype and emotional traps that comes from a desire to get rich quick. I also hope (against hope, perhaps) that those promoters who have been pushing that mathematically-impossible model will at least tell the truth to their potential downlines.
I welcome all feedback on this article. Till then, may you find health and wealth in your endeavours.
Michael Chan used to be a teacher, before he left to run a managed fund. When his business failed, he returned to teaching, and is currently a Department Head at the Shanghai Singapore International School.
He constantly applies his business acumen to his job, to add value to his employer. His thoughts on K-12 education and on financial education can be found in his blog at http://www.senseimichael.com
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