Thursday, May 08, 2014

MLMs and Me

Via Steve, this NYT article on the dueling diversity-mongers betting billions of bucks over the future of Herbalife inspired me to write of my own exposure to “Network Marketing”, a.k.a. multi-level marketing (MLM).

My grandparents were Amway salesmen back in the late 1970s (at least, I think it was the 1970s, but it might have been the early 1980s), recruited by friends into the organization.  They eventually left with a garage full of not-especially-effective laundry detergent, which we were still using well into the 1990s.  I myself was too young to have any appreciation for the Amway business model, although I was old enough to know that Amway products weren’t very good.

I have a stronger recollection of the visit the Shaklee Vitamin people paid to my parents house circa 1980 (plus or minus a couple of years).  As my parents explained later, a (somewhat distant) professional friend of my father called and asked to come by to discuss “a personal problem”.  Invited over to the house, he arrived with what turned out to be a higher-level Shaklee pitchman.  My parents, whose Scots-Calvinist resistance to salesmen puts my own to shame, wouldn’t allow them in the house before asking them straight out if they would be required to buy or sell anything.  They were assured that this was not the case.

I sat in on their presentation, and received my first exposure to  the MLM method of marketing goods to consumers.  For those of you new to the concept, MLMs recruit recruiters of recruiters, an endless chain of representatives who build “downlines” fueled by personal consumption of the MLM’s products, some residual became the sales commission for the “uplines”.  So the Shaklee reps weren’t exactly lying:  my parents had they become involved, would theoretically have not been required to purchase any products, nor would they be selling products as such.  They would have been Shaklee representatives recruiting  further levels of Shaklee representatives.  So while someone obviously would have to buy something for anyone to make any money, no individual would be required to.

Flash forward to the early 1990s at a sizeable military town in the Southwest.  An associate from work called and asked to come by my apartment.  The words “personal problem” may not have been spoken, but that was definitely my impression at the time.  And as in the Shaklee experience, my friend served as a stringer for a higher-level rep who made the bulk of the pitch.

“So . . . it’s a pyramid scheme,” I observed at the conclusion.

“No it isn’t!” exclaimed the rep with no small animation.  “We have a letter from the FTC saying we’re obeying the law!”

“I don’t care about the FTC,” I replied calmly.  “I’m saying that, structurally, the money-making enterprise you are pitching here requires an ever-expanding base of consumer-marketers recruiting and ever-expanding base of consumer-marketers.  Definitionally, this is a process that must end in saturation, leaving the bottom of the pyramid consuming products but not actually making any money.”

We went around and around on this point without much progress.  Several times, I disavowed any interest in being a salesman of any sort but expressed interest in seeing the product catalog.  Several times, the rep replied that while they would be willing to show me the catalog at some future date, what they really wanted was for me to recruit.  Since I worked with the stringer, I think I may have eventually seen a catalog; I am certain I never purchased anything; few of the products advertised were ones for which I was in the market, and none were price competitive.

Flash forward a few months later.  I received my second pitch for network marketing.  A “friend” (in the sense that we attended the same young-adult Bible study group) invited me downtown to a restaurant to discuss a “business proposition”.  This sounds relatively honest, but my specific impression was that it was a business that he himself was creating.  I won’t quibble over definitions, except to say that MLMs encourage their reps to think of themselves as “business owners”.

Our dinner meeting was somewhat frustrating.  I was treated to a list of interview-type questions about my goals, financial objectivds, etc., followed by a fairly lengthy and very general lecture on “residuals”, i.e. profit margins.  It was frustrating because (a) I didn’t see myself as applying to join his “business” and (b) the ECON 101 struck me as pretty obvious, yet my “friend” wouldn’t skip to the part where he actually told me what the business was.  At the end of it, he invited me to another meeting where it would all be explained.  “Why don’t you explain it to me now,” I suggested.  “Sorry, but that’s not how I do business,” my “friend” said.  “If you’re really interested, you’ll come to the meeting.”

I was pretty irritated by this point, but since I didn’t yet smell an MLM and, being single, didn’t really have anything better to do with my evenings anyway, I eventually came to the public school auditorium with 1000 other potential recruits for the “meeting”.  The ushers carefully sat us in the front; the recruiters sat in the rows in the back, making slinking out early extremely difficult.

The “meeting”, as you might expect, was conducted in the spirit of a revival meeting by a man that, I swear, was a spitting image of Wayne Newton.  Apparently, every one in the room worked for him.  There was a long inspirational talk about “financial independence”, the revelation that this was indeed an MLM, and a final revelation that this MLM was called “Amway”.  It was not long after “Amway” that I decided that, conspicuousness be damned, I was walking out the door, but I want to share the one visually striking evidence as to what the opportunities in MLMs really are.  At one point, Wayne Newton asked everyone who had achieved the first level of network growth to stand up, and the back half of the auditorium duly rose.  The first level of growth would earn its recruiter, IIRC, $6 per month in commissions.  Wayne progressed through the levels until reaching the level of “financial independence” at which we could quit work:  $20K per year.  (This isn’t as absurd as it sounds:  in the early ‘90s in the Southwest, there were a whole lot of people scraping by on less than $20K, including, just barely, me.)  There were, I think, two individuals in the back left standing at this level of success.  Everyone else in the auditorium was supporting those two people, who were themselves supporting Wayne Newton.

Those two recruiting attempts within the first six months of my residence were the most aggressive.  Other attempts would follow over the next two years, but they were much more conversational.  By the time I returned from Japan two years after that, my professional status had lifted me out of the target demographic, and/or the enthusiasm for MLMs had cooled in the face of much better job opportunities.

In preparation for this article, I set about researching Shaklee’s multiple run-ins with the FTC.  I failed at this research; indeed, it appears that Shaklee has successfully purged the entire internet of its malodorous legal history.  But I eventually came across this exhaustively compiled political, legal, and regulatory history of MLMs.  The article deserves to be read in its entirety if you have several hours to devote to it.  But I wanted to comment on a few summary points I gleaned.

  • The standard MLM pitch as my parents received it from Shaklee and I received it from Amway is, according to formal FTC interpretation of the law, illegal.  This, frankly, had not occurred to me at the time.  I did not believe that anyone was, strictly speaking, lying to me about the income opportunities since the improbability of realizing those opportunities was so immediately obvious.  But as Steve points out, MLMs attract – and exploit – the bottom half of the bell curve, while I sit firmly in the top 5%.  The author writes:
    Most recruits will join because of the "business opportunity" and because they are led to believe the products are not only in high demand but are unique ("always!"), exclusive ("absolutely!"), elite, upscale, innovative, super-concentrated, miraculous, healthier, more environmentally friendly, etc. When the business opportunity fails, they either accept the theft because they've had it drilled into their heads that only losers quit and settle on believing that they're buying these products at some tremendous discount because they're in a "buying club", or quit and feel so guilty they fail to understand they've been robbed. Now imagine an entire legion of MLMers paying for millions of these overpriced, uncompetitive products just so they can participate in a compensation plan they believe is leveraged to help them earn a reasonable part-time supplemental income if not a vast fortune, and you've got MLM's gravity-defying money funnel, which is more aptly compared to a vacuum cleaner sucking the income stream from the bottom up.
  • The FTC wields incredible power.  During the Clinton administration, the FTC under Robert Pitofsky pre-emptively shut down a string of MLMs, forcing them on pain of bankruptcy to sign Consent Decrees without ever having to bring a criminal case in court.  You don’t have to love MLMs to be bothered by unaccountable power.
  • Contrariwise, MLMs in the 2000s went to some lengths to cozy up to Republican politicians in the name of “free enterprise”.  You don’t have to hate MLMs to be bothered by the prostitution of your philosophy for the bottom-feeders of capitalism.
  • We live in a hyper-regulated economy.  As the article makes clear, everything has a set of regulations governing the minutiae of its behavior.  Franchises are regulated.  Buying clubs are regulated.  Independent contractors are regulated.  Commissioned and direct sales are regulated.  And of course, employment is regulated.  Post 2008, I am somewhat less sympathetic than I once was (though not entirely unsympathetic) to the argument that this regulation is as bad in principle and practice as some libertarians will often insist.  But I am pretty sure that no good can come from having the regulations and then allowing MLMs to exploit (or create, or merely assert) loopholes in those regulations to operate with impunity on the grounds that they aren’t actually a buying club, or a franchise, or a sales force.


    Anonymous said...

    I have seen some religions operate that way. Lots of sales pitch without ever mentioning their already market-tainted brand.

    Dr. Φ said...

    It's embarrassing, but MLMs cultivate a sense of religious-like fervor and often subtly align themselves with Christianity.

    It's always worth asking, "Who benefits?" when non-economic motivations intrude too far into what should be straightforward transactions. That skepticism should be extended to the encroachment of religiosity on your job with stuff like company songs, company uniforms, tripe about "Service before Self"-

    Oops, wait . . .

    heresolong said...

    Too bad because Amway had the potential to be a great company. Big and positive name recognition, all they had to do was actually focus on selling good products. I remember their oven cleaner being really good.

    Anonymous said...

    While I've avoided MLM I spent two disastrous years enmeshed in something very similar, that being the straight commission life insurance pyramid scam. Had you asked me in advance if I ever would have fallen for such an obvious scam I would have said never. Not only did I consider myself reasonably cynical and capable of making reasoned judgments, I'd also heard years before that the failure rate in life insurance is enormously high. No way would I fall for such a scam.

    What I never realized is that the insurance managers are extremely persuasive. Do you like your job, and want to stay there until retirement? Spend five minutes listening to an insurance recruiter and I 100% guarantee that you will HATE your job and will be eager to ditch it in favor of peddling life insurance. The recruiters make life insurance sound so good that it will be impossible for you not to want to be part of it.


    Dr. Φ said...

    The article I linked has a section on life insurance, which it ropes in with MLMs. As it happens, I have a separate post on life insurance coming up.