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"Make Money Fast"--Start a multi-level marketing scam

by Arnold Kling
July, 1994
(originally appeared on GNN's Personal Finance Center)


November, 1996 update

The pattern of comments on this article has changed. I've always gotten some favorable email and some criticism. The critics used to be gentle. The writers mentioned God a lot and many of them seemed to be from Utah. Fine with me.

Lately, however, the negative mail has been from a different sort. The critics say that by putting down multi-level marketing I am promoting "wage slavery." As far as I can tell, the definition of "wage slavery" is:

  1. Working for someone else.
  2. Getting paid for it.
I will readily concede that multi-level marketing is not wage slavery, because as you will see, the point of this article is that multi-level marketing involves working for someone else without getting paid for it.
These days, it's hard to get on the Net without running into advertisements to "make money fast." Many of these ads are for schemes known as pyramid selling or multi-level marketing. This article describes my encounters with these schemes, how they work, and why they have emerged as a significant phenomenon on the Net.

Why isn't Amway bigger than the whole U.S. economy?

I went to my first Amway meeting about 15 years ago. The meeting was at a friend's apartment. Most of the people there were in their twenties, and their jobs barely allowed them to make ends meet. This is the demographic group most susceptible to pyramid sales.

Amway sold cleaning products. The meeting leaders focused on how great things would be once you became a "diamond distributor," meaning that you had six distributors under you, and each of those had six distributors under them. When I asked how long it took to become a diamond distributor, the leaders said that it typically took 18 months. To me, this implied that Amway should grow by a factor of 36 every 18 months.

Some time later, I asked the meeting leaders if they could tell me the total annual revenues of Amway. I took the figure they supplied and multiplied it by 36, to get the projected company revenue in 18 months. Then, I multiplied by 36 again to get projected revenue in three years. After one more multiplication, I announced, "In 4-1/2 years, Amway will be bigger than the entire GNP of the United States."

Amway is still around, but it has not dwarfed the U.S. economy. It is not growing by a factor of 36 every eighteen months, and it never will. Multi-level marketing schemes can work for a short period of time for a few people, but the mathematics dictate that most people who get involved will lose money.

The Mahatma Gandhi Fruit Punch Company: a case study

To understand how pyramid selling works, let us design our own multilevel marketing scheme. We need a product that is used widely and repeatedly, and which costs almost nothing to manufacture. Fruit punch, which consists of water, corn syrup, food coloring, and "less than 1 percent real fruit juice," would be a great product.

Next, we need a brand name that suggests integrity. So we'll call ourselves the Mahatma Gandhi Fruit Punch Company. ("the drink that's passively irresistible")

Let's suppose we manufacture 500,000 gallons of fruit punch, at a cost of $50,000. We sell it for $2 a gallon, so our goal is $1 million in revenue. If we used a normal marketing organization, we might pay $100,000 in salary and bonus to our sales director, and we might pay $50,000 in salary and commissions to each of our 15 sales persons. After paying for manufacturing costs, our sales director, and our sales force, we have a net profit of $100,000.

Instead, suppose we try multi-level marketing. We find 10 people, whom we call "Martin Luther King" distributors. Each of them buys a "starter kit" of 500 gallons of punch for $2 per gallon, or $1000. Each person in the "Martin Luther King" layer recruits 10 people, whom we call "Joan Baez" distributors. Each "Martin Luther King" distributor sells its starter kit to a "Joan Baez" distributor, plus 9 starter kits to 9 other "Joan Baez" distributors. The "Martin Luther King" layer gets no commission from the sale to the "Joan Baez" layer of these starter kits, but they do get a 5 percent commission from sales made by the "Joan Baez" layer to the next layer. Each "Joan Baez" layer distributor finds 10 people in the bottom layer, and sells them all starter kits. (Of course, the bottom layer does not think of itself as the bottom layer. These folks think that they are going to recruit distributors also.)

To summarize:

By using a multilevel marketing organization, Mahatma Gandhi has captured a much higher profit share, $900,000 vs. $100,000 for a normal business. These profits come at the expense of its sales force. The highest-tier sales force has taken a big risk and gotten a small share of revenue, the mid-level sales force has taken a big risk and gotten nothing, and the bottom layer of the sales force is left "holding the bag," (or, in this case, the fruit punch).

Why is this all over the Net?

Most of the "make money fast" schemes that you will find on the Net are variations on the Mahatma Gandhi fruit punch model. Remember that in a normal business, the company pays the sales force. If it's the other way around (to become a sales person you have to buy a "starter kit" or what have you), that's a sign that something is fishy.

The Net has brought new life to chain letters and other pyramid scams for the same reason that it has brought new life to long-distance chess: communication is faster, and you can reach many more people than was possible before. The one drawback of the Net for multilevel marketers is that it does not facilitate the type of psychological programming that was possible in the group meetings of the old days. (I was never invited back to another Amway meeting, but from the the glassy-eyed expressions worn by some of the more seasoned recruits I inferred that the cult-style brainwashing got pretty heavy once you went further into the process.)

As an informed consumer, you can steer clear of these schemes. There have been attempts to outlaw pyramid selling, but to be against the law one has to be about as blatant as Mahatma Gandhi Fruit Punch. Do not count on the law to protect you.

The big nuisance with multilevel marketing on the Net is the way it pollutes e-mail and news groups. There, it is part of a larger problem, as Michael Rothschild of UCSD has pointed out in Forbes ASAP, which is that your attention is mispriced. People pay nothing to grab your attention through e-mail or newsgroup postings, even though they are taking your valuable time.

Many of us on the Net are struggling with the issue of how to deal with junk mail and junk postings. When we come up with a solution, the pyramid sales traffic will dwindle sharply.

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