Your MLM loves you

In 1998, with promises of riches to be made, a close friend recruited Leo (who requested that his last name be withheld) to join a company called Quixtar. Though he was a full-time employee at a national insurance company, after meeting “very positive and up-tempo” people who appeared to be earning a considerable income as Quixtar distributors, Leo was eager to join their ranks.

Like Leo, those in his Quixtar community were African-American.

“[Being a part of Quixtar] was a good feeling,” he says. “A lot of us look alike, and we were rubbing elbows with those who appeared to be prosperous.”

That sense of community kept Leo going for years, even though he made no money. Quixtar was a multilevel-marketing enterprise that shared a parent company with Amway. Critics of MLMs (and their illegal incarnations, pyramid schemes) say these companies count on and exploit that sense of community by using emotionally manipulative tactics to retain recruits, most of whom invest more money than they will ever earn, and to placate them should they ever leave, as Leo eventually did.

PYRAMID SCHEMES: A LEGAL EXPLAINER

Rather than brick and mortar stores, MLMs market their goods through independent distributors who sell the products to customers, usually beginning with friends, family and others in their community. The distributors generally pay a fee to join and make an initial investment to acquire an inventory of products. Distributors also recruit their own salesforce, known as their “downline,” and make money both from selling products to their downline and from a percentage of their recruits’ sales to customers.

Manipulation is an inherent part of marketing, says Dr. Claudia Gross, who studies the culture and structure of MLMs at the Institute for Management Research, part of the Radboud University Nijmegen, in the Netherlands. But, she says, manipulation has an outsize effect with MLMs because of their organizational structure and the lax regulatory environment in which they operate.

“It’s the combinations of these factors all together that make MLMs morally problematic and particularly dirty,” she says.

In addition, Gross points to a structural characteristic that makes MLMs unlike other business models. Participants in MLMs are caught in a situation in which they are not strictly self-employed, because they are part of an existing company, whose rules they do not set. So while they have some of the benefits of the self-employed — such as the ability to set hours and determine which markets to operate in — they also lack the support of unions or other intermediaries they can rely on for help when needed.

This makes participants in MLMs particularly vulnerable, experts say, built as they are on personal relationships and atypically structured. Any emotional manipulation employed in this environment makes it easier for participants to believe the unbelievable, ready to silence any doubts, unquestioning of failure and unwilling to act against the company.

“The messaging in these companies that I’ve investigated — they are all trying to leverage hope,” says William W. Keep, dean of the School of Business at the College of New Jersey, who has served as an expert witness in federal prosecutions of pyramid schemes. “In every business you can get excited, but you are not going to get as excited as when the message is ‘You can change your life,’ with its strong emotional aspect.”

That hope seems attainable because at the rallies, business luncheons and seminars — all common tools of MLMs and pyramid schemes — recruits are constantly meeting people who say they have “made it,” but who provide little transparency about how much money they’ve earned or how they earned it. Keep says the lack of transparency also distinguishes MLMs from other businesses, which issue quarterly reports or share their earning statements.

According to Brooks, determining whether a business is operating as a pyramid scheme requires in-depth analysis. "It's very difficult for even the FTC to determine if a business is acting as one. If they can't, how can the layman?"

If data were available, participants could more easily evaluate whether the potential for making money is overstated. In her research on Amway, for example, Gross found that members suggested everyone could make a lot of money, to the tune of 500 times more than actual average income.

MLMs run the risk of being labeled pyramid schemes when the primary source of income for distributors is from sales to their downline, rather than sales to non-members who use the products themselves.

(While the FTC found that Amway was not a pyramid scheme in a 1979 ruling, the company continues to face similar accusations by its distributors and other critics and in 2012 agreed to a $55 million class-action settlement with distributors.)

An Amway spokesperson declined to be interviewed for this article but responded with a statement: “Building an Amway business takes hard work and continued effort, and may not be for everyone. Just like joining a fitness facility, signing up doesn’t get results — showing up consistently and working hard is required. But registering with Amway is simple and costs only $62 in the US, with a 100% money-back guarantee for the first 90 days.

“And people do earn money with Amway. In 2013, more than 350,000 Independent Business Owners in North America received a bonus from Amway.” Even if distributors only make a few hundred dollars, the statement continued, “Amway IBOs can define success on their terms.”

In addition to the lack of public data from MLMs, the companies routinely flood the Internet with misleading information. In some cases, they set up websites that appear to be independent and critical of multilevel marketing, yet conclude that a particular MLM is legitimate. This makes it hard for new recruits to really know what is true and what isn’t.

If new recruits become skeptical, their doubts are often quickly silenced by the family and friends who recruited them. (This practice of reyling on participants to recruit or solicit mostly from their network is also known as “warm marketing”). It’s harder to suspect people you know of acting deceptively or in bad faith.

“‘We don’t have data, we have trust!’” is how Keep sums it up.

There is never an analysis of why a distributor is not being profitable, Keep says, just constant advice to work harder and keep the faith. “With so many models of people who are supposedly successful, the only possible reasons for your failure is you,” he says.

Part of the reason many company rallies are out of town and feature success stories from across the nation, adds Gross, is that if the promoters stayed local, there wouldn’t be that many examples to share.

Rather than pinpoint what specific action or inaction accounts for not turning a profit, participants are even told that they are too emotionally attached to poverty, says Robert FitzPatrick, who runs the watchdog website Pyramid Scheme Alert. When recruits join, FitzPatrick says, they are told that their “poverty mentality” is the reason for their lack of wealth but that following the MLM credos will transform their lives. When they don’t see sweeping change, he says, “it becomes an experience that validates your worst thoughts about yourself.”

For Steve Hassan, an expert on the mental-health aspects of cults who founded a center to help break their hold on individuals, MLMs bear striking similarities to these secretive groups. Like in cults, Hassan says, the control that MLMs wield “short-circuits critical thinking, so you believe you can work part-time and make a million dollars.”

Hassan has also occasionally been hired by families desperate to extract their loved ones from MLMs. “They have been inculcated with this notion that they are part of a chosen group," he says of the recruits. "They have this new identity where they become the company.”

Leo, now 52, can retire in three years from the same insurance company he was employed by when he tried Quixtar; he has been working there for 26 years. But he’s not ready to be a full-time retiree and is still eager to own his own business. It won’t be another MLM, he says.

“I don’t necessarily want to make that kind of investment and risk,” he says. “I’d rather do something more financially rewarding.”