The only difference was that the money funneled from the bottom ended with these tools promoters rather than funneling the rest of the way up to the top. Returning to , the FTC had ruled an entire industry legal based on the premise that MLM could play fair given a few rules. Amway co-founder Jay Van Andel had admitted in that he had little power over distributors who made false claims, but in that same year legislation was conveniently passed that got Amway — and the MLM industry — off the hook for it anyway, as you'll see in the next section. In the late s, MLMs and other companies had witnessed a pattern of the Internal Revenue Service fining into bankruptcy companies which had misclassified employees as independent contractors ICs , a misclassification which was costing the IRS revenue.
Ruling their independent contractors as employees would destroy the very basis of MLM, that of individual business opportunities. If MLM's product was really just products and not business opportunities, the law I'm mentioning next would not have been necessary to chase after.
In under President Ronald Reagan [R] , the IRS added Internal Revenue Code Section , which conveniently gave a statutory exemption to two groups of workers: real estate agents and direct sellers. Legitimate independent contractors come to their clients pre-hatched — they:. That last point is crucial. Businesses who utilize the MLM model depend on the services these workers provide; remove these workers, and the business must grind to a halt! And it works in reverse too — take away the company, and these workers' "businesses" vanish.
That alone should tell you there is something very wrong with the MLM model to begin with! Also note that you are more than likely an employee if the employer can exercise control of your work through the threat of dismissal. In , the DSA argued with the Senate Committee on Finance that "direct sellers established themselves as independent contractors for tax purposes under the common law rules in the test case of Aparacor, Inc.
United States, F. However, if you study the actual Aparacor case , the trial judge's opinion states that "the word 'termination' is used in company procedures simply to signify that a relationship with a particular distributor has come to an end because of a lack of interest on the part of the distributor " AND that the distributorship could be reactivated by simply ordering product.
So why do MLMs and other like employers misclassify workers as independent contractors when those workers should quite clearly be classified as employees of the company? Because it's cheap and lessens legal liabilities. For example, the company escapes responsibility for:. The market that MLMs typically recruit are not people holding themselves out as professional salespeople. They require training to do sales, and training generally marks them as employees. The way MLMs usually get around this is to sell the new recruit a sales kit containing sample products and "advice on how to grow your business", and all actual training is done verbally by the recruiters.
This way they and the company can conveniently disavow knowledge of it later if necessary. The original duplication of the "unapproved behavior" gets passed so far down the line that salespeople may have no idea that the training they received "isn't approved" by the company wink wink , and that training their own recruits risks making them the salesperson's own employees — with all the associated expenses!
And the direct selling industry knows that they are not to train their salespeople. He replied:. And in fact, we cannot , because [ But if one looks at DSA member Amway's website, they state:. Again I quote:. Note the year. How curious that MLMs can pawn responsibility for legal violations off on their "independent contractor" distributors even whilst they verbally encourage their naive distributors to break the law , but their own industry organization won't permit them to do that for purposes of ethical violations.
Nice double standard! Even the DSA knows what hogwash that is. And here's still more MLM double-speak. Therefore, distributors earn income not only on the products they sell, but they earn income from bonuses on the products their distributors sell. Building a balanced business - combining marketing and sponsoring - leverages one's time to its best advantage.
Did you get that? Amway was essentially telling you that taking optimum advantage of MLM's model requires recruiting; indeed its very design relies on it once the market saturates. Distributors who only self-consume "buy from themselves" will always lose money. Having been an Amway distributor in the s under Dexter Yager's downline, I can attest that my upline taught me to ONLY recruit, completely ignoring retailing; their mantras were:.
As of those pages disappeared from Amway's website, and the website makes no mention of either concept marketing products or building a distributor network on its " Our Business Model " or " Careers " pages or subpages, the most likely places to find such information. The "Careers" page now links to paid employee positions , not IC salesperson positions. Perhaps you can see now why that information was removed — the company can't have in writing that its optimal "business plan" requires recruiting, after all!
To me, this appears to be an admission by the company that it knows its salespeople are routinely making such claims, albeit not in writing! And of course this is a restriction that simply should not be put on so-called "independent contractors". The site was attracting visitors per day when Amway asked him to shut it down.
He complied, but opined, "They didn't want the Quixtar [Amway] information to be disseminated wrongly. I think there's a fine line, and in my opinion I don't feel I crossed it. Perhaps you can see why Amway wanted Mr Eddy's "educational" site closed. If the salesperson ever leaves the company, he is usually bound by non-solicitation and non-compete agreements. These one-sided agreements are clearly against the laws of free enterprise that a true independent contractor enjoys. Note that last bullet.
MLMs can't assign territories without triggering laws that risk their independent contractor sales force being classified as employees, but that also forces the largely inexperienced and unsophisticated sales force to market blindly and inefficiently without regard to inevitable market saturation. A person who buys a franchise knows he is buying the built-in market that the company has already attracted via its recognized brand name.
Since salespeople in these industries have usually been taught to prospect using their friends and family, they have not truly learned to prospect. Thus when salespersons leave the company, they leave behind the only clients they usually get, so these salespeople are for all intents and purposes out of business for the term of the non-compete and non-solicitation agreements.
More states should follow suit! And of course the above opinions are only those of their authors and should not be construed as my condemning any of these companies as guilty; only a court of law can decide that, hence it is so important for victims to act. These industries tend to prey not on successful salespeople but on relatively naive work forces that they must train, consisting of the un- or undereducated, recent college graduates, stay-at-home moms, immigrants, and disenfranchised workers.
For the record, the auto rental industry already seems on its way. A quick look at a former Enterprise Rent-A-Car "employee"'s complaint reveals many of the same complaints as MLM: 1 promotion only "from within" means all salespeople started at the bottom regardless of education and experience; 2 job "interviews" consisted of cattle calls that were motivational in nature about the "business opportunity"; 3 high turnover as many rental agents who were making far less than they expected either quit or found creative ways to put money in their pockets at the expense of customers and other reps; and on and on.
In the mids in San Diego I rented from Enterprise and an agent actually forged my initials onto a damage waiver insurance form, which was clear since I had the triplicate copy I'd originally NOT initialed. Some five years later a friend in Los Angeles was planning to rent from them and I warned her to watch for that little trick, and sure enough the Los Angeles rep forged hers too!
Apparently they get incentives to push for that often-unnecessary insurance, as most people's own auto insurance already covers it. One other anecdote I'll share is that some reps at a financial services firm had a laugh one day about Amway being a scam, and they derided any "fool" who would join. This amused me in particular, as I had been an Amway distributor at one time and noted just how similar the firm was to that MLM.
The resemblance was uncanny. The MLM method of "throw the independent contractor newbies against the wall to see who sticks" may eventually find a few reps who stick around long enough to know their jobs and earn some money, but the reps and ultimately the consumers suffer until that's a reality, IF it ever is. Many people who come from MLM and companies that are run like them are surprised to hear that most reputable companies hire experienced salespeople and compensate them well from the start in order to retain them. Let's look at what else happened from there. With the FTC v.
DSA memberships shifted from single-level to multilevel quite significantly after , so it must pay [guess who? It also helped that MLM entrenched itself largely among Republicans who believed in deregulated free enterprise. Let's follow the money trails to see who all got abused:. Clearly some in Amway, the Mother of all MLMs, saw the potential in aligning themselves with others who believed in American free enterprise and Christian values — and then abused those relationships.
Indeed I only joined Amway because I was told that changing my buying habits would help my younger relative earn commissions. She also became a conservative Christian during her stint in Amway. I'm certain that many religious leaders and politicians are thankful for the financial support but don't understand the entire reasons behind the causes and legislation they're then asked to push on behalf of their benefactors. And then again, some probably know full well what they're doing. I mentioned how President Bill Clinton [ D ] signed into law a rider that Senator Bob Dole [R-KS] sneaked into the minimum wage bill at the last minute that mis- classified newspaper deliverers as independent contractors.
But to his credit, it was under Clinton's administration that the hounds were released on MLMs, pyramid schemes, and fraudulent "business opportunities". In , the FTC had gone after Nu Skin, alleging unsubstantiated claims for the income opportunity and products. But it would be disingenuous to be critical of Pitofsky as being too soft, as he proved quite the pitbull for the remainder of his six-year term until Republican President George Bush replaced him with Timothy Muris in Pitofsky successfully applied the FTC Act and Franchise and Business Opportunity rule to end many MLMs and like businesses, including promoters selling "franchises" of vending machines, pay telephones, medical billing biz ops, and envelope-stuffing schemes.
First-pass HB was defeated. Of course a legal challenge preceded all this — that's next. In the FTC under Pitofsky began revisiting the issue of chain-recruiting in the aftermath of a civil class action suit against Omnitrition Webster v. The case boiled down to the suspicion that most distributors were simply selling to their own downlines, which meant that the vast majority in the bottom tier could only be "buying from themselves", unable to recruit in a saturated market, and thus only ever lost money.
Omnitrition defended that its compensation program was similar to Amway's; the court found that the existence of the Amway Safeguards was at a minimum no good without enforcement. Regarding Koscot:. And now Omnitrition's in dicta language which referenced Koscot:. If Koscot is to have any teeth, such a sale cannot satisfy the requirement that sales be to 'ultimate users' of a product. The case settled out of court, but the DSA recognized the potential for the in dicta opinion on "personal use" to impact the MLM industry and filed a amicus friend of the court brief in support of Omnitrition, a U.
DSA member. The old DSA c. The new DSA c. Good grief, what a crock. The DSA was arguing in essence that the court's attack on "personal use" based on the Koscot test was an attack on the very structure of MLM duh based on a "misunderstanding" of how MLM worked. The problem that Koscot recognized with "personal use" was that those at the bottom of a saturated MLM, comprising mathematically in fact the vast majority of MLM members who are unable to recruit , should of necessity be selling retail to nonparticipants. The DSA was arguing that the Koscot test did not apply to unsaturated MLMs, which we all know by now is a temporary state of being, hence there exists that "intolerable potential to deceive".
Take note of that amount, as it will come back to haunt the MLM industry later! In order to avoid the onerous restrictions involved with being classified as a buying club, MLM had to minimize recruiting based on the attractiveness of buying wholesale. Thus the main reason a new recruit would join an MLM had to be based on the business opportunity, an opportunity that may not be viable because MLM by its very structure has no controls to determine at what point market saturation occurs.
The court was correct in attacking MLM's structure again ; a prevalence of "personal use" among MLM distributors was definitely evidence that the income opportunity drove endless chain recruitment, i. The Omnitrition court affirmed that the Koscot test was necessary, though it never explicitly noted the buying club connection and thus failed to fully understand exactly why the Koscot test was necessary.
The court also affirmed that the Amway safeguards were "still sound" but emphasized that they needed to be enforced in order to be a defense. However, a second look reveals that Amway itself could not have been enforcing the Safeguards. Recall this quote:. Clearly it wasn't for lack of trying, since buying club appeals were out and the "business opportunity" was the only reason left to participate. If each distributor was selling to 10 customers outside the scheme per month the 10 Customer Rule in order to qualify for commissions, then the vast majority of Amway's business volume would have been consumed by them and not by the distributors themselves!
In affirming the use of a definition that excluded self-consumption of products from the "retail sales" requirements of the Koscot case, the Sixth Circuit endorsed the position taken by the FTC and the Omnitrition court, and specifically pointed out that a basis for the Koscot case was the extensive self-consumption of products by the scheme's participants rather than actual retail customers. The court concluded:. In May the FTC pursued Fortuna Alliance on grounds that although it appeared to be offering consumer benefits services, in reality it was selling positions in an opportunity with the right to secure others to do the same.
Recall that 's Koscot case found that selling positions in an opportunity constituted an unregistered security. In the final settlement, Fortuna Alliance was permitted to pay commissions on the sale of goods and services, but it was strictly prohibited from paying commissions on membership fees or dues , because those purchases were of "business centers". This means that a 'raid' by a governmental agency which put Fortuna Alliance out of business without a warning or a trial to prove guilt of any kind, will never happen again.
In any case, MLMs took notice as the FTC was able to effectively shut down, even only temporarily, MLMs suspected of being pyramid schemes before the crime was ever even actually proven. MLMs selling discount buying, travel, and consumer benefits packages particularly took note of the FTC's prohibition against paying commissions on membership fees or dues, which made those businesses impossible since the membership was the product!
In addition, Jewelway agreed to some very onerous restrictions in order to enforce compliance so Jewelway could continue its business. Among other things, the settlement required Jewelway to:. Note that the above requirements infringed upon the rep's independent contractor status by exerting control over the method in which he ran his "business" in case he wasn't already restricted enough.
The message sent was clear: Jewelway could now be held responsible for infractions by its distributors. It also set the stage for independent contractors to possibly challenge their status as employee misclassification. World Class Network was a multilevel marketer of travel agent credentials that the FTC charged with running a pyramid scheme which drove recruitment by misrepresenting its services and income opportunity. Since 's Omnitrition case, the MLM industry was on somewhat thin ice regarding "personal use. In the JewelWay case, the majority of the sales revenue approach had been applied to the entire company, but in Futurenet, the majority sales revenue approach was applied to individual distributors , i.
This deterred inventory loading, the bugbear of the Omnitrition case, but removed the consumer protections against "closed system" buyer clubs in which distributors were encouraged to buy, even in small amounts, only to participate in purported "savings". This new standard only led to more FTC micromanagement and confusion. The FTC missed the boat on this one.
Pitofsky was eventually sharp enough to recognize that pyramids needn't collapse if they can maintain saturation equilibrium, though the harm to consumers remained the same. Of note in this case is the fact that 2Xtreme Performance International sold training materials, a practice vaguely approved of in Futurenet, but the FTC took notice and disapproved this time because the training materials were required as mandatory purchases in order to earn 2Xtreme commissions.
The training materials and commissions paid on them served only those within the MLM a closed system , had no value to those outside and were even of questionable value to those inside — the Dallas BBB had received many complaints a year before from consumers who complained they lost money because of income misrepresentations and dodgy buyback policies. You will see Bernstein's name again later when she somehow flips her loyalty.
In a case culminating in , the FTC charged Equinox International with being an illegal pyramid scheme. The founder invoked the Amway defense and the FTC again found it again inadequate without enforcement. In May the FTC charged that Skybiz was a classic pyramid scheme in which promoters misrepresented the income opportunity and products. Bush wasted no time once in office in , replacing him with Timothy Muris [R] in June.
Take a good look at Pitofsky's chairmanship and note that he was the person who drafted the original FTC v. Notice as you read the opinion that there is no discussion of any evidence or argument put on by the FTC prosecutors that Amway's purported enforcement of those rules did not actually result in most of the products being sold to outside customers.
There is no discussion of any argument or evidence from FTC prosecutors that the majority of the products were sold to the so-called distributors for their own use and consumption. And most importantly, notice that there is no mention of the 'tools' business. That last oversight is glaring given the lessons the FTC should have learned from the critical role motivational 'tools' played in Glenn Turner's [Koscot] scheme.
In short, it is apparent that the prosecutors did not put on the right case against Amway. The entire legality of MLM hinges on one botched case. Given Pitofsky's later aggressive prosecution of MLMs, I believe he may have regretted the mistakes made, noted the unfortunate consequences, and then creatively used his FTC power to begin trying to set legal precedents that might eventually right them. Why is it so hard to get proper laws passed? Obviously there's the DSA lobby, but they're simply relying on easily-manipulated politicians; the Republican party was simply chosen by MLM because its structure and belief system was easiest to abuse.
Most will never recover a dime. It's no stretch to presume the FTC suffered in similar fashion. In , spurred into action by the FDA, Muris did initiate regulatory actions against an MLM called Seasilver for making false and unsubstantiated claims — but he did not allege it ran a pyramid scheme. In fact, once Muris was in office:. Peter J. Vandernat out of the area of MLM fraud investigation and analysis. The easiest jurisdiction was understandably NexGen's own turf. However, what seems odd to me is that the action was brought not by the FTC's Western Region office which encompasses Arizona but by the Southeast Region office.
Burnlounge at first appeared to have ceased operations due to this litigation, but as of October their website's home page promoted "BL3" or "BurnLounge 3. These cases beg the question: 'where has the FTC been? You will recall that previous FTC Chairman Pitofsky noted the meteoric rise in "business opportunity" frauds in the s and s and had instigated a regulatory review of the Franchise and Business Opportunity Rule.
Though he had prosecuted "franchise" and MLM promoters of "business opportunities," establishing in 's Jewelway and World Class Network cases some guidelines under which such business opportunities should be permitted to operate, the job of actually revising the Franchise Rule fell to successor after successor as the Rule remained in question. For instance, DSWA Direct Selling Women's Alliance stated these reasons, which are rather representative of the industry, as their primary objections:.
Despite the MLM lobby's best efforts Florida did not pass SB in , which would have effectively legalized pyramid schemes. It could still be proposed again in another bill. In other words, SB allows MLMs whose non-competes are proven to be illegal to amend the contract instead of losing in court altogether based on the contract's illegality. Just sayin'. I and a few million others would beg to differ.
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Another contributor to that same support letter for Primerica is J. I expect Congressmen to get manipulated by special interests, but FTC members who are appointed to protect consumers should know better! This wasn't the DSA's first attempt at lobbying for exclusion of direct selling business opportunities from the Franchise and Business Opportunity Rule. This does not take into account the money spent self-consuming over the membership's lifetime, and the MLM's products are generally only bought in order to qualify for "rebates", "commissions" from retailing? The goal is to get enough people in your downline that your "rebates" and "bonuses" eventually zero out your purchases and hopefully you may even begin to profit.
If you eventually begin making a profit, you're only stealing more from your downline! The MLM sure as heck isn't giving your purchases to you! In that same document, the DSA also argues that direct selling business opportunities differ from franchises in that "franchise agreements will occasionally restrict from whom franchisees can purchase supplies, equipment and inventory.
Unlike franchisees, many direct sellers are not prohibited from selling the products of competitors. By contrast, direct sellers are independent contractors who determine themselves when and where to sell , to whom to sell , which products to sell , and how much to sell. Perhaps Mr Ellman should have consulted first with one of the oldest and largest MLMs, Amway again , whose non-compete agreement of the time read:.
In order to protect these interests as well as those detailed in Rule 4. In other words, if you were in Amway, you couldn't sell to someone else's downline, and you couldn't sell vitamins for Herbalife or suchlike concurrently because Amway also sold vitamins among many other products. If selling products were the ultimate goal, you'd be able to set up a vitamin shop and sell to whomever you please whichever vitamins on the market you determined were BEST for your customers; MLM vitamins that don't actually compete in the open market to keep their prices down would be a hard sell.
Recall Avon's and Tupperware's rather disastrous experiments with trying to sell retail. So tell me again how that is freedom to sell to whom you please, however and wherever you please? You read that right. What a convenient omission! In the Commission's enforcement experience, fraudulent businesses have often passed themselves off as legitimate companies that use this business model.
One must wonder why the DSA and the MLM industry it represents continue to oppose requirements that are designed to help the consumer avoid getting defrauded by them! After all, the entire reason the Franchise and Business Opportunity Rule exists is to define the proper scope of the term ''business opportunity,'' the types of business opportunities that are known to engage in deceptive or fraudulent conduct , and the types of disclosures that are material to business opportunity purchasers.
MLM cannot even decide what it IS, an unregistered buyer's club, or an unregistered security investment, or an unregistered franchise! Compare the April 29, archived page to the May 22 , archived page , which is not-so-coincidentally about the time this article pointed out Amway's hypocrisy. The phrase "business opportunity" now appears under the " About Amway " page. Page states:. The Commission therefore determined to continue to challenge unfair or deceptive practices in the MLM industry through law eforcement actions alleging violations of Section 5 of the FTC Act and not through the Business Opportunity Rule.
Recall that all this opposition was to avoid a simple one-page disclosure that would have "disproportionately affected the MLM industry" by "showing [MLMs] in a distorting negative light. What has history taught us thus far then? If you walk away from this article with one thing, let it be this: any "business" in which the total of commissions exceeds the FINITE marketable retail markup of the product has only one purpose: funneling money up a chain.
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! 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.
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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.
MLM author and consultant Daren C. Falter, who is obviously pro-MLM, explains his version of "wholesale buying clubs" vs. The organization offers the same items you might find in the retail and wholesale store at similar prices, or possibly a bit higher. The organization retains the profits that would otherwise have been savings to the consumer.
These profits fund the organization. Note the mention of the company developing their own products and recall the second chart from earlier in which the MLM manufactured its own products for a fraction of what they retailed for. He also adds:. He's technically quite right, though he tries to use the these facts to defend MLM while I use the exact same facts to gut it.
I challenge you to find any MLM whose commission structure rewards all salespeople equally based on their actual product sales. If the company were truly interested in marketing the product efficiently and avoiding the taint of "scam" it would never bother with MLM. I repeat:. I've picked a random U. Shaperite Concepts and 4HealthDirect , from the list at the left in order to try to illustrate potential warning signs that an MLM is financially raping distributors.
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This should not be interpreted as proof that they are running a pyramid scheme. The very concept of MLM is outdated, redundant, and exploitive. Only a few years back when Amway began marketing itself online in North America as Quixtar , the Quixtar website hawked to distributors " your own Web-based business ". Quixtar's website home page originally had no mention of Amway, and you couldn't view the products without logging in with a distributor ID number or whatever they called it.
I only knew Quixtar was Amway because a relative who was in Amway told me. I began to see a proliferation of cookie-cutter Quixtar distributor websites, which distributors were apparently buying. They all led back to Quixtar's original site where the products were actually sold. If this silliness didn't expose the redundancy of the MLM model, I don't know what can! Some time later those distributor websites disappeared, and for a while Quixtar simply awarded unreferred orders to the random rep nearest the buyer.
But why pay somebody commissions when they did no work to procure the sale and you can just keep it? Amway scrapped the Quixtar idea relatively quickly, and today you can buy products directly from Amway's home website without logging in or needing any distributor whatsoever. Even Amway has essentially admitted that its distributors are redundant.
It's little surprise that Amway rather recently began its ironic "Now You Know" advertising campaign on television like any traditional retailer — but though they could have simply advertised the products, they pretty much had to advertise the "business opportunity" or risk alienating their distributor force. When I checked that list again in , the total MLMs evaluated had grown to over , and only Pampered Chef passed Taylor's compensation structure test, and even then that one was rated as only marginally better than the rest.
The "intolerable potential to deceive" pointed out in the Amway case has only proven all too real. And yet MLMs keep on recruiting. MLMs often have a meteoric rise and end up in Inc. Magazine's fastest-growing companies The Inc. Meteoric growth often only happens when consumers join a feeding frenzy based on deceptive product and income claims, and the promoters are only trying to rake in as much as possible before getting caught , hence recruiting is emphasized over retailing in order to saturate the market as quickly as is feasible, and then try to maintain saturation equilibrium for as long as they can by replacing all who drop out.
The first attempt, federal HR , failed. Since savvy federal regulators keep blocking incarnations of that one, they've resorted to searching out dupes at the state level. According to PyramidSchemeAlert. You might note that while DSA's old page on HR included language from the ruling that found in MLM an " intolerable capacity to deceive ", the current page conveniently omits this. M any parts of DSA.
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If MLM were so clearly legal, they would have no need of lobbying for special exemptions and hiding behind flimsy legal double-speak. DSA members have been prosecuted by regulatory agencies and state Attorneys General for operating illegal pyramid schemes or similar crimes. For those who enjoy gambling, that means even with U. As for how the DSA penalizes members who violate their " Code of Ethics ", the most severe penalty they can inflict is to terminate the member's DSA membership.
You can guess how often DSA terminates memberships. Monavie was presumably punished for "encouraging distributors to violate their Amway non-compete agreements". Especially ironic is the fact that Amway was started by two Nutrilite salesmen who quit and took their downlines with them! Speaking of the DSA's "Code of Ethics", at one time the DSA hijacked archived; click on a date to see the proof the mistyped web traffic of a critical site, www. ORG , by registering www. A screencap from July shows that pyramischemealert. This disgraceful behavior belies the spirit of DSA's own " Code of Ethics " , which states: "Member companies shall ensure that no statements [ I sincerely hope he will continue what Pitofsky started.
MLM has essentially managed to get itself out from under scrutiny by defining itself as "not a business opportunity"; so force MLM to define itself! Buying club, security, or what? SOMEbody is responsible for regulating them. And it's time to stop worrying about prosecuting on the potential for fraud; fraud is inherent in the very business model. It's as simple as looking at the structure and who it's really rewarding. Even if a distributor wants to do nothing but retail an MLM's products, he must join in somebody's downline to buy at wholesale price and pass his business volume up the pipeline through them, with everybody or at least many superfluous levels above him taking a cut.
That's typical, because in MLM the "business" is optimized for both retailing wink wink and recruiting. The FTC can continue fining offenders into bankruptcy after the vast majority of the damage is done, but far better would be regulations targeted at ensuring consumers receive all material facts up front so they can make truly informed choices before the brainwashing begins.
This will also require a strengthening of regulators so that they can actually do the jobs we expect of them.
When business started difficulties overcame:
Best of all options, of course, would be to altogether outlaw this predatory "business" model and all its incarnations which have infested other industries - and other countries. The world can learn from the U. What can you do to avoid becoming a victim of MLM fraud?
The simplest answer is to never, never get involved with an MLM or any company that has adopted any elements of the MLM model. Don't fool yourself into believing that you will make a good living by taking a share of the business of those you "help" below you, because statistically all you will be doing is making you and them poorer while enriching only a numbered few at the very top of the pyramid.
Even if you become one of the infinitessimally few who DO net any profit, is it worth defrauding your friends and family to do so? What happens after is their clients are having someone do business with who is fired up, focused, excited so we have mom and pop businesses, small businesses, one is about to go to a billion dollars, very successful companies, but what drives me is that their businesses are fed by clients that could be trusted.
Because we are in the economy of trust you know,.. Or horrible follow-up. So that gives me joy. People being satisfied in life, from all angles, from customers, and obviously my clients. Being able to trust what we teach and operate at that next level. John, you sort of touched on my next question, so what is it that drives you? I think you might have partially answered that with what you said before. You know, what drives me is I believe everyone is born a champion. I believe you are all here for a specific reason. No matter what, maybe a family member or a friend told you and they create this emotional disfunctionality in life, you know everything is a thought process.
So what drives me is to see people succeed and to see people wake up each day with direction. And not deal with fear and not talk about the past, you know. I mean what was exciting was I had the opportunity of sharing the stage six times with Mr Jim Rohn during my speaking career. And I was honoured to speak with Mr Rohn.
And I remember when he saw me speak, the first time I spoke, and at the end he had his little baseball cap on him, he was in the back row and I say this humbly for all of you that are getting into the speaking world. If you are a speaker, take this wisdom from Mr Jim Rohn. This was back in , and it is the first time I spoke with Jim Rohn.
They are too busy talking about themselves and not listening to wisdom, this is, the day you think you are beyond learning, is the day you stall. I am always learning. So Jim Rohn is, to me the grandfather of self-development. There is no question, is to me. I totally agree, amazing guy. I loved listening to him. How do you relax when you are not working in your business? Besides that, I went to see my brother and then we stayed at the Ritz Carlton. In the marketing realm, I teach from five companies. Multi-billion dollar companies that created niches within niches.
I use the word buildings. I believe we are all buildings, so for me, I love what I do, I love reading, I love learning, I love writing. As you are interviewing me. I am an athelete, so I do alot of exercise, and so I do work out every day. I have done some crazy fitness challenges.
I am known for doing 45 mins box jumps. I love everyone from the UK because I just completed a one million metre row, I am a big rower, I love rowing. Ha ha ha on my ipod today, so and I believe for all of you listening too, love what you do, I mean just love what you do. I believe Bill Gates even though he is not with Microsoft, I believe he is still loves programming. Ha ha ha. So John, do you have any entrepreneurial role models?
My Grandfather. My Grandfather came from Italy with nothing and he went to like third grade education. Came over to the United States in and he was in Manhattan during the depression for the , , during the depression times. I did not know what the word entitlement meant back then, but that is the unique word they use these days. So he would go on the streets of Manhattan, and take a little canvas and paint on it.
And he would sell the paintings for five cents, 8 cents, ten cents. Lets flip it forward Neil to when I graduated at college, we had one store, we had one art gallery, my grandfather, I mean talk about timing guys. My grandfather was born in He opened his first art gallery in I was born in My brother Phil who runs the art galleries now in York has been here since So I was born and raised in the entrepreneur way, I used to walk from grammar school to the art studio. And I used to see my grandfather sitting in front of blank canvases, and tell all of his students.
And I was born and raised around extreme integrity. And I teach right now, I have books about extreme customer service. My grandfather was extreme customer service. He was always paying attention, it is interesting we talked about being on time. We would always get, Saturday was a big pick up day for custom.
Framing custom, mats and hard work and restoration work for the art business. Even though something is going to be due Saturday, its ready on Friday, because people are thinking about their family, picture their family portrait, their wedding, their certificate, their diploma, whatever, and they are going to call on the way home from Friday, we want to say YES to a customer on the phone. Yes its done for you, Neil, so you can come in right now. My grandfather, integrity, family friendly values, focused, caring about people, loving his family. My grandfather told me two things, and this is very important for all the entrepreneurs.
Is your reputation, and what you tell people. So thats my grandfather. He is absolutely, and my dad who is 85 years of age right now. Is obviously one of my top mentors also and he is known as fully d — he comes out to my advance and he is a fireball. Wow, John, are you ready to now throw your mind back to the time before you were an entrepreneur? You are in the business of replacing dissatisfaction with satisfaction. So my first million dollars I earned, the first company I built a million in the beginning, just trying to force people to get ahold of product or service that they did not want.
Thats the biggest promise alot of people, and now as I teach now, I have a book about marketing words and I talk about the word dissatisfied. What you are looking for, is dissatisfied people to satisfy them. Yeh and did you make, did you have any doubts that delayed you starting your business. I worked 80 hours, thats one thing too, I see people 40 hours a week for entrepreneurs.
You can just bank that one and forget about that. It becomes a lifestyle. Is that your entrepreneur building is already there. Its just a matter of developing it, it is some of you guys and I say respectfully, you have to lose the ego, and realise the more you develop your confidence, your belief structure, your self-esteem. The higher and stronger your business will be. Follow-up, be on time and so forth so. Yeh, I think you have conquered it. Ha ha ha John did you have any doubts that delayed you starting your business? Thats good. In my second company that I built to all goes to a billion dollars shortly, is firing people quicker.
Right now, I have an awesome team and in my teachings now, but years ago, I felt bad for people and I think all of you that realised and this is something that I teach all the time, is that the experience of your consumer, is only known by your team member, that why the Ritz Carlton is known for extreme customer service. And you know my cousin Peter, I was actually on the phone with him today, he talked about mentorship, he is my marketing manager, he has been on a home shopping network for 21 years.
He has done hundreds and hundreds and millions of dollars on air live. And he has never showed up late once. Because guess what? So I believe now, I have zero tolerance for employees, which would probably cost me upwards ten or fifteen million dollars not firing people quick enough. Yeh and what are some of the things you did before you started your business that would be helpful tips for some of the listeners? Two things, I want to identify right now, because so many businesses are failing, identify why businesses are failing.
I will tell you a number of reasons why they are, its customer service, we are in the economy of customer service. Its not Amazons fault. Its not Apples fault, Blackberry lost out listening to the consumer, you know give the consumer what they want. Listen to what they want and give them what they want. And then when you provide with someone who wants, all you are doing is just solidifying and giving him a solution for a product that they want also have zero ego when listening to your consumer, look at Blackberry versus Apple and Samsung.
Look at Amazon. Walmart is now spending two billion dollars in the next two years to try to catch up to Amazon. And let me, if anyone from Walmart. Because he was barely making money, because he always took the long-term mindset. Yeh its amazing what Amazon has done. So now what I would like to do is move forward and talk about your entrepreneurial journey a little bit John, so when you have started working in businesses or having your own business, so in business, is culture important from the beginning do you think?
And paying attention to your customer. Culture is the key, whatever culture you are going to be very diversified.
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You got to have culture I think its very very important. Yeh, great answer. And knowing what you know now, is there anything that if you had known it when you started out, would have helped you to short cut the learning curve? Absolutely, studied people outside my industry, this is the issue, and I say this respectfully, totally respectfully. I earned a million dollars in direct selling, I made some great real estate investments, I have spoken at close to 75 real estate investment seminars, I made some great real estate investments. I believe gods making no more land, I believe your investments will always appreciate.
The in land. So when I got into speaking, in Long story short, I started to speak at this kind of seminars and I would see these speakers on stage all fired up and riled up up up up. Then I get to know them going, they are broke, they got no money. I am like, I am confused. So that is when I flipped a switch and I started to study, businesses outside your niche, and all of us, and the reason why I mentioned those five companies, Amazon, Home Shopping, The Ritz Carlton, Disney and Starbucks. When you guys know those companies, they did not create the niche they are in.
All they did was satisfy the niche that the consumer was already in. That is huge marketing wisdom. Your consumer is already in a niche, just satisfy like never before then you can convert them into being a satisfied customer of yours, so, for me, I spent too many years at the beginning Neil studying, I respect Jim Rohn, I respect him for his speaking ability. But now, from a business perspective, I built my business and it all goes to go to the first billion dollar self-development company. I studied operate my companies based upon multi billion dollar companies.
And I believe that is a big belief mindset entrepreneurs have to shift from and when your industry is specific, you are too worried about your competition. First be concerned about your consumer. You can get concerned about your consumer, you get concerned about your consumer, I get a little passionate about that. Because I see so many businesses drop in prices, ever use a little side note to not throw right back for your next question. I want you guys to take a hold of this, every single one of my entrepreneur clients from constructive company owners to painters to contractors to relators, to auto-buy consultants to chiropractors, acupuncturists, everyone of them, all entrepreneurs.
Independent people earning income. Everyone of them, raised their prices in That does not make any sense according to their industry, but guess what? I believe that if there is one thing you guys get from this today, study the consumer and study companies growing. Amazons growing. One minute she was commanding a team of caterers, the next she was dissolving into giggles, waving her arms and squealing with excitement. On top of her sixty-plus hours a week at E, she was improving herself with MBA classes at night; she, too, was seeking some way off the wobbly treadmill of income-from-wages-salaries-and-tips.
When Amway called, touting a future that combined business ownership with Percent Empowered Consumerism, she was ready. Sherri and Josh had attended the same small Christian college. Before that, he had been an Indiana farm boy, and he still had the look: a beefy, boyish face with a grin that verged on gaping, mussed hair with perpetually sweaty bangs, a brown suit that flared in all the wrong places, and a general air of guilelessness. This cast in high relief his constant, ill-advised attempts to put on city airs: the firm handshake, the breezy small talk, the man-of-the-world asides.
Scott Coon the millionaire from Seattle , on the other hand, was the genuine article: His breezy small talk projected an illusion of sincere interest, his well-fed face reflected self-assurance. Scott worked the small crowd with consummate slickness. After a mumbled intro from Josh followed by whoops from the audience , Scott stood beaming at us, rubbing his hands in anticipation. Sherri had told me to expect an hour-long talk, but two and a half hours barely winded this speaker.
I would later realize that this was a typical Amway speech: somewhere between an infomercial and a sermon, a loosely organized string of riffs that bespoke either improvisational genius or, more likely, countless repetitions. Before that, everyone was either a small-business owner or apprenticing to be one; afterwards, it was all about benefits packages. An accurate narrative of the last few decades—growing productivity, GDP, and per-capita income, accompanied by a massive upward redistribution of wealth—would hardly have packed the millennial portent Scott was looking for.
The Second Wave, like Communism, like all the works of man, was destined to decay and collapse, making way for the coming entrepreneurial kingdom—which, for those who lacked faith or zeal, would bring a day of reckoning. Were we ready? But unlike E, which catered to the executive class, Scott offered salvation to the common worker, the middle-level manager, the petit bourgeois professional. Moreover, he offered them something so entrepreneurial, so Third Wave, so purely capitalist that it transcended Darwinian struggle, allowing people to escape into early retirement.
Before the meeting, I had worried that my hand-held tape recorder would stand out. As it happened, everyone was recording Scott: I kept track of time by the sounds of cassettes being flipped. This was not, however, a topic to be discussed without considerable preparatory spadework. Ray Kroc had figured out a better way to flip a burger, but instead of hiring employees to do it, he taught it to franchisees, people fired up with the zeal of business ownership.
He worked in the cutting-edge field of distribution, where the real money was to be made nowadays. Through his business, he could get thousands of quality goods, many of them brand names, and cut distribution costs by almost a third. It might surprise us that this company was Amway! There were some truly spectacular incomes to be made through The Business—which Scott would have told us about but for FTC regulations barring him from doing so.
To see how this worked, we were told to imagine recruiting six distributors, each of whom would bring in four more, who in turn would each net an additional two. And for those of us who had no taste for sales, Scott had fabulous news: A group of Amway millionaires had come up with a sure-fire system for making The Plan work—and had formed World Wide Dreambuilders LLC, a corporation independent of Amway, to teach that system to others. Being an intensive Amway consumer was such a great deal that once we spread the word, our businesses would practically build themselves. And that was just the beginning: There were some truly spectacular incomes to be made through The Business—which Scott would have told us about but for FTC regulations barring him from doing so.
And all the human capital we needed was the ability to shop and be effusive about it, which were practically American birthrights. I also had doubts about the business of The Business. Gee thanks , Mom! In their zeal, Josh and Jean shuttled me to at least one meeting too many. Here, during a marathon transfusion of spine-stiffening resolve, I got a glimpse of just how demoralizing the travails of Amway could be.
The speaker, Conrad Halls, a Hollywood cameraman with over-the-hill golden-boy looks, had been frank and congenial in his First Look the night before. One night, after he had taken me out to dinner we went Dutch , Josh told me that there was a price list in the back of his car—sealed in an Amway Starter Kit.
That was all right, he insisted: I could write a post-dated check that he would hold until I gave the O. I still resisted, and he got out of the car with me, opening the hatch to show me the sealed white box within. Eventually, he settled for giving me a book called Being Happy , which he could later retrieve. The next week, I decided.
I would never learn the truth about Amway until I joined. A week later, I left another message. By my third attempt, I got Josh himself who had been intending to return my calls and was finally able to arrange a time to separate me from my money. Amwayers are like vampires: To join them, you must invite them into your home.
Josh limited himself to preparing my contract and casting a longing gaze every time my roommate ventured out of his room. Jean was also the only one who had actually read the Amway Business Manual included in the Kit. Finally, she did the best she could with the Amway paperwork, but, math teacher though she was, she got lost in its byzantine intricacies.
Figuring out the arcana of Amway took months. Everyone saves money, and the rebate is shared equally. Those bottom forty-eight distributors, in other words, get back 3 percent of everything they spend while the top distributor gets 13 percent of everything they spend. It would amount to the same thing if the distributors at the bottom were to receive the 25 percent rebate—and then pay fees directly to their uplines equal to 3 percent, 6 percent, and 13 percent of their purchases.
Disguising the upward flow of fees within a downward flow of commissions definitely has its advantages. One of the decisive factors in the FTC decision exonerating Amway from allegations of pyramiding was that most of its revenues came from product sales, not from enrollment fees. The assumption is that those sales are based on rational consumer choices—made on the basis of price and quality—and that the money paid into the bonus system is not an extraneous surcharge, but merely the portion other corporations would pour into their marketing budgets.
These savings are the source of the alleged wholesale 30 percent Basic Discount that every distributor is supposed to enjoy even before the bonuses kick in. To test these claims I took my new Amway wholesale price list down to the local supermarket for a price comparison. As it turned out, Amway wholesale prices were only slightly better than supermarket retail prices, although a few Amway products, like freezer bags, were significantly cheaper.
All in all, the 30 percent Basic Discount was nowhere to be found. To get the full Amway experience, I started buying my groceries through The Business. Not big to begin with, its thorough occupation by Amway Corporation made it positively claustrophobic. The living room was dominated by huge metal cabinets displaying Amway cleaning and food products; shelves along the wall were devoted to toiletries; boxes of cereal lined the top of the couch.
When I arrived for the first time, Jean had already bagged my order. Jean urged me to be brave about the Fudgie delay. Inefficiencies were everywhere, since the supply chain rigidly followed the line of recruitment. Some of the items I ordered had to be sent by mail all the way from Seattle, since that was where Scott and Shelley Coon, our upline Direct Distributors, happened to live. Jean suggested I have them sent to her apartment to be picked up with the rest of my order. While Jean explained all of this, Josh, by way of chatting up the friend who was to drive me home, offered him some Glister Anti-Plaque Gum.
This was a companion to Glister AntiPlaque Toothpaste, something so caustic-sounding that I never dared put it in my mouth. Once safely in the car he described the bathroom as something not to be missed. I did pick-ups for several depressing weeks. Apart from Sherri, I never saw any sign of another customer. It was like one of those dusty, deathly-still mom-and-pops frequented only by regulars who come mainly to chat—and I was oppressed with a similar sense that the proprietors needed my money more than I needed their merchandise.
It was actually a relief when, one week, Josh and Jean left town without warning me. Unfortunately, biases crept into the data when my subjects learned to identify what they called the Telltale Amway Aftertaste, a lingering cardboard bouquet with unmistakable PineSol inflections. The Goglonian Bagels were universally declared the worst ever experienced.