The Hidden Pyramid Scheme

MLM: THE HIDDEN PYRAMID SCHEME

Jimmy Welles FILL SEEM (Forum on Independent Lifelong Learning and Self-Empowerment) Pontianak, West Kalimantan, Indonesia

ABSTRACT A new type of swindle has evolved from the old “chain-mail” scam. It has begun to take roots in the multi-level marketing business. It may appear to be harmless, but truly is cannibalistic in nature. This article attempts to describe the hidden pyramid scheme behind seemingly harmless MLM or network marketing systems.

Introduction In the showbiz, the most successful entertainers are those who can skillfully market themselves. Madonna and Dedi Corbuzier are amongst those entertainers who are innovative in their “marketing strategy”. Madonna is so ground-breaking that her “marketing strategies” are being analyzed and studied at the Harvard Business School, one of the most reputable business schools in the U.S. In the world of business, a business is considered as successful when it is successful in marketing its line of products. Appropriate marketing strategy can increase company sales significantly, and therefore generate more revenues to the company. Thus, marketing is considered as the key element of the success of a company. In Indonesia, the latest marketing strategy boom in the new millennium is the socalled direct selling or network marketing or what generally known as the multi-level marketing. A lot of new MLM companies emerge since the late 90‟s. Some of these companies promise their distributors (READ: employees) “financial freedom” and “time freedom” in a complete package of “a quick-rich scheme”. Nowadays, we are practically drowning in the ocean of information. One has to be highly selective to pick out what is

enlightening and what is brainwashing. In order to reign on the top of the food chain, some MLM companies use any means necessary to increase sales and inflict dependencies on their distributors/members. The chain-recruitment, or duplication through the recruitment of new distributors who in turn have to recruit other new distributors, is a never-ending vicious trap, a hidden systematic flow chart of monopoly. One thing that we can learn from H.C. Andersen‟s The Emperor’s New Clothes is that the voices of the majority do not always constitute the truth. These companies are feeding their new distributors with misleading half-truth (where the other half is kept secret and swept under the rug). The Origin of MLM Barret1 argues that MLM started out in the United States from a company called Amway Corporation and its Nutrilite product line. The Nutrilite concept is said to have originated about during the early 1930s in the mind of Carl Rehnborg, an American businessman who lived in China from 1917 to 1927. According to Amway publications, this gave Rehnborg "ample opportunity to observe at close range the effects of inadequate diet." He also "became familiar with the nutritional literature of his day." Concluding that a balanced diet was needed for proper bodily function, he began to envision a dietary supplement which could provide people with important nutrients regardless of their eating habits. After seven years of "experimentation," Rehnborg produced food supplements which he gave to his friends to try. Carl Rehnborg's food supplement business, which thus began as the California Vitamin Corporation, changed its name to Nutrilite Products in 1939 when it moved to larger quarters. Gross sales soared to $500,000 a month, but the promoters also ran afoul of the law. In 1947, the FDA began a 4-year struggle to force Mytinger, Casselberry, Rehnborg, their respective companies, and some 15,000 door-to-door agents to stop making wild claims about their products. Potential customers were being given a booklet, How to Get Well and Stay Well, which represented Nutrilite as effective against almost every case" of allergies, asthma, mental depression, irregular heartbeat, tonsillitis, and some 20 other common ailments. The booklet, which contained testimonial letters, also implied that cancer, heart trouble, tuberculosis, arthritis and many other serious illnesses would respond to Nutrilite treatment.

1

Barret, Stephen, M.D. (1999). The Origin of Multilevel Marketing. MLM Watch.

After Mytinger and Casselberry, Inc., was asked by the government to show cause why a criminal proceeding for misbranding should not be started, the booklet was revised. A "new language" was devised which referred to all diseases as "a state of non-health" brought about by a "chemical imbalance." Nutrilite would cure nothing -- the patient merely gets well through its use. Most direct curative claims were removed from the booklet, but illustrative case histories were added. Although continued governmental pressure led to removal of the case histories, the booklet remained grossly misleading. In 1951, the Court issued a permanent injunction forbidding anyone who sold Nutrilite products from referring to any edition of How to Get Well and Stay Well and more than 50 other publications that exaggerated the importance of food supplements. The court decree also contains a long list of forbidden and permissible claims about nutrition and Nutrilite products. Amway's founders, Rich DeVos and Jay Van Andel, were friends who became Nutrilite distributors after high school graduation. They were extremely successful and built a sales organization with over 2,000 distributors. Fearing that Nutrilite Products might collapse, they formed a new company, the American Way Association, later renamed Amway. They began marketing biodegradable detergent products and other household cleaning products and later diversified the product line to include beauty aids, toiletry, jewelry, furniture, electronic products, and many other items. Gross sales rose steadily from half a million dollars in 1959 to over a billion dollars by the early 1980s.

The Concept of MLM MLM or multi-level marketing is basically a marketing system where the distribution of goods is shortened so products or goods can be sold to consumers directly through an independent unsalaried-but-bonus-oriented distributor in order to cut distribution cost, marketing and promotional cost, and employee training cost. MLM companies do not provide stationery and office supplies, fixed salary, health and dental care benefits, yearly holiday bonus, insurance, etc. On the other hand, a company using a conventional marketing system usually incurs overhead costs for the upkeep of daily operations, aside from distribution, marketing, promotional, employee training costs, etc. Santoso2 provides two charts to describe the differences between a conventional marketing system and an MLM system as pictured below.

2

Santoso, Benny. (2003). All About MLM: Memahami lebih jauh MLM dan pernak-perniknya. p. 29

Conventional Marketing

MLM/Direct-selling Marketing

MANUFACTURER MANUFACTURER DISTRIBUTOR/SOLE AGENT

WHOLESALER/SUB-AGENT

INDEPENDENT DISTRIBUTOR

RETAILER CONSUMER CONSUMER

As we can see from the chart above, MLM is only a simplified version of the conventional marketing system, and it is not a miracle quick-rich scheme. This means that the manufacturer and the distributors gain profit from the sales of products. If the sales decline, so does the profit. However, unlike the conventional marketing system, MLM system inflicts dependencies on their distributors. First, distributors have to reach a sales target in a certain period of time in order to receive sales bonuses/commissions. Sometimes distributors are left with no choice but to purchase the products at their own expense. Second, the distributors can or must extend their network by recruiting new distributors. The newly-recruited distributors also have to reach a sales target in an unspecified time in order to receive bonuses or an approved distributor membership. The two MO are common and are practiced by almost all MLM companies. That explains how MLM companies‟ sales are increasing exponentially each year. In addition to describing the benefits of their products, MLM distributors make something what they call “business proposals” or “business opportunities” to other people whom they regard as prospective distributors. These prospective distributors would be invited to a “business presentation” or a “seminar” where they would be promised commissions or “other rewards” for both sales of goods and those of other people they recruit to become distributors. A typical MLM “seminar” would begin by the presentation of the concept of financial and time freedom, the amazing rewards, the company‟s profile and line of products, and the parade of successful distributors. The writer will explain briefly the truth and the half-truth that is usually discussed in the “seminar”:

1. The Concept of Financial and Time Freedom Robert T. Kiyosaki3 has presented a concept that in a financial or economy point-of-view, the world has only four types of people, i.e.: Employee, Selfemployed, Business Owner, and Investor. This concept is generally known as ESBI or the Cashflow Quadrant. An employee is somebody who works for others. A selfemployed person is somebody who works at his own pace, at his own self-chosen time. This person will receive income only when he works, but he has the luxury (that the people in the Employee quadrant don‟t have) of time freedom. Doctors and lawyers are people in the self-employed quadrant. Somebody who belongs into the business owner or investor quadrant has the luxury of the so-called “time and financial freedom”. It is everybody‟s dream to be sitting in Kuta Beach, sipping lemonade, kicked back, and watching the sunset, without ever worrying about money. Kiyosaki‟s books such as, Rich Dad Poor Dad, Retire Young Retire Rich, Rich Kid Smart Kid, and Business School are bestsellers in Indonesia. Although he has never openly and explicitly supports the idea of MLM, he also writes a book entitled The Business School which explains the hidden benefit of network marketing. It is a must-read book for MLM new recruiters. Almost all MLM distributors selfishly use the concept of The Cashflow Quadrant or “time and financial freedom” to influence new prospective distributors. Some of them would say that MLM is the fastest way to achieve time and financial freedom. In other words, it is the fastest way to get rich. Because MLM distributors regard their effort as being in the B and I quadrant, they would also say that MLM is the fastest way to change tracks from the “rat race” to the “fast track”, from E or S to B and I. They would even say that by signing up as a distributor, you automatically become an owner of a master franchise, and you can establish chains of stores anywhere anytime. This is only half-truth since MLM businesses is nothing like franchise businesses. McDonald’s and Kentucky Fried Chicken franchises impose strict rules to their franchisee, such as the location of the outlets, the distance between outlets or the ratio of population density, purchasing power parity, market saturation, and the number of outlets. This means that if we have a lot of money and

3

Kiyosaki, Robert T. & Lechter, Sharon R. (2003). The Casflow Quadrant. p. 14

are interested in opening a KFC outlet in Pontianak, we will most likely be put in a waiting list. Probably we would still be in the waiting list for the next 20 years to come. The franchise management would take population growth and people‟s purchasing power into consideration. Since there are already a number of outlets here in Pontianak, the opening of another outlet would minimize the market share of the other existing outlets. MLM businesses never consider market saturation as an issue because their system inflicts dependencies on their distributors/members. 2. The Amazing Rewards One of the most glaring part of the “seminar” is the part where they “advertise” what the prospective distributors can achieve if they sign up. They would often begin by displaying pictures of dazzling luxurious cars, villas, planes, yachts, and famous overseas travel destinations. They would promise that you can achieve all of these and more. Do not get the wrong idea; the writer does not imply that nobody can achieve the so-called financial freedom and time freedom in this business. There are some unique individuals who achieve this kind of success in MLM, but what rarely known is that they achieve it at the expense of other distributors. It is morally-degenerating and plainly unjustifiable to sell “hopes and dreams” to other people and get filthy rich in the process. 3. The Company‟s Profile and Line of Products The basic idea of MLM is to shorten the distribution channel in order to cut cost which also includes the absence of advertisement cost. However some MLM companies do advertise themselves in the media. This is done mainly for improving company‟s public image. The image of MLM gets so negative and bleak that the people in this business no longer use the term “MLM”, they change it into “network marketing” or “direct selling”. MLM companies tend to market products related to health care products (vitamins and food supplement), personal hygiene products, beauty products, and other consumer products. When it comes to the explanation of their products, some MLM companies make excessive exaggerated claims on their products, such as “the miracle drug”. In fact, some of them could be placebos and contain merely nothing but “psychological self-suggestion remedial properties” induced by mass hysteria and “The-Emperor‟s-New-Clothes syndrome”. Once again, do not get the wrong idea; some of the products have very high quality, and some of them do become

very popular and widely-used. However, Nehra as quoted by Santoso4 states that the argument that a person sign up for a membership in order to purchase its products (because of product values) immediately becomes weakened if the purchase of the products is necessitated: 

As a requirement to become a distributor



As a requirement in order to open a “product center”



As a requirement in order to receive payment of compensation or commission plan



As a requirement in order to continue to receive payment of compensation or commission plan



As a requirement in order to re-enter the same or a different cycle of compensation or commission plan



As a requirement in order to reach a higher level of compensation or commission plan

In other words, most people are interested to sign up, not because of the value of the products but because they want to participate in the “system”. The golden rule of economy is the equilibrium of supply and demand. MLM businesses do not only supply products, but also supply “hopes and dreams”. The demand for the products may be low, but the demand for “hopes and dreams” will always be high. Men do not live from bread alone, but they live from hopes and dreams. If you take away the bread, they will starve, but if you take away their dreams, they will die. 4. The Parade Carnegie5 proclaims that humans crave for a feeling of importance. Some MLM companies have a special session in the “seminar” where they would parade their handful of successful local distributors. These distributors are given a standing ovation in order to generate mass hysteria. Since humans generally crave for, as Carnegie put it as “a feeling of importance”, some people eventually sign up in order to get that feeling of importance.

The Hidden Pyramid Scheme

4 5

Ibid. p. 163 Carnegie, Dale. (1990). How to Win Friends and Influence People. p. 19

Barret6 defines a pyramid scheme as a multilevel marketing plan that pays commissions for recruiting new distributors. Pyramid schemes are illegal in the U.S. because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people--except perhaps those at the very top of the pyramid--end up empty-handed. Below is an excerpt of an article alerting consumers how unfair a pyramid scheme is.

Lesson from the Pyramids: Why Nearly Everyone Loses Money in MLM, but So Many Keep Trying7 What few people realize about "duplication" in MLM sales schemes (Recruiting other distributors who recruit other distributors, who recruit others, and so on) is that it places the vast majority of enrollees always at the bottom levels. This is where nearly all the members permanently are who pay the money that goes to the top. The doubling of the penny each day for just 30 days illustrates the mathematical trick that MLM companies perpetrate on the new recruits. A penny doubled every day for 30 days amounts to over $5 million. However, note that it takes 25 days (levels) before it amounts to just one hundred thousand dollars. Then, in the last 5 days, it soars to over 5 million. Such is the pattern of "duplication." Like MLM, most of the money is at the end of the chain. The source of that money is the newest enrollees who make up the vast majority of the entire chain. The big numbers are at the deepest level of the "downline", but many levels must be assembled and maintained long before the numbers starting adding up. In MLM, only a few can ever achieve this. This is mathematically predetermined from the start by the MLM pay plan. The trick of the trade is to cover up this reality and to guilefully convince each and every enrollee that he/she can succeed. Recruits are told that the program is a formula for wealth, even though it is mathematically impossible for any but a few to succeed. The way the mathematical trick works itself out is in the pattern of dropouts. Facing the mathematical impossibility of building a downline of thousands of new people, the people entering at the bottom levels soon quit or the ones they have recently enrolled quit.

6

Barret, Stephen, M.D. (1999). LFTC Consumer Alert on Multilevel Marketing. MLM Watch. 7 FizPatrick, Robert. (2002). Lesson from the Pyramids: Why Nearly Everyone Loses Money in MLM, but So Many Keep Trying. Pyramid Scheme Alert.

Effectively the pyramid is continually collapsing in the lower ranks and rebuilding when new hopefuls are found to replace the recent "losers." In this way, MLM‟s don't totally saturate areas with members quickly because most people quit within a year. All MLM‟s experience a 50-90% annual dropout rate. But during the brief time that people in the bottom levels pursue their futile quest, they are also continuously paying money to the MLM for products and training as well as incurring other business expenses -- and thereby supplying money to those in the top ranks. On each "sale" or enrollment, the MLM pay plans specify that the highest percentage of bonus money goes to the top ranks. The doomed efforts of the new recruits pump nearly all of the bonus payments to those few people in the top ranks. The bottom levels, where the vast majority of members are, become a revolving door with new people cycling in and out every month. "Success" of the few at the top is based on the losses of nearly all they enroll. Also, it involves continuous recruiting in order to keep replacing those "losers."

Days/Levels

Dollars/People

Days/Levels

Dollars/People

1

$0.01

16

$327.68

2

$0.02

17

$655.36

3

$0.04

18

$1,310.72

4

$0.08

19

$2,621.44

5

$0.16

20

$5,242.88

6

$0.32

21

$10,485.76

7

$0.64

22

$20,971.52

8

$1.28

23

$41,943.04

9

$2.56

24

$83,386.08

10

$5.12

25

$167,772.16

11

$10.24

26

$335,544.32

12

$20.48

27

$671,088.64

13

$40.96

28

$1,342,177.28

14

$81.92

29

$2,684,354.56

15

$163.84

30

$5,368,709.12

Moral Issue MLM businesses have also contributed into the “un-professionalism” of professionals. Doctors, lawyers, and teachers who moonlight as MLM distributors can become greedy by asking their patients, clients, and students to sign up as distributors. They can become very persistent, and sometimes overtly insistent in urging prospective distributors (their patients, clients, and students) to sign up. They just never takes “never”, “no”, “I„ll consider it”, or “I‟m broke” for an answer. Relationships become estranged in this way, friends do not speak, family ties broken, professionalism ruined just because of a sudden urge of greed.

The Hidden Benefit of MLM Kiyosaki argues that we have to view MLM or network marketing as an opportunity to hone business skills that are needed in real life. An opportunity to learn the much-needed business skills is more valuable than the so-called “opportunity of success” that MLM business claims it can give. Kiyosaki8 mentions 12 positive points in the network marketing business or MLM. It can help in: 1. Building positive attitude for success 2.

Building leadership skill

3. Building communication skill 4. Building public relation skill 5. Building self-confidence, and overcoming personal fear and doubt 6. Overcoming the fear of rejection 7. Building money management skill 8.

Building investment skill

9. Building accountability skill 10. Building time management skill 11. Determining personal goals/objectives 12. Building systematization

8

Kiyosaki, Robert T. (2001). The Business School. p. 14

Conclusion The idealistic view of MLM or network marketing that everybody who is in the system will get rich is just like the debate over whether communism can prevail in our modern society or not. Cigarettes are legal products and are sold freely because our society has accepted cigarettes as any other consumer products, regardless of the hazard that they can cause to our health. The government is “hear no evil, see no evil, talk no evil” in the case of cigarettes, because much of the needed government fund is largely from cigarettes taxes. Corporate power is subsequently considered as the biggest power in the world. It is what triggered the U.S. invasion to Iraq, ain’t it? However the case is much worse when we legalize a hidden pyramid scheme. It is like legalizing marijuana; now every country is the Netherlands. It is like legalizing gambling; now every country is Las Vegas. When corporate power become so strong, we have to find out what is truth and what is only halftruth; and carefully select whatever information or “opportunities” that we come across.

Disclaimer Any brand names, company names, and trademarks quoted in the writing, especially on The Origin of MLM are quoted as is. The writer is merely reporting and rewriting from Stephen Barret‟s MLM Watch which is located at: Hence, the writer is in no way responsible whatsoever if any legal proceedings should arise due to the quotation of The Origin of MLM. References Barret, Stephen, M.D. (1999). LFTC Consumer Alert on Multilevel Marketing. MLM Watch. Barret, Stephen, M.D. (1999). The Origin of Multilevel Marketing. MLM Watch.

Carnegie, Dale. (1990). How to Win Friends and Influence People. New Delhi: Jainsons Printers and Publishers. FizPatrick, Robert. Lesson from the Pyramids: Why Nearly Everyone Loses Money in MLM, but So Many Keep Trying. Pyramid Scheme Alert. Kiyosaki, Robert T. & Lechter, Sharon R. (2003). The Casflow Quadrant. Jakarta: Penerbit PT Gramedia Pustaka Utama. Kiyosaki, Robert T. (2001). The Business School. Jakarta: Penerbit PT Gramedia Pustaka Utama. Santoso, Benny. (2003). All About MLM: Memahami lebih jauh MLM dan pernakperniknya. Yogyakarta: Penerbit ANDI.

Please visit our website at: http://equatrans.tripod.com

CURRICULUM VITAE Name

:

Jimmy Welles

Place/Date of Birth :

Jakarta/February 8, 1981

Language Ability

:

Indonesian, English, Malay, Hakka, Teochew, Cantonese

Current Address

:

Jl. A. Yani 2, Komplek 288 No. J7 Pontianak, West Kalimantan

Mobile Phone

:

+62 812 5365 8755

E-mail

:

[email protected]

Education 2007 :

Awarded with a Bachelor Degree in English Language Teaching/Education from the University of Tanjungpura, Pontianak

2012 :

Awarded with a Master’s Degree in TESOL at La Trobe University, Melbourne, Australia under the AusAID/Australian Development Scholarship

Experience 2012 (November) – now:

Deputy Director at the Foreign Language Academy of Widyadharma Pontianak

2010 – 2012:

Student at La Trobe University, Melbourne, Australia

2008 – 2010:

English Teacher at Saint Mary Vocational High School Pontianak

2007 – 2010:

English Lecturer at the Foreign Language Academy of Widyadharma Pontianak

2006 – 2007:

Translator for the Nordic Institute of Asian Studies/ICSN (Indonesian Conflict Studies Network) West Kalimantan (http://www.icsnasialink.net), conflict studies and awareness program funded by the European Union

2005 – 2006:

Instructor of TOEFL and Teaching Assistant at STAIN Pontianak

2005 – 2006:

Instructor of TOEFL at the Language Center of the University of Tanjungpura, Pontianak

2004 – 2005:

West Kalimantan Supervising Area Representative of PT Protekindo Sukses Mandiri, Pontianak (Motor Vehicle Total Loss Insurance)

1999 – 2004:

Instructor and English-Indonesian/IndonesianEnglish Translator at ELI Language School, Pontianak