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Doing the sums on MLM

The promoters of pyramid and multi-level marketing schemes rely on the inability of their targets to do mathematics. The most obvious manifestation of this attitude is the way that they expect people to not be aware of the market saturation effect caused by the necessity to recruit more people each month. It might be understandable that potential victims don't appreciate that particular problem, because not everyone understands geometric progressions, but I have come across some examples of where the scheme promoters are working on the assumption that the marks can't even do simple arithmetic.

I recently had to look at the web site of the Direct Selling Association, the industry body for multi-level and pyramid operators in the USA. (The DSA board of directors looks like a Who's Who of scammery.) I was investigating the DSA because I had found out that they were using someone else's organisation name to deceive people. (Read about it here.) In one place on the site they boast that the industry has annual sales in the USA of $28.7 billion, sold by 13 million distributors. As I said, the marketing of all multi-level and pyramid schemes relies on prospects being unable to do simple mathematics, and I suspect that they think that nobody is going to be other than impressed by these huge numbers. They think wrong. Ignoring the fact that the total sales is a fictional number based on what the sales would be if all product ended up in the hands of people who are not participants in the system and pretending that no distributor ever buys anything for themself, if you divide 28.7 billion by 13 million you get average annual sales per participant of $2208. Remember that this the gross sales income for a year. The average commission rate is about 2% (most people actually receive a lower rate of commission payments) so this gives an annual net income before taxes and expenses of $44.15. Net income. For an entire year's work. Out of that $44.15 the participants have to pay for training materials, conference and seminar fees, normal business costs like telephone and transport, make-up, dry cleaning and nice clothes to look prosperous at functions, child minding while they are out showing the plan, ... And people try to pretend that these scams are legitimate business opportunities. Of course, there are people making money out of these schemes, but it certainly isn't by direct selling of anything.

The situation is not much different in Australia. During a court battle with a multi-level marketing organisation I was forced to run a notice on this site in which the other side got to proudly offer in their favour the statistics that in Australia there are 500,000 MLM participants selling $1.2 billion worth of goods and services each year. This works out to $2,400 gross sales per year per participant.

At the time this was written (November 2005) the minimum legal wage in Australia was $12.30 per hour, which comes to $24304.80 per year for someone working 38 hours each week (and not getting any overtime). This is just over ten times the sales for the average MLM participant. A single mother on a pension gets a minimum of $12383.80 per year, which is more than five times the average MLM gross income. A 16-year-old can get benefits of $178.70 a fortnight while looking for work. But it gets better, because the $2,400 sales turns into $48 real income at the average commission rate of 2%. $48 per year! That's less than for working for four hours at the minimum wage rate. Less than for a day and a half as a poverty-stricken single parent. Less than four day’s income for a kid on the lowest level of the dole. I think I will stick to stacking shelves at Safeway to earn my pocket money.

Still, those billions of dollars of sales are very impressive, so let's look at the $28.7 billion in perspective. $28.7 billion sounds like a lot of money, and it is to you and me. If I were to be getting paid that each year I would have to put on extra staff just to help me spend it. Anyone who has ever been shown the plan will have been told how multi-level marketing is about to replace conventional retail trade, so how does $28.7 billion compare to retail sales? I chose one company which operates in Australia, a country with about 7% of the population of the USA. The company is Coles Myer Limited, and in 2004 Coles did $A32.3 billion of sales. Adjusting using the exchange rate on the day this was written, this is about $US25 billion. So we have a single company in a country with 20 million people doing 85% of the total business that is being done by a group of 164 companies in a country with 300 million people and an economy to match. And these companies are about to dominate the retail sales universe? Is it any wonder that they have to lie in and with their advertisements? They must be terrified of prospects getting even a hint of the truth.

The SkepticThis article appeared in the December 2005 edition of
the Skeptic, the journal of the Australian Skeptics

Seek the evidence

Australasian ScienceA revised version of the article appeared as the Naked Skeptic
column in the January/February 2008 edition of Australasian Science
You can see the later version here.

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