Multi-level Marketing Doesn't Add Up

We often hear complaints that people can't do arithmetic any more and can't apply simple methods of algebra to their daily lives. A common example is the inability of shoppers to calculate unit prices when comparing products in different sized packages. This inability is transparently exploited by manufacturers and retailers.

The promoters of pyramid and multi-level marketing schemes also rely on the inability of their targets to do mathematics. Most obviously, they expect people to not be aware of the market saturation effect caused by the necessity to recruit more people each month. Certainly, not everyone understands geometric progressions, but they also work on the assumption that the marks can't even do simple arithmetic.

During a court battle with a multi-level marketing organisation I was forced to run a notice on my web site in which the other side got to proudly offer the statistics that in Australia there are 500,000 MLM participants selling $1.2 billion worth of goods and services each year. It was left up to the reader to calculate that this works out to $2,400 gross sales per year per participant.

At the time the minimum legal wage in Australia was $12.30 per hour, or $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, 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. It gets better, because the $2,400 sales turns into $48 real income at the average commission rate of 2%. $48 per year! (Some schemes pay a lower rate of commission!) 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 someone on the lowest level of the dole. Out of that $48 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, … .

Is it any better in another country? The US Direct Selling Association proudly claims annual industry sales in the USA of $32.2 billion, sold by 15.2 million distributors. How could anyone be other than impressed by these huge numbers? If you divide 32.2 billion by 15.2 million you get average annual sales per participant of $2118. Remember that this the gross sales income for a year. The average commission rate is again about 2% (and again most people actually receive a lower rate of commission payments) so this gives an annual net income before taxes and expenses of $42.36. For an entire year's work. 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.

Still, those billions of dollars of sales are very impressive, so let's look at the $32.2 billion in perspective. $32.2 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 $32.2 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 Group Limited, and in 2006-7 Coles did $A34.7 billion of sales (not including GST). On the day this was written this equates to about $US30.5 billion. So we have a single company in a country with 20 million people doing 88% of the total business that is being done by a group of "more than 200" companies in a country with 300 million people and an economy to match. And these companies are about to dominate the retail sales universe? They must be terrified of prospects getting even a hint of the truth.

Not being able to do arithmetic is a small problem when it only means that you think that a 250ml bottle of hair shampoo on special at $2.99 is better value than 500ml at the regular price of $5.23. It is not so small a problem if it allows you to be dragged into an activity which can take many hours of time each week but which returns on average less per year than the cost of a meal at a reasonably good restaurant.

This article was published as the Naked Skeptic column in the February 2008 edition of Australasian Science