Deception and Delusion: How Pyramid Schemes Maintain the "Direct Selling" Disguise

According to the MLM companies, Herbalife, Nu Skin and Amway, and others, the great majority of people who sign sales contracts, join as “salespeople” and buy sales kits have absolutely no interest in being salespeople or in making any money at all in those enterprises. Why did they join and pay the fees and sign the contracts? Merely to buy the product at a discount, the companies say. They signed contracts and bought sales kits and even agreed to pay sales tax on the retail price so they could get a salesperson’s discount. They bought the products only because they loved those products, not because of reward incentives, quotas and qualifying for rewards. So, those consumers who ended up making no profit really did not “lose” money because they were never trying to make money in the first place.

Now, even before examining this amazing behavior, it should be noted that the claim conflicts with the official position of the Direct Selling Association. According to the DSA: “Nearly all direct sellers (97%) earn money from personally selling product, and 34% earn money just from their own personal sales, not relying on any downline sales.”

So, now, which is it, 97% make money or very few of direct sellers even
try to make money? And how would anyone know which people “try”?

But Herbalife and others say they do know. They claim they know
exactly which people joined just for the products and not for the money. How? Because those that did not want to make money never did! They never successfully recruited anyone or gained any override payments based on recruiting. Therefore, they never tried! Successfully recruiting defines whether someone is in MLM “for the money.” Herbalife and other MLMs also say they have conducted surveys in which most of the MLM participants said they joined “just for the products.” They did not care about the “greatest income opportunity in the world” as MLM is advertised.

So, millions of people become salespeople only to buy a product that the salespeople sell and get a modest discount? They did this rather than just buying the product online or from a real salesperson who would happily sell it at a discounted price?

Of course this story is not real or true.

How would these consumers even know about these products that are not advertised and want them so much, that they sign contracts and pay fees to get them, even before trying them? This defies all that is known about buying behavior. Why would those who are selling the goods and trying to make an income sign up others as competitor salespeople or offer them the products at a discount, thereby gaining no retail profit at all? Why wouldn’t they just sell to them as retail customers and give them a modest discount. That’s usually how retail selling works.

Golden Pathway Based on Buying and Recruiting

There is another explanation. It is based both on corporate deception and consumer self-deception or perhaps the delusion that is cultivated inside the closed world of MLMs. Millions of people join MLMs because they are told that it is a golden pathway to “unlimited income” or solid part time income through recruiting others into the “opportunity.” The proof of this is on every MLM website. The income promise is electrifying indeed. The MLM marketing chart shows an explosive downline developing after recruiting just a few friends and a portion of all their purchases coming back to you, and it never stops expanding! It is portrayed as the last best hope for the average person to achieve the American Dream. For others, it is a shown as a road out of abject poverty.

But there’s a problem. This program of recruiting people who recruit more people, forever, looks very much like a pyramid scheme, or an “endless chain”, which might be
illegal. It looks like a scheme in which the majority will always be in the bottom ranks of the “downline” where they are doomed to lose money. So those who try to make money in this manner would be doing so out of the losses of their recruits, possibly their friends and family members. Who would say they are doing that? Obviously, a rationalization is needed. So, everyone is told by the MLM leaders that the “business” is about the products and consuming the product. Wink wink nod nod. This is pure corporate deception, as in “unfair and deceptive trade practices.”

The company executives are not deceiving
themselves, though. They know, down to the penny, that the business is all about recruiting and selling the “income opportunity” not the consumer product. They know that the great attraction of their consumer “products” is the financial products, the contract proposition of “unlimited” override commissions that can be gained from an “endless” recruiting chain. And they use powerful tools to entice people with these recruiting rewards while diverting attention from the plan’s flaw of dooming nearly all to lose, except a few at the top.

They deliberately set it up so that If the “salespeople” don’t buy, they don’t earn “points” that add up to override commissions or higher commission rates. They
design the pay plan so that If the “salespeople” don’t continue to buy, they lose their “qualification” to ever get commissions. And they always based the promised rewards on what the salespeople and their recruits buy, not what they sell. The people running the business know that their main marketing message is all about getting people to buy and to recruit other to buy and recruit. They know that this buy and recruit plan works. Millions join up. Many are fooled. Some want to be fooled. Some fall into the world of deception so deeply, it becomes a kind of religion, a closed society. They practically worship the leaders. They learn to speak only in the logic of the MLM. That logic says they are in the business “for the products” while they are also told the dedicate themselves entirely to recruiting. The deception is contagious. It corrupts those who believe the lie – concocted in the executive suite – to carry it, word for word, into neighborhoods, churches, offices and into their own homes.

The problem with this contagious and profitable lie is that regulators might notice that this is
unfair and deceptive. It looks on its face exactly like a chain letter, with people buying product then recruiting others to do the same, instead of putting cash into an envelope, sending it to the person at the top of the list and then sending the invitation to participate to 10 more “friends.” Chain letters are illegal. Pyramid schemes are illegal because they promise what they cannot fulfill. They do the opposite in fact, causing nearly all to lose money. So the promoters are keen to say that the program is not about paying-buying-recruiting. No, it is really all about consuming products. To make money from recruiting, each person has to also buy the goods, so the companies say those that sign up buy the products because they love them, not because of potential rewards tied to buying. They train everyone to say that too.

Many people are quite happy to say that it’s all about the products because it is certainly better than saying, “I am trying to make money off my downline (friends and neighbors) who will certainly lose their money.” The “love the product” claim is a
calculated marketing deception by the company and self-deception by the recruits. It works.

Later, when the recruits fail to make money, which 99% eventually do in all MLM companies, the “losers” have a nice, ready-made excuse for their losses. They blame themselves. Many will insist that they lost only because they were mostly interested in the product, not the money. And some will even say they actually
profited from the camaraderie and the business lessons they learned, even though the lessons were about recruiting, not business, and they never associate with their old MLM pals any more. This story about products helps also when friends rebuke them for getting them into a scam. They can say, “Hey, didn’t we all get the products we wanted?” This feels a lot better than saying, “I failed in the greatest income opportunity in the world, or, I tried to scam my friends, but I couldn’t get any to take the bait and I ended up losing some friends. Or, I wasted six months and wound up with nothing.”

Lost Love

By the way, after they quit or don’t renew their sales contracts, those people who joined “for the love of the product”, not for the money, at least keep using those products, don’t they? If they had earlier signed contracts and paid fees just to get access to these products, surely they continue buying, whether they made money or not, right?

No, they don’t. After quitting the “income opportunity” their love of product, strangely, vanishes. The vast majority never buy those products ever again.

The “love of product” or “to get a discount” story makes no sense, but people say it, and some even believe it when they say it. They seldom realize they were
told to say it. They say it because they were told to and because it covers over some painful truths about being duped, about losing money, about misusing friendships, about chasing a false promise and about participating in a pyramid scheme.

Just Giving and Receiving

How do I know that the official story about discounts and love of product — even with the survey results — is a hoax? One way I know is from my own experience, many years ago, when I myself joined a pyramid scheme, called the “Airplane Game”. The Airplane Game was just one of many versions of pyramid schemes called “
gifting schemes.” These scheme run parallel to multi-level marketing. Millions of Americans have joined them. Most recently the schemes go by the name of “Women Helping Women.” They are essentially the same as multi-level marketing, but they don’t use buying and selling products to cover over a pyramid money transfer. They use a beautiful and inspiring story about “giving and receiving.” I recounted my experience in the Airplane Game in my book, False Profits. It was this experience that led me into years of study and research into the structure, operation and psychology of pyramid schemes.

When I was in the gifting pyramid scheme, all the participants — tens of thousands — said to each other that they were making "gifts" and receiving gifts while they actually traded money in envelopes to gain positions on a 1-2-4-8 pyramid. After 15 had joined, the last 8, called “Passengers”, gave their money, $1,500 each at that time, to the top person, called the “Pilot”, who got a whopping $12,000, and then the pyramid split with the next two taking top positions of two pyramids, and the bottom 8 becoming 4 each in the two new groups. Now each group of 7 had to find 8 more “Passengers” each, a total of 16, to pay, sorry, I mean “give” their money to the two new “Pilots” at the top, and so it went on, 32, 64, 128, 256, etc.

“Gifting” to each other, we were told and we so wanted to believe, was
legal (not covered by the state or federal wording of anti-pyramid laws or court rulings against pyramid schemes) even though the scheme itself was a naked endless chain pyramid. We longed for the $12,000 returns on our $1,500 investments so much that we ignored the impossibility of the “endless chain” extending forever and we ignored the fact that 90% of all who ever participated would always be in the bottom and therefore could never get their promised “gifts.” Since we were not criminals, we could not be possibly be breaking laws, right? So we are all gifting each other! Of course, we were! You could have taken a scientific survey of the participants back then and most would have confirmed it. No sir, we were not in it for the money. Not us. We just wanted to give and to receive. And many of those who later lost their money – well over 90% lost, just as the math dictates – also said that they did not really lose, because they were only in it to give and to receive, not to gain rewards, and anyway it was also to learn wonderful lessons about sharing, as the leaders said we would.

Of course, at some level, everyone really did know that it was payments and rewards (800% return!) for recruiting, not gifting. It was that promise of 800% return that fueled the mania of recruiting and enabled the scheme to sweep through communities like a new religion that promised heaven to all. But, honest to God, thousands of people said they really were just "giving and receiving", and some continued to swear it even after the sheriff's office raided meetings and closed the scheme down.

Big Lie Needed

A "mass" scam, like “multi-level marketing” and the “Gifting Club” requires a massive lie to cover up the nasty realities of deception, 99% losses, and manipulation of friends, all done in plain sight. They need to fool regulators but also they need the big lie for the thousands of people to rationalize their participation in the fraud, without feeling they are doing anything wrong.  They need a cover story. The facts about losses, false income promises and the raw reality of how the money transfer works need to be disguised.

If the people in the gifting clubs really are just “giving and receiving”, they are not breaking laws because the law says that it is illegal only to make “payments” for the right to receive “rewards” based on recruiting others to do the same. The law can’t stop people from joining and recruiting each other into a pyramid if they just want to “give” and “receive” money from each other, can it?

Similarly, for multi-level marking, this means convincing regulators and courts that to “prove” they are pyramid schemes the regulators must first prove that the
motive of the losers was to make money. If those “losers” were just involved for their own “internal consumption”, not to ever make any money in the first place, then they didn’t lose anything and the enterprise did no harm, right? And, the law can’t stop people from joining a pyramid, if they just want a product for “personal consumption," can it?