When Market Declines, Hire More Sales People?

Economic Recessions always produce new scams. They also expose existing ones.

For example, the current Recession exposed Bernard Madoff’s Wall Street Ponzi. Many of Madoff’s investors suddenly needed cash when their real estate and stock market investments sank. When they asked to withdraw their money Madoff could not do it because he had already transferred their funds to earlier investors or used it himself. He could no longer hide his fraud so he confessed. Investors lost $50 billion when his fund collapsed.

It was the Recession that exposed Madoff’s scam. Government regulators were not even investigating him and the media had not raised a serious question.

In the case of multi-level marketing (MLM), the Recession is both spawning new MLM scams, e.g., Donald Trump’s new scheme, and exposing the fraudulence of
existing schemes.

The revelation of MLM fraud, which the Recession provides, is this:
As the markets shrink and fewer people buy goods, MLMs are ramping up recruitment of salespeople! Here is proof positive that MLMs make money off the recruits themselves, not from their “sales.” The Recession reduces the ability of MLM recruits to sell, but increases the ability of MLMs to recruit salespeople. More people are unemployed and desperate – perfect candidates for recruiting to invest in the MLM “income opportunity.” Of course, they will not be able to sell products, but the market for MLM recruits (who are destined to lose) has increased.

To cover over the revelation of an obvious “business opportunity” scam, MLMs have launched a logic-defying PR campaign that tells consumers that MLMs are “havens” for the unemployed and that MLM is “recession-proof.” In other words, as MLMs cause ever more losses by luring unemployed people into Ponzi money-transfers, they claim they are saving people from unemployment!

There is a perverse truth in the claim that some MLMs can grow during a Recession. There is no truth, however, that those who join them will benefit. To the contrary. The terrible reality is that MLMs cause double harm in a Recession. Citizens who have lost their jobs will lose again in the MLM. The MLM itself will gain from their losses.

Another way of saying this is that in a Recession, opportunity for legitimate selling declines, but the market for selling snake oil (MLM’s false income promise) rises. Hence, some MLM’s “grow.”

Most of these false stories about “direct selling,” aka MLM, being a “safe haven,” a “fall back” and “Recession-proof,” are planted by the MLM lobbying group, the Direct Selling Association. Some in the media have bitten the hook. Few look at data which shows that MLMs
produce 99% loss rates among the recruits. Almost none question the feasibility of recruiting new salespeople when markets are down. Few reporters draw a distinction between the MLM company gaining revenue and the recruits making a profit. Hardly any know the difference between salespeople selling products and companies selling inventory to salespeople. They enjoy the chance to report some “good” news, even it is untrue.

One of the very first exposés of multi-level marketing was an essay written by
Dean Van Druff, entitled “What’s Wrong with Multi-Level Marketing?” This article, which has been read by tens of thousands of people worldwide, exposed the fatal and fraudulent flaw in the MLM “model.” MLMs, the article noted, never stop expanding their sales forces. This would be like MacDonalds adding more and more stores in the same area. (MacDonald’s, like all franchises, must disclose to new franchise owners the incomes of existing ones, and it always limits the number of stores per area so that existing ones can prosper.)
But in MLM, long after a market would have enough sales people, MLMs keep on recruiting more salespeople. In fact, MLM is designed to expand its sales force at an
increasing rate (the larger the MLM the more new people it must recruit) even as market potential decreases (as all markets must eventually reach saturation). MLMs must do this forever!

The “endless expansion” requirement reveals that MLM is not a sales model, but a swindle of the consumers who are the “last ones in.” This group always constitutes the majority involved at any given time. These last ones in have no market to sell to and there are not enough people to recruit either. So, they inevitably “fail” to sell the products or find enough new recruits. They soon quit, after not making a profit, and are then replaced by new hopefuls. That is how the MLM “model” works.

That MLMs are ramping up recruiting as the markets for their products shrink ought to be a red flag to regulators that
business opportunity fraud is being committed. It ought to be obvious that when markets for products shrink, companies need fewer, not more, salespeople. Legitimate companies are laying off salespeople. Others have frozen hiring. But MLMs are doing the opposite.

Recruiting sales people into a shrinking market might be seen as just a misuse of salespeople to squeeze out a bit more revenue from a shrunken market, at the expense of the salesperson’s effort (more work, less income). But in MLM, abuse is different
and much worse. MLM’s don’t just waste the salesperson’s time and labor. They take their money. The idea is not to generate more retail sales, but to dupe more salespeople out of their money.

Even in good times, most MLMs do not actually have customers that buy products from MLM salespeople on a retail basis. There is no “demand” for products sold by MLM companies, certainly not at the high prices charged. MLMs make their money not from selling products that the pubic demands, but from gaining the salespeoples’ investments in the form of fees, marketing materials and inventory purchases. Sales people are induced to buy the products and marketing materials themselves and to pay the fees because they have been promised an income opportunity.

Now that there is a Recession, the market for MLM’s true product – the (false) promise of an income opportunity – is expanding, even while the market for their products – pills, potions, lotions, insurance, fruit juice, meal replacements, etc. – is shrinking. So, MLMs can find more people desperate for income, and they can make even more money falsely promising them an income opportunity.

To repeat, MLMs do not make money selling products to consumers. In fact,
few consumers ever buy MLM products. Almost all MLM “sales” are made only to the salespeople. These are citizens who pay money, sign legally binding contracts to become MLM “contractors” and obtain the right to get money from the MLM. They are no longer “consumers.” They buy inventory. They pay fees. They incur many legal liabilities and restrictions as contractors. Many buy the MLM products every month only to qualify for the “commissions” they hope to gain if they can recruit other “salespeople.” Most will quit within a year, after they “fail.” But along the way, they buy a lot of products, marketing and motivational materials, and some pay a lot in fees.

MLMs gain their revenue
directly and ultimately from the salespeople (who lose). The more salespeople, the greater the revenue. In a Recession, the market for the losers (new salespeople) grows, among the people already suffering layoffs and other Recession hardships.