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At what point does it become a scam? MLMs

 What is a “Scam”?

Scams happen every day to people all around the world. These scams vary greatly with some of them being more obvious about the fact that you got scammed, whilst others are much subtler, leaving you unaware for a decent amount of time and then even after finding out, leaving you in confusion as to what happened to you.

In past articles, we covered some of the more obvious tech-related scams. But what about other things such as multi-level marketing companies, casinos and the lottery? Would you consider those mentioned to be scams? If so, at what point does it become a scam? Let’s explore the topic together.

I think in order to begin exploring this topic, we must first clarify the definition of what a scam is. Here is how a few different sources define the word scam:

Google Dictionary depicts:

dictionary_scam

The Business Dictionary depicts:

business_scam

And the legal dictionary depicts:

fraud

“N. the intentional use of deceit, a trick or some dishonest means to deprive another of his/her/its money, property or a legal right. A party who has lost something due to fraud is entitled to file a lawsuit for damages against the party acting fraudulently, and the damages may include punitive damages as a punishment or public example due to the malicious nature of the fraud. Quite often there are several persons involved in a scheme to commit fraud and each and all may be liable for the total damages. Inherent in fraud is an unjust advantage over another which injures that person or entity. It includes failing to point out a known mistake in a contract or other writing (such as a deed), or not revealing a fact which he/she has a duty to communicate, such as a survey which shows there are only 10 acres of land being purchased and not 20 as originally understood. Constructive fraud can be proved by a showing of breach of legal duty (like using the trust funds held for another in an investment in one’s own business) without direct proof of fraud or fraudulent intent. Extrinsic fraud occurs when deceit is employed to keep someone from exercising a right, such as a fair trial, by hiding evidence or misleading the opposing party in a lawsuit.”

The legal definition for fraud goes on much longer, the rest is in this link for those that wish to read it is here.

With these three definitions, we can set a precedent that we can later compare the entities to and try to determine whether they are scams or not.

 

Multi-Level Marketing Companies

In this part 1 of the “At what point does it become a scam” article, we’ll begin with something that is usually more obvious whether it’s a scam or not; multi-level marketing (MLM) companies. It’s very likely that you’ve heard of a few MLM companies already, even if you don’t quite know what they are, but here’s a short clarification pulled from a subreddit that’s dedicated to helping others be aware of MLM companies and their schemes, the subreddit being aptly named Anti-MLM;  “The idea behind MLMs is that people pay to become distributors of a product. These can be physical products or services. The company is structured so that the people above (the person who recruited or signed up the new distributor, the people above them, ad infinitum) get a percentage of whatever the distributor sells. The new distributor is encouraged not only to sell the product but to sign up other people below them so that they can make even more money.”

As the definition above states, the “product” behind MLM companies can either be physical products or services. Such as Herbalife nutrition items or care products, Amway supplements or beauty skincare products or even financial services offered by companies such as Primerica.

Such “companies” are normally considered scams as their primary goal is to “recruit” more distributors of their product or service, rather than trying to focus on selling the product itself. In a regular job with a similar position, you would be hired as a salesperson with the sole objective of trying to sell the service or product that your company provides, making the big difference that when you are employed to sell something, you are given a salary to go out there and make sales, as well as usually being enticed with a commission based on your sales performance.

MLMs however, instead of being “employed”, you are instead “recruited” and their recruiting is significantly different from being hired or employed. This is why, MLMs are often associated and classed as pyramid schemes, and the two terms “Multi-Level Marketing” and “Pyramid Schemes” often go hand in hand. First of all (similar to pyramid schemes), there is usually an “entry fee” for the person being recruited. Meaning that you have to pay a sum of money in order to become a distributor for them. There is no employment contract, so there is no salary and the only money you can make is from the products or services that you will be selling or “distributing”.  However, keep in mind that you first had to pay for these products yourself, meaning that it will be coming out of your profits.

A decent amount if not a lot of people are quite aware of MLM companies. Meaning that as soon as you start your sales pitch and they figure out what it is you’re trying to sell, they’ll already be reluctant to listen let alone buy. This is the reason why MLM companies and distributors instead focus on recruitment of additional distributors, and this is where and why most people consider MLMs as scams.

The idea is that the people who recruited you get a percentage of whatever it is that you sell.  And the people that you’ve recruited, you get a percentage of whatever it is that they sell, so on and so forth. So, not only do you have to buy the products you’ll be selling, but a percentage of your sales is also given to your recruiter.

The whole thing is full of red flags and you’re probably wondering how does anyone ever even decide that they’d join an MLM. This is where things begin to get a little “dishonest”.  MLM recruiters rely on predatory-like tactics when giving you their pitch. Recruiters try to lure you in with stories and talk of wealth, as well constantly using abstract words during their speeches and pitches. They can often refer to their job as a “journey” and how you can also quickly become the “owner of your own business” just like they are after you’ve signed up.

Remember folks, you are not the owner of your own business if you’re signed up with somebody else, bought their products and must give a percentage of your sales to them. But of course, the constant talk of how they’ve obtained their wealth and high lifestyle through this “journey” can be enough to lure in the less aware and the financially desperate. Keep in mind that if the focus were selling products, why would these people try to recruit you into the business and dilute their market by creating more competitors?

It’s because it’s not so much about selling the product, as it is about recruiting more people into the scheme that will pay them the entry fee or buy the products to try and sell later on. Here’s a well-explained video on How to spot a Pyramid Scheme:

As you can expect; the probability of somebody becoming successful through multi-level marketing schemes are low. Very low. This recently published article has a few statistics that shed some light on MLM success and drop out rates.

mlm_drop

So, can we consider MLM companies as a scam?  In my opinion, yes. As soon as the whole company scheme is revolved around recruiting additional members and distributors instead of focusing on trying to sell the product or service, then I would consider that to be a scam. Throw in the fact that you also have to pay for the products that you have to sell/distribute and you have in my opinion; a recipe for a scam.

However, quite a number of MLMs aren’t illegal. As already mentioned, Pyramid Schemes and Multi-Level Marketing often come in hand due to their similar business practices, and while Pyramid Schemes are illegal, MLMs often find ways around the legal barrier, but because they are actually selling a physical product or a service, that service or product often grants the MLM; legal status. So, it’s only illegal if it’s a pure pyramid scheme, which is a business that doesn’t actually provide any real product or service, but instead is 100% reliant on customers bringing in other customers.

From some quick research, the lawsuits on “popular” MLM companies are mostly to do with their products being terrible or not as advertised, instead of any legal action against their business practices, meaning that while we may find the idea wrong, MLMs aren’t actually doing anything illegal.

 

So, in conclusion; are MLM businesses a scam? Legally no, but remember that what is legal isn’t always ethical.

 

Cover illustration artist manticor, DeviantArt

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A lover and advocate of all things Tech, Loy has had an exciting time learning about Blockchain and the possibilities it brings for the future.