Prev: The Mirage of Multilevel Marketing
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From: Will Ketcher on 27 Jun 2006 16:38
The Mirage of Multilevel Marketing
Stephen Barrett, M.D.

http://www.quackwatch.org/01QuackeryRelatedTopics/mlm.html

Don't be surprised if a friend or acquaintance tries to sell you
vitamins, herbs, homeopathic remedies, weight-loss powders, or other
health-related products. Millions of Americans have signed up as
distributors for multilevel companies that market such products from
person to person. Often they have tried the products, concluded that
they work, and become suppliers to support their habit.

Multilevel marketing (also called network marketing) is a form of
direct sales in which independent distributors sell products, usually
in their customers' home or by telephone. In theory, distributors can
make money not only from their own sales but also from those of the
people they recruit.

Becoming an MLM distributor is simple and requires no real knowledge of
health or nutrition. Many people do so initially in order to buy their
own products at a discount. For a small sum of money -- usually between
$35 and $100 -- these companies sell a distributor kit that includes
product literature, sales aids (such as a videotape or audiotape),
price lists, order forms, and a detailed instructional manual. Most MLM
companies publish a magazine or newsletter containing company news,
philosophical essays, product information, success stories, and
photographs of top salespeople. The application form is usually a
single page that asks only for identifying information. Millions of
Americans have signed up, including many physicians attracted by the
idea that selling MLM products can offset losses attributable to
managed care.

Questionable Financial Opportunity

Distributors can buy products "wholesale," sell them "retail," and
recruit other distributors who can do the same. When enough
distributors have been enrolled, the recruiter is eligible to collect a
percentage of their sales. Companies suggest that this process provides
a great money-making opportunity. However, it is unlikely that people
who don't join during the first few months of operation or become one
of the early distributors in their community can build enough of a
sales pyramid to do well. And many who stock up on products to meet
sales goals get stuck with unsold products that cost thousands of
dollars. This strategy -- referred to as "front-end loading" -- is
promoted with claims that it will push the new distributor to higher
bonus and/or leadership levels quickly. Some companies permit direct
ordering of their products, which avoids this problem. In July 1999,
the National Association of Attorneys General announced that complaints
about multilevel marketing and pyramid schemes were tenth on their list
of consumer complaints.

An Amway Corporation report indicates that the vast majority of its
distributors make very little money. Amway's 1998 "Business Review"
tabulates figures gathered from April 1994 through March 1995 from
distributors who attempted to make a retail sale, presented the Sales
and Marketing Plan, received bonus money, or attended a company or
distributor meeting in the month surveyed. The average "gross income"
for these "active distributors" was $88 per month. The report defines
"gross income" as the amount received from retail sales minus cost of
products, plus any bonus. It does not take any business expenses into
account. If this figure includes purchases for personal use, the
potential profit would, of course, be less. The report also notes that
"approximately 41% of all distributors of record were found to be
active."

Dubious Health Claims

More than a hundred multilevel companies are marketing health-related
products. Most claim that their products are effective for preventing
or treating disease. A few companies merely suggest that people will
feel better, look better, or have more energy if they supplement their
diet with extra nutrients. When clear-cut therapeutic claims are made
in product literature, the company is an easy target for government
enforcement action. Some companies run this risk, hoping that the
government won't take action until their customer base is well
established. Other companies make no claims in their literature but
rely on testimonials, encouraging people to try their products and
credit them for any improvement that occurs.
Most multilevel companies tell distributors not to make claims for the
products except for those found in company literature. (That way the
company can deny responsibility for what distributors do.) However,
many companies hold sales meetings at which people are encouraged to
tell their story to the others in attendance. Some companies sponsor
telephone conference calls during which leading distributors describe
their financial success, give sales tips, and describe their personal
experiences with the products. Testimonials also may be published in
company magazines, audiotapes or videotapes. Testimonial claims can
trigger enforcement action, but since it is time-consuming to collect
evidence of their use, government agencies seldom bother to do so.

Government enforcement action against multilevel companies has not been
vigorous. These companies are usually left alone unless their
promotions become so conspicuous and their sales volume so great that
an agency feels compelled to intervene. Even then, few interventions
have substantial impact once a company is well established.

Dubious Promotions

During the past 15 years, I have collected information on more than 100
multilevel companies marketing health products. Here are some examples
of improper marketing activities:

· Body Wise International, of Carlsbad, California, markets "fitness"
products and weight-management products. In 1995 the FTC charged the
company with making unsubstantiated claims that Cardio Wise was
"designed to give an extra margin of insurance against heart disease"
and that its weight-management products would foster weight loss
without dieting. The company signed an FTC consent agreement
prohibiting it from making unsubstantiated health-related claims in the
future.

· At one time, Mary Kay, well known for its cosmetic products,
marketed a $29.50-per-month daily supplement packet alleged "to help
bridge the gap between what a healthy diet provides and what a woman
needs for optimum health and beauty." Tufts University Diet & Nutrition
Letter observed: (1) the supplements contain huge amounts of thiamin,
riboflavin, vitamin B6, and vitamin B12, which almost all Americans get
from their food; (2) they lack iron, which might benefit some women of
childbearing age; and (3) more rationally formulated
multivitamin/mineral preparations are available elsewhere for one tenth
the cost.

· In 1993, Melaleuca Inc., of Idaho Falls, Idaho, began offering a
"wellness assessment" by a company that provided in-home testing. The
procedure included a questionnaire, a blood cholesterol test, a
blood-pressure reading, and an estimate of the percentage of body fat.
The resultant report evaluated personal risk factors and recommends
modifications in diet, exercise habits, and lifestyle. The
recommendations include taking a "balanced vitamin/mineral supplement
every day" and "working closely with a 'Vitality for Life counselor' (a
Melaleuca distributor) to implement the suggested changes. Prospects
were then encouraged to purchase a "Vitality Pack" of "55 different
vitamins, minerals, and other nutrients, all in the proper amounts and
proper proportions," which wholesales for $263.40 for an annual supply.
Although the health-risk appraisal could provide useful information,
the Vitality Pack is a waste of money. People who wish to take a
multivitamin/multimineral formula can obtain equivalent nutrients at a
drugstore for less than $50 per year. The company also marketed a
patented "fat conversion activity bar," an expensive candy bar whose
ingredients are claimed to make exercise easier by "inhibiting the
body's ability to hold on to fat."

· Matol Botanical International, a Canadian firm, markets Km, a
foul-tasting extract of 14 common herbs. Km was originally marketed as
Matol, which was claimed to be effective for ailments ranging from
arthritis to cancer, as well as for rejuvenation. Canada's Health
Protection Branch took action that resulted in an order for the company
to advertise only the product name, price, and contents. In 1988 the
FDA attempted to block importation of Matol into the United States.
However, the company evaded the ban by adding an ingredient and
changing the product's name. The product literature acknowledges that
Km has never been tested for effectiveness against any disease and
states that distributors should not diagnose or recommend its products
for any specific disease. However, many distributors do so

· Nature's Sunshine Products, of Spanish Fork, Utah, markets herbs,
vitamins, other nutritional supplements, homeopathic remedies, skin and
hair-care products, water treatment systems, cooking utensils, and a
weight-loss plan. Its more than 400 products include many that are
claimed to "nourish" or "support" various body organs. Its salespeople,
dubbed "Natural Health Counselors," are taught to use iridology (a
bogus diagnostic procedure in which the eyes are examined), applied
kinesiology (a bogus muscle-testing procedure), and other dubious
methods to convince people that they need the products.

· Nu Skin International, Inc., of Provo, Utah, sells body-care
products and dietary supplements. Nu Skin's Interior Design division
markets expensive antioxidant, phytochemical, and "active enzyme"
products. The enzyme products are said to be important because "the
majority of cooked or processed foods we eat lack an ideal level of
enzyme activity" needed for digestion. This statement is nonsense
because the enzymes needed for digestion are made by the body's
digestive organs. In 1993, the company and three of its distributors
agreed to pay a total of $1,225,000 to settle FTC charges that they
made unsubstantiated claims for Nutriol Hair Fitness Preparation and
two skin-care products. In 1997, the company agreed to pay $1.5 million
to settle charges that it had made unsubstantiated claims for five more
of its products. The products, which contained chromium picolinate and
L-carnitine were falsely claimed to reduce fat, increase metabolism,
and preserve or build muscle.

· Sunrider Corporation, of Torrance, California, claims that its
herbal concoctions can help "regenerate" the body. Although some
ingredients can exert pharmacologic effects on the body, there is
little evidence they can cure major diseases or that Sunrider
distributors are qualified to advise people about how to use them
properly. During the mid-1980s the FDA ordered Sunrider to stop making
health claims for several of its products. In 1989, the company signed
a consent agreement to pay $175,000 to the state of California and to
stop representing that its products have any effect on disease or
medical conditions. The company toned down its literature but continued
to make therapeutic claims in testimonial tapes included in its
distributor kits. In 1992 a jury in Phoenix, Arizona, concluded that
Sunrider had violated Arizona's racketeering laws and awarded $650,000
to a woman who claimed she had been misled by company representations
and had become ill after using some of its products. On January 7,
1997, The Wall Street Journal reported that Sunrider's president Tei-Fu
Chen and his wife Oi-Lin Chen were indicted for conspiracy, tax
evasion, and smuggling. The article stated that they had (1)
underreported their 1987-90 income by more than $125 million, (2) used
foreign companies they controlled to overcharge Sunrider for
ingredients so the company could understate its profits, (3) wired
millions of dollars to pay the inflated charges, but "recycled" the
money to purchase U.S. real estate and Chinese antiques, and (4) filed
falsely low customs declarations to reduce the import duty on dozens of
art works. In September 1997, the Chens and the company pled guilty to
tax and customs frauds. Mr. Chen was sentenced to two years in federal
prison, to be followed by two years of supervised release including six
months of home detention. Mrs. Chen was sentenced to two years
probation, including six months of home detention. The financial
penalties totaled $99.8 million. The Corporation was fined $500,000 for
filing a false tax return for 1989. Mr. Chen agreed to pay the Customs
Service $4 million to avoid forfeiting antique items that had been
seized. In related actions, the Chens had paid the Internal Revenue
Service $93 million in back taxes, interest, and penalties, and paid
the Customs Service $2.3 million in additional duties. In 1998, the FDA
issued a warning letter citing manufacturing violations and stating
that it was illegal for the company to market "spray vitamins" as
dietary supplements.

Motivation: Powerful but Misguided

The "success" of network marketing lies in the enthusiasm of its
participants. Most people who think they have been helped by an
unorthodox method enjoy sharing their success stories with their
friends. People who give such testimonials are usually motivated by a
sincere wish to help their fellow humans. Since people tend to believe
what others tell them about personal experiences, testimonials can be
powerful persuaders.
Perhaps the trickiest misconception about quackery is that personal
experience is the best way to tell whether something works. When
someone feels better after having used a product or procedure, it is
natural to give credit to whatever was done. However, this is unwise.
Most ailments are self-limiting, and even incurable conditions can have
sufficient day-to-day variation to enable bogus methods to gain large
followings. In addition, taking action often produces temporary relief
of symptoms (a placebo effect). For these reasons, scientific
experimentation is almost always necessary to establish whether health
methods are really effective. Instead of testing their products,
multilevel companies urge customers to try them and credit them if they
feel better. Some products are popular because they contain caffeine,
ephedrine (a stimulant), valerian (a tranquilizer), or other substances
that produce mood-altering effects.

Another factor in gaining devotees is the emotional impact of group
activities. Imagine, for example, that you have been feeling lonely,
bored, depressed or tired. One day a friend tells you that "improving
your nutrition" can help you feel better. After selling you some
products, the friend inquires regularly to find out how you are doing.
You seem to feel somewhat better. From time to time you are invited to
interesting lectures where you meet people like yourself. Then you are
asked to become a distributor. This keep you busy, raises your income,
and provides an easy way to approach old friends and make new ones --
all in an atmosphere of enthusiasm. Some of your customers express
gratitude, giving you a feeling of accomplishment. People who increase
their income, their social horizons, or their self-esteem can get a
psychological boost that not only can improve their mood but also may
alleviate emotionally-based symptoms.

Multilevel companies refer to this process as "sharing" and suggest
that everyone involved is a "winner." That simply isn't true. The
entire process is built on a foundation of deception. The main winners
are the company's owners and the small percentage of distributors who
become sales leaders. The losers are millions of Americans who waste
money and absorb the misinformation.

Do you think multilevel participants are qualified to judge whether
prospective customers need supplements -- or medical care? Even though
curative claims are forbidden by the written policies of each company,
the sales process encourages customers to experiment with
self-treatment. It may also promote distrust of legitimate health
professionals and their treatment methods.

Some people would argue that the apparent benefits of "believing" in
the products outweigh the risks involved. Do you think that people need
false beliefs in order to feel healthy or succeed in life? Would you
like to believe that something can help you when in fact it is
worthless? Should our society support an industry that is trying to
mislead us? Can't Americans do something better with the billion or
more dollars being wasted each year on multilevel "health" products?

Physician Involvement

During the past few years, many physicians have begun selling
health-related multilevel products to patients in their offices. The
companies most involved appear to be Amway, Body Wise, Nu Skin
(Interior Design), and Rexall. Doctors are typically recruited with
promises that the extra income will replace income lost to managed
care. In June 1999, the AMA House of Delegates approved ethical
guidelines emphasizing that physicians should not coerce patients to
purchase health-related products or recruit them to participate in
marketing programs in which the physician personally benefits,
financially or otherwise, from the efforts of their patients. The
guidelines clearly frown on doctors profiting from the sale of
health-related nonprescription products such as dietary supplements.

Recommendations

Consumers would be wise to avoid health-related multilevel products
altogether. Those that have nutritional value (such as vitamins and
low-cholesterol foods) are invariably overpriced and may be unnecessary
as well. Those promoted as remedies are either unproven, bogus, or
intended for conditions that are unsuitable for self-medication.

Government agencies should police the multilevel marketplace
aggressively, using undercover investigators and filing criminal
charges when wrongdoing is detected. People who feel they have been
defrauded by MLM companies should file complaints with their state
attorney general and with local FDA and FTC offices. A letter detailing
the events may be sufficient to trigger an investigation; and the more
complaints received, the more likely that corrective action will be
taken. If you possess a distributor kit that you no longer need, I
would be pleased to add it to my collection. If you would like to help
Quackwatch gather information on MLM companies on the Internet, click
here.
For further critical information:

· Amway: The Untold Story
· Dean & Laura Van Druff
· False Profits
· MLM Watch: Quackwatch's skeptical guide to multilevel marketing

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