Posted on Monday, April 28, 2003

A very thin line between multilevel marketing and pyramid schemes

By Max de Leon, Researcher

First of three parts

After six frustrating months working like crazy for a “networking com­pany” to earn his first million, Mark—a law­yer—realized he was chasing a mirage. It was time to quit and head back to the real world, he told himself.

Mark joined Forever Living Products Philippines Inc. (FLPPI) in October 2000, and shelled out P10,000 for the op­portunity to earn big money the fast and easy way. He was in high spirits after joining the company and even spent sleep­less nights thinking of the big bucks he was told he could earn when he was first invited to attend the company’s “opportunity plan presentation.” He even thought about giving up law to go full-time into “the business.”

Like other FLPPI recruits, Mark found FLPPI’s marketing and compensation plan very enticing, because the overrides and commissions supposedly get higher with every successful recruit, made including those of the “downlines.” The term “downlines” refers to the new workhorses at the base of the recruitment pyramid—the recruits’ own recruits.

But after a few months of frustration with recruiting downlines, Mark’s enthusiasm faded. 

“Of course, when you invite someone, you have to pay for the fare and snacks, only to get frustrated in the end when you are rejected,” says Mark. “In those times that I did the business, I couldn’t get back the money I had invested.”

“It was like I was buying and using the company’s products that were grossly overpriced,” adds Mark, who now works in a government agency.

Probably thousands more share Mark’s frustrations. FLPPI, company insiders said, has drawn around 300,000 members nationwide since it was registered with the Securities and Exchange Commission on Sept. 19, 1988. Several dozens other companies have sprouted, following FLPPI’s modus operandi.

Shadows of the pyramid

Originating from the United States, FLPPI is only one of many firms currently engaged in “multilevel marketing” (MLM).

Also prominent owing to the size of their membership are Powerhomes Unlimited Corp., Amway, First Quadrant, Herbalife, Sunrider Philippines, Waters Philippines and GoldQuest. MLM firms have a variety of titles for their members like “distributors,” “business associates” and “sales associates.”

FLPPI, Sunrider and Herbalife offer mainly food supplements; PowerHomes sells houses and lots and training in computer, networking and real-estate brokering. First Quadrant offers leather products and clothes; GoldQuest, gold coins; and Water Philippines, water purifiers.

They are referred to as MLMs, networking or network marketing firms.

But nonbelievers call them “shadow pyramiding.” “These schemes really walk, talk, smell and appear to be like pyramiding,” says one observer.

Jaime Olmos, Department of Trade and Industry assistant director and acting chief of the Bureau of Trade Regulation and Consumer Protection, said they are not sure how many companies are engaged in MLM schemes.

He noted that the department becomes aware of an MLM firm only when a complaint has been filed against it, because the department is required to invite the supposed erring firm for marketing presentation and questioning.

“We don’t keep a list of companies engaged in MLM,” says Olmos. “What we do is invite certain companies to look into their marketing plan to see whether they are legitimate or are using the pyramid scheme.”

Traditionally, pyramiding involves only the investment of money in which a recruit would have to get a specific number of downlines and earn a certain percentage from the amount he invested and those that were poured in by the recruits of the recruits.

But when authorities cracked down on firms or persons involved in this illegal scheme, some “innovative” groups thought of going around the law by offering products and/or services in their scheme.

Thus began the problem of distinguishing a legitimate MLM from those into pyramiding.

Olmos says MLM in itself is legal.

“It is a marketing strategy to broaden the market base,” he said. But only a thin line separates networking from the pyramid scheme.

Olmos stressed that simply by offering products and services, a networking company becomes legal and is shielded from pyramiding charges.

“We really need to check the business plan or compensation plan, because that is where we can determine if a company is a legitimate MLM or not,” he said.

Recruitment is the business

Joey Sarmiento, president of Sunrider and chairman of the Direct Selling Association of the Philippines (DSAP), said MLM is a kind of direct selling or person-to-person selling that pays distributors commissions based on the sale of products and services at fair market value.

When compensation is anchored on recruitment, Sarmiento said, it becomes pyramiding, as distributors of the company will tend to concentrate on recruiting persons rather than selling products and services.

Olmos said the earnings in recruitment should only be incidental and always smaller than the commission from the sale of the products.

Sarmiento noted that the scheme would become pyramiding if those on top of the chain, often called “uplines,” would continue to earn big even if they have stopped selling goods and services.

To become a distributor in a legitimate MLM, Sarmiento said, one mustn’t pay huge sums of money in exchange for overpriced products and the right to recruit other persons.

Sarmiento said padding the price of the products and services is obviously meant to facilitate the payment of commissions out of the recruitment of downlines.

Direct selling or pyramiding?

The direct-selling industry became visible in the Philippines in the 1970s.

Counting only the distributors of the 26 members of the Direct Selling Association of the Philippines, Sarmiento said more than two million Filipinos are engaged in MLM and direct selling nationwide.

Their total sales figure for 2000 was $298 million (P15 billion). In 2001, total sales reached $500 million (P26 billion).

The Philippines ranks fourth in Southeast Asia in sales and first in the number of people in direct selling with Indonesia, followed by Thailand and Malaysia. Worldwide the industry had total sales of more than $78 billion in 2001, and was powered by some 44.6 million salespeople.

And even with pyramiding schemes hogging the headlines, Sarmiento said the networking industry in the country continues to grow, although not as much as they expected.

“The figures are not declining, although they are not growing as fast, because of the proliferation of pyramiding schemes that give the industry a bad image,” he said.

Sarmiento said estimates in the sales for 2002, showed the industry grew by only about 10 to 20 percent compared with the 67-percent increase from 2000 to 2001.

Doomed to fail?

MLMs work by geometric expansion, whereby a recruit must in turn recruit a certain number of people. So, if selling the product is a mere sideshow to the real profit-making anchored on recruitment, an MLM firm is bound to collapse at a certain level due to saturation.

If, for example, a recruit—in order to earn his commission—must recruit 10 other people, at a depth of three levels, there would be 1,000 persons under his pyramid. At a depth of six levels, that number would swell to one million.

Considering the limited number of people who can afford and are willing to buy and use a particular product, saturation is inevitable and fast. This makes only those on top of the chain happy while those below are doomed to lose money.

To compound the situation, in MLMs the product is not the real reason people are enticed to join. The product offered is merely the excuse to legitimize the real and probably illegal moneymaking scam.

Part 2 | Conclusion