MLM's ABYSMAL NUMBERS Chapter summary Legal disclaimer

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The Case (for and) against Multi-level Marketing

By Jon M. Taylor, MBA, Ph.D., Consumer Awareness Institute

Chapter 7: MLM’s ABYSMAL NUMBERS

Chapter summary

Is MLM a profitable business

opportunity? And if so, for whom? Just do the

math – the numbers don't lie. In this and

preceding chapters, you will find the most

rigorous and thorough analysis of MLM

profitability ever done by an independent

research firm. Questions about the viability

and profitability of MLM as a business model

and its many company manifestations are

answered in this and prior chapters – based

on 15 years’ research, worldwide feedback,

and analysis of the compensation plans of

over 350 of the leading MLMs, as well as

average earnings data, where available. The

answers are not pretty.

Our studies, along with those done by

other independent analysts (not connected to

the MLM industry), clearly prove that MLM as a

business model – with its endless chain of

recruitment of participants as primary

customers – is flawed, unfair, and deceptive.

Worldwide feedback suggests it is also

extremely viral, predatory and harmful to many

participants. This conclusion does not apply

just to a specific MLM company, but to the

entire MLM industry. It is a systemic problem.

Of the 350 MLMs I have analyzed for

which a complete compensation plan was

available, 100% of them are recruitment-

driven and top-weighted. In other words, the

vast majority of commissions paid by MLM

companies go to a tiny percentage of

TOPPs (top-of-the-pyramid promoters) at

the expense of a revolving door of recruits,

99% of whom lose money. This is after

subtracting purchases they must make to

qualify for commissions and advancement

in the scheme, to say nothing of minimal

operating expenses for conducting an

aggressive recruitment campaign – which

(based on the compensation plans) is

essential to get into the profit column.

The claim by MLM promoters that many

participants work for part-time or seasonal

income is a bogus argument because

without full-time and long-sustained effort,

MLM participants cannot build and maintain

a large enough downline to meet expenses,

and therefore do not profit.

These conclusions were confirmed in the

average earnings reports of all 30 MLMs for

which we were able to obtain data published

by the companies themselves. Such statistics

are invaluable for analysts to debunk the

many misrepresentations that are told to

thousands of prospects every day.

Failure and loss rates for MLMs are not

comparable with legitimate small

businesses, which have been found to be

profitable for 39% over the lifetime of the

business; whereas less than 1% of MLM

participants profit. MLM makes even

gambling look like a safe bet in comparison.

MLM stocks are questionable

investments at best. And like gambling,

losses from MLM participation should not be

allowed as a tax deduction – beyond the

amount of actual income.

MLM as a business model is the

epitome of an “unfair or deceptive acts or

practice” that the FTC is pledged to protect

against. It is even worse than classic, no-

product pyramid schemes (for which the

loss rate is only about 90%) and “pay to

play” chain letters. For promoters to present

MLM as a “business opportunity” or “income

opportunity” is a misrepresentation.

Legal disclaimer

These reports, analytical tools, and

opinions are intended purely to communicate

information in accordance with the right of free

speech. They do not constitute legal or tax

advice. Anyone seeking such advice should

consult a competent professional who has

expertise on endless chain or pyramid selling

schemes. Readers are specifically advised to

obey all applicable laws, whether or not

enforced in their area. Neither the Consumer

Awareness Institute nor the author assumes

any responsibility for the consequences of

anyone acting according to the information in

these reports.

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Chapter contents

Chapter summary 7-1

Assumptions needed to proceed 7-2

What tax studies have revealed about MLM 7-2

Disclosure of information supporting income

claims is crucial for consumer protection 7-3

Inherent flaws in MLM 7-4

How can the odds of profiting from an MLM

be calculated? (6 steps) 7-4

The case of Nu Skin – responding to an FTC

Order to cease its misrepresentations 7-7

Sample calculations, using Nu Skin data 7-8

Exhibit 1: How data are presented by Nu Skin 7-10

Exhibit 2: Data presented with highlighted

information important for prospects to

know, but not disclosed by Nu Skin 7-11

Additional conclusions that could be

extracted from Nu Skin data 7-12

Perform your own calculations 7-13

These conclusions on abysmal loss rates

apply to every recruitment-driven MLM 7-14

Exhibit 3: Analysis of recruitment-driven

MLMs for which we have received data 7-15

Why the breakeven point for expenses is set so

high before participants can net any profits 7-16

Even if we assume lower expenses and attrition

rates, MLMs loss rates are abysmal. 7-17

MLM loss rates are not comparable to those for

legitimate small businesses 7-17

Does MLM participation qualify for tax write-offs? 7-19

Do MLM stocks make good investments? 7-19

Network Marketing Payout Distribution Study 7-20

These conclusions confirmed in other

studies 7-20

MLMs are the worst of “business opportunities”

and of all pyramid schemes. 7-22

The critical need for adequate disclosure

underscored by this information 7-24

MLMs as “pay more” buyers’ clubs 7-24

Note to persons being recruited 7-24

Conclusions 7-25

Appendix

7A: Analysis of loss rates of recruitment-driven 7-26

MLMs

7B: List of MLMs Evaluated 7-30

7C: Winners & losers in no-product pyramid 7-32

schemes

7D A simple form that would provide honest and 7-33

meaningful disclosure

7E: Profit and loss rates for various income

Options (chart – separate pdf file)

7F: Network Marketing Payout Distribution Study

Assumptions and cautions

needed to proceed with this

analysis

In any analysis, especially on a

controversial topic and using less than

perfectly gathered and controlled data, the

analyst must make certain assumptions and

recognize certain cautions or potential

pitfalls in order to proceed. So in order for

me or anyone to do this analysis of

profitability for MLM participants, certain

assumptions will be identified - such as

whether or not participants seek to optimize

their gains, and what costs could be

incurred (and therefore should be

subtracted from earnings) in a successful

recruitment campaign. Questionable

reporting that could mislead those seeking

to get at the truth must be guarded against,

such as how numbers are reported and

displayed.

What tax studies have revealed

about MLM profitability for

participants

The Wisconsin experience with

Amway. In 1980, as part of a suit against

Amway, an investigation was undertaken by

the Office of Attorney General for the State

of Wisconsin, led by Assistant AG Bruce

Craig. Out of approximately 20,000

distributors operating in Wisconsin, state tax

returns were obtained for all of the Amway

“Direct” Distributors in Wisconsin, which

numbered about 200, which represented

approximately the top 1% of distributors in

Wisconsin. Attached to the returns were the

federal forms, which revealed a breakdown

of revenue and expense information.

Though these were supposedly the top

distributors in the state, with an average

gross profit of about $12,500, the average

net income after subtracting operating

expenses for these 200 top Amway

distributors was about minus $900.

(Obviously those who profit must be much

higher in the hierarchy of participants than

the top 1% - and not living in Wisconsin)

This information was reported on the

nationally televised “60 Minutes” show.

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It should be noted that had the costs of

all Amway products that were consumed or

given away as gifts – but which were

required to qualify for commissions and

advancement in the scheme –

been subtracted, the net losses could have

been much higher.

Mr. Craig recalled that a couple of

distributors may have grossed $50,000, with

actual net income after expenses that would

have exceeded a minimum wage for the

time spent on their Amway “business” – but

far below the income suggested at Amway

“opportunity meetings.” Approximately two

distributors who operated profitably out of

20,000 total distributors yields a one in

10,000 ratio – decidedly uneconomic.

The Utah tax study. In 2004, I

personally telephoned 99 tax preparers in

four Utah counties, three of which were rural

counties with no MLMs (MLM companies)

headquartered in their boundaries. So I felt

it was a safe assumption that few if any

TOPPs (top-of-the-pyramid promoters), or

“kingpins,” would live in those counties.

None of the 33 tax preparers could

remember anyone reporting a profit on their

income taxes from participating in MLM, for

any length of time, even though

an earlier randomized survey of

Utah consumers showed that

approximately 21% of the

population had at some time

been involved in MLM.

Then I called 33 CPAs who perform tax

preparation in Utah County, in which is

located the highest concentration of MLM

company headquarters in the country – now

over 25 MLMs. While they could not reveal

specific amounts, collectively these CPAs

could recall 35 clients who made large sums

of money from MLM. These of course were

TOPPs who lived close to company

headquarters and (I assume) used CPAs

because the income amounts were so large.

I called another 33 tax preparers in

Utah County who were not CPAs. From

these, an additional five tax filers were

reported to have very large incomes from

MLM participation – likely also TOPPs.

These results strongly support what the rest

of this chapter will show – that most of the

money goes to TOPPs at the expense of a

revolving door of unwitting new downline

recruits who try an MLM program and quit,

only to enrich the TOPPs with commissions

from the purchases they made in a vain

effort to “succeed.”

Disclosure of information supporting

Income claims – so crucial for

consumer protection – is vigorously

resisted by the MLM industry.

Since the income claims of MLMs

touted by their promoters are at the heart of

the legitimacy of their programs, it is

important to disclose the truth about

average earnings so that prospective

recruits can have valid information upon

which to base their decisions on whether or

not to participate.

So far, regulatory

agencies have not required

honest and understandable

disclosure of essential infor-

mation to MLM prospects. I

have examined the compensation plans of

hundreds of MLMs and found that virtually

all hide the near-zero odds of making a

profit, and in fact almost certain loss after

subtracting purchases of products

necessary to qualify for commissions and

advancement in the pyramid of participants.

It is no wonder that MLMs and their chief

lobbyist, the DSA, vigorously resist

transparency regarding income claims to

protect consumers.

It is no surprise that recent efforts by

the FTC (Federal Trade Commission) to get

business opportunity sellers to disclose

average earnings has been met with fierce

resistance from MLMs and their primary

lobby, the DSA (Direct Selling Association).

This by itself should be a red flag signaling

something very wrong with MLM as an

The average net income (after

subtracting expenses) for the 200 top

Amway distributors in Wisconsin was

approximately minus $900.

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The fundamental flaw in MLM is the endless chain

of recruitment of participants as primary customers.

MLM pay plans assume infinite markets and virgin

markets – neither of which exists in the real world.

industry and/or as a fundamental business

model.

The DSA/MLM lobbyists argued that

handing out a one-page disclosure of

average earnings, criminal background of

leaders, and references, etc. prepared by

the company would be an “intolerable

burden” for direct sellers. FTC personnel

should have seen this as a blatant effort to

avoid consumer protective transparency. It

is actually quite absurd, especially since

franchisors are required to furnish a

disclosure document to prospects that is

often hundreds of pages long.

It should also be noted that the average

earnings data that has been disclosed by a

select few MLMs (whether mandated or not)

appears to have been cleverly designed to

mislead prospects and regulators. So in my

opinion, it is imperative that the deceptions

be identified and a more true portrayal of

average earnings be made available. I will

also endeavor in this chapter to provide a

set of procedures for any qualified analyst to

use to replicate my findings.

Inherent flaws in MLM

In prior chapters, the flaws in the MLM

as a business model were discussed. In a

nutshell, MLM is predicated on the

recruitment of an endless chain of

participants as primary customers. MLM

compensation plans assume an infinite market

and a virgin market, neither of which exists in

the real world. MLM is therefore inherently

flawed, unfair, and deceptive.

From analyses of the compensation

plans of hundreds of MLMs, I have found a

consistent pattern of pay plans that are

recruitment-driven and top-weighted, meaning

they are driven by incentives to recruit, with

company payout of commissions going

primarily to founders and a select few

“TOPPs” (top-of-the pyramid promoters) who

are usually those who were positioned at

the beginning of the recruitment chain.

Worldwide feedback suggests that

MLMs are also extremely viral and

predatory. They feed on the product

investments of a revolving door of new

recruits, each subscribing to product

purchases to qualify for commissions or

advancement in the pyramid of participants.

But for almost all newcomers, they are

being sold a ticket on a flight that has

already left the ground. MLMs can be

extremely harmful, causing huge losses for

those who invest the most in the schemes.

Assuming all this were true, we would

expect to see it reflected in the average

earnings of participants in MLM programs.

And that is precisely what I will examine in

detail.

How can the odds of profiting

from an MLM be calculated?

Statistics of average earnings that have

been provided by MLMs are laden with

obfuscation and deception, apparently to

avoid revealing the abysmal odds of success

for new recruits. But careful analysis can lead

Handing out a one-page disclosure

document to prospects – an

intolerable burden?

MLM compensation plans assume an

infinite market and a virgin market,

neither of which exists. MLM is

therefore inherently flawed, unfair, and

deceptive. MLMs are also extremely

viral, predatory, and harmful.

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to a more accurate picture of profitability (or

loss rate) for those considering a particular

MLM. I have found that by following the steps

outlined here a more truthful assessment can

be made. Here is how I would advise persons

being recruited into an MLM to estimate the

true odds of their being successful, regardless

of effort:

Step 1: Obtain average earnings

statistics

Obtain from the MLM recruiter the

average earnings statistics for the MLM you

are examining, showing the average

amount of money paid by the company in

commissions and bonuses to participants at

the various levels in the compensation plan.

Caution: If the MLM won't provide

statistics of average earnings, you should

consider that a red flag, as it would for

anything promoted as a “business

opportunity” or “income opportunity.”

Step 2: Determine total incentivized

or “pay to play” expenses – and other

purchases expected of participants.

From the compensation plan,

determine the minimum incentivized or “pay

to play” purchase requirements. In other

words, how much in products and services

will you be expected to purchase (even if

supposedly for resale) in order to qualify for

commissions and bonuses, and to advance

up the various levels in the pay plan.

TOPPs for many MLMs expect

downline participants to pay for training,

conferences - and books, recordings, sales

literature, and other “tools” needed to be

successful.

For the MLMs I examined, incentivized

or “pay-to-play” purchases ranged from $50-

$500 a month. I usually discover at least

“$100 a month as a minimum figure for

incentivized purchases.

Caution: Avoid falling for the ruse that

you don’t have to purchase anything, or that

you can sign up just to get the products at a

discount. If you listen carefully to the pitch of

the MLM recruiter, it should soon become

clear whether they are selling the products,

or the opportunity. If the latter, it is

deceptive to sell you on signing up so you

can buy products. Ask this question: “Is this

a buyers’ club - or an opportunity chain?”

Step 3: Try to find out the average

total amount of money paid to the

company by participants.

If the company will provide it, you

should also get the average of the total

amount of money paid to the company by

participants at each level for products and

services purchased from the company. I

have found this to be an important piece of

information that MLMs have been unwilling

to provide, though it is crucial information,

since prospects have a right to know the

likelihood they will lose money or come out

ahead. Even if – as MLM promoters claim –

it was not possible to get total operating

expenses, average amounts of money paid

in to the company per participant should be

readily available.

Determine as much as possible what

other costs may be involved, such as

training meetings, “tools” (books, web site,

CD.s etc.) sold by TOPPs (or upline

promoters) that they are selling to assure

the “success” of downline participants.

Caution: Avoid falling for the line that

purchases that you make for their own use

are purchases you would have made

anyway and therefore should not count.

Typically, similar products can be

purchased for a small fraction of the price

from alternative sources. And purchases are

seldom continued after participants

terminate.

The point that you want to determine is

how many people come out ahead

financially from their participation. The

formula for profitability is very simple –

money paid by the MLM to participants less

money paid to the MLM by participants. As

will be seen, our calculations show the

balance is nearly always negative, meaning

a net loss for participants. And it is even

worse if you subtract operating expenses.

More on that later.

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Caution: You should not assume you

can sell the products at a heightened “retail”

price to others, as promoters claim is

possible. Our extensive research and

feedback leads to the firm conclusion that

such re-selling by MLM participants is only a

very minor portion of product sales.

Typically, MLM products are far too

expensive to compete with products

purchased from standard retail outlets. (See

Chapter 4.) “Direct selling” by MLM

participants to non-participants in significant

volume is a myth promoted by well-paid

MLM company and industry communicators.

Exceptions to this are “sympathy buyers” –

friends and family that may purchase the

overpriced products out of sympathy for

participants. As with participants, such

purchases usually cease when the

participant leaves the MLM.

However, if an MLM promoter insists

that significant retail selling is going on, ask

for proof in the form of receipts. If it were a

legitimate direct selling operation, sales to

non-participants would be many times the

amount of sales to participants.

Caution: Avoid accepting uncritically

the MLM promoter’s claims that the

products have magical properties that will

heal or prevent every disease on the planet

and that they can only be obtained through

this particular MLM. Many MLM promoters

claim to have the latest and greatest “pills,

potions, and lotions” – or the best and most

unique of some other products or services.

Note the ingredients and shop around for at

least comparable products through other

outlets – you will be surprised at what you

can save. (Again – see Chapter 4.)

Step 4: Obtain – or estimate – the

company’s attrition/retention rate

Prospects should ask their recruiter to

furnish the company’s attrition (dropout)

rate; i.e., the percentage of recruits who

sign up only to drop out within a year – and

over a five or ten-year period. If they can’t or

won’t furnish it, you can assume that it

exceeds the minimum of 50% per year,

which we have found where such data is

available. Over a five-year period, at least

95% typically have left the company; and

usually after ten years, nearly all but those

at or near the top of their respective

pyramids will have dropped out.

At the very least, you can assume that

90% of participants will terminate within five

years, and at least 95% within ten years.

This is useful to know, since MLM's

published average earnings reports will often

include top-level participants who were there

from the beginning – which may be ten years

or more. To be statistically valid, all dropouts

and terminations should be included for the

same period as for those participants

included at the top levels.

If any company challenges the

assumption of attrition of 90% for five years,

and 95% for ten years (or retention rates of

10% and 5% respectively), ask company

officials for data to prove otherwise. To my

knowledge, no recruitment-driven MLM has

been able to show less unfavorable attrition

statistics than these. (For important

information on attrition rates, see Chapter 6.)

Caution: Don't accept an MLM’s statistic

for the total number of "active" distributors or

participants as the base used for calculating

what percentage of participants succeeded in

rising to the various levels. Again, if the

"successful" participants who have been with

the MLM for ten years are counted, then

every person who signed on with the program

during that same ten-year time period. should

be counted in calculating success rates -

whether they are active, inactive, or

terminated. The MLM practice (endorsed by

the DSA) of comparing only currently "active"

participants (most of whom have been there

only a short time) with "successful"

participants who have been there for many

years, greatly skews the numbers in their

favor - a huge deception.

The MLMs’ practice of comparing

only currently "active" participants

with "successful" participants who

have been there for many years,

greatly skews the numbers in their

favor - a huge deception.

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Step 5: Obtain – or estimate –

minimum operating expenses needed

to conduct a successful recruitment

campaign.

Estimate minimum operating expenses

necessary to successfully recruit. It is true

that most MLM participants purchase a few

products, find recruiting and selling very

tough, and then quit without spending much

money. But my analysis of hundreds of

MLM compensation plans convinces me

that participants rarely – if ever – move into

the profit column without an aggressive

recruitment campaign carried out over a

period of time.

In 1994-5, I put Nu Skin, a leading MLM

program, to the test for a year, devoting all

my time to climb to the top 1% of

participants (counting ALL participants,

including dropouts). During that year I kept

careful records of my spending and wound

up with expenses of over $1,500 per month

including products and services from the

company, plus all operating expenses, such

as travel, telephone, computer supplies,

advertising, meeting rooms, etc. My

commissions totaled only about $250 a

month, netting an annual loss of

approximately $15,000.

I included incentivized purchases in the

amount spent on products and services,

even though some or most were personally

consumed or given away. This is because

these are purchases necessary to qualify for

commissions or advance-ment in the

scheme. Some may not be treated as a

deduction for tax purposes, but they should

be considered as a cost of doing business

for analytical purposes – especially if the

participant would not have made the

purchases were he/she not intending to

advance in the scheme in some way.

Important note: The $18,000

($1,500/mo.) operating expense figure

would be equivalent to well over $25,000 in

2008 dollars (the year for the report in

Exhibit 1). So as a reasonable assumption

based on my experience, in typically

saturated U.S. markets I would estimate a

bare minimum of $25,000 in total expenses

to mount an effective recruitment campaign

today, which is essential for any hope of

success in a typical recruitment-focused, top-

weighted MLM program. This is a

conservative figure, and the figure could be

several times that for TOPPs who must

frequently travel, rent meeting facilities, etc.,

in order to recruit sufficient new recruits to

replace those who are continually dropping

out. Also, many costs have increased since

1994, along with new recruitment resources,

such as maintaining a web site.

Caution: MLM promoters and the DSA,

often claim that many or most participants just

work part time for a little cash to supplement

income, to meet Christmas expenses, etc.

This is one of their biggest deceptions.

Profitability in MLM does not come cheaply or

easily. It’s very costly and time-consuming,

and compensation plans require consistent

effort over time to advance in any MLM

scheme. Based on the foregoing, I feel

confident in my conclusion that part-timers

and seasonal participants are not profiting,

but are merely contributing to the coffers of

the company, founders, and TOPP's.

Tax studies and analyses of reports of

average incomes (assuming minimal expen-

ses are subtracted) show that few ever earn a

profit from MLM participation, with the notable

exception of those who arrive at or near the

top of their respective pyramids – who may

make a lot of money, often millions of dollars

– harvesting commissions from purchases of

hopeful new recruits beneath them.

Caution: Don’t accept the argument by

promoters that success in MLM recruitment

costs little or nothing. New MLM recruiters

will soon start getting the cold shoulder from

friends and relatives and have to recruit

elsewhere. Again, anyone who climbs the

ladder in the compensation plan must spend not

only a great deal of time, but a considerable

amount of money to be successful.

Part-timers and seasonal participants

are not profiting, but are merely

contributing to the coffers of the

company, founders, and TOPP's.

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Step 6: Calculate the profit/loss rate

Now put it all together. This means

debunking the figures supplied by the

company by including ALL who signed up

during the same period during which those

who “succeeded” are counted – and then

subtracting expenses as explained above.

Even if you just go back five years, you can

multiply the MLM company’s published

success rate by a factor of 0.10 (retention

rate with 0.90 attrition rate) to get a success

rate much closer to the truth. Then select all

distributors who earned enough to have

exceeded the break-even point; i.e.,

incentivized or “pay to play” purchases plus

estimated operating costs. Again, don’t

assume resale of products at heightened

retail prices unless they can show you the

actual sales receipts to prove it.

The case of Nu Skin –

responding to an FTC Order to

cease its misrepresentations

Exhibit 1 is extracted from a report of

57,998 "active distributors" in the U.S. for

Nu Skin Enterprises

1

, a leading MLM

company which was ordered to cease its

misrepresentations of distributor earnings in

1994 – and has since then periodically

provided average earnings data. We will

show you how to interpret these numbers

and then apply the same procedures to

other MLMs.

Cautions: Great care must be taken in

reading these numbers in this report. Note

these deceptive techniques used to mislead

readers:

 Quarterly commissions are given and

then the figures are annualized. Since many

terminate before a year is over, this

annualized number could be much higher

than annual figures. But we'll give them the

benefit of the doubt.

1

“2008 Distributor Compensation Summary”

published by Nu Skin, which is posted on the Nu Skin

web site. The report is updated periodically, but for

each year we see the same pattern of extreme

concentration of payout to Blue Diamonds at the top.

 Percentages are presented in a way

to make the odds appear much higher than

they are, especially if we assume 90%

dropout rate over 5 years, or 95% over ten

years - an optimistic assumption, based on

actual statements by Nu Skin. Since the

company was 24 years old when these

2008 statistics were reported, and the top

earners (Blue Diamonds) in the U.S.A. have

been there for well over ten years, it is

reasonable to use the ten-year figure. Using

these assumptions, the number of people

achieving Blue Diamond status would then

be 0.14%, or 0.0014. Then, 0.0014x 0.05

(5% remaining after 10 years) equals

0.00007 – which looks a lot less than the

reported “.14%”.

 Minimum pay-to-play in this program

is $100 a month, or 1,200 a year – in order

to qualify for commissions. This is not

included in the report, as it should be. Only

a small percentage of distributors would

earn enough in commissions to exceed this

amount.

 Add to the $1,200 the operating

expenses needed to conduct a successful

recruitment campaign, which the author found

to be absolutely essential to climb the

hierarchy of distributors. In my one-year test

of the Nu Skin program, the minimum total

expenses to recruit successfully was over

$18,000 per year (well over $25,000 in 2008

dollars), including products and services from

the company, travel and telephone expenses,

home office and rooms for opportunity

meetings, printing and duplicating expenses,

advertising, telephone and computer

expenses, and miscellaneous supplies. (For

a more complete account of my Nu Skin

experience, read Chapter 1.)

Sample calculations, using Nu

Skin data:

Step 1: Average earnings statistics are

published by Nu Skin, as shown in the table

in Exhibit 1 and labeled “2008 Distributor

Compensation Summary.”

Step 2: “Pay to play” purchases have

for years been at least $100, with many

times that amount (in group volume)

required to qualify for Executive status, the

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lowest “pin level” in the pay plan. In

addition, the company and its “Blue

Diamonds” (“TOPPs”) encourage partici-

pants to make additional purchases of a

wide range of products and services – and

to pay for training and opportunity meetings

to enhance their “success.”

Step 3: Data on average amounts of

money paid by participants to Nu Skin is not

provided.

Step 4: Nu Skin has been in business

since 1994, and several of the Blue

Diamonds included in the report have been

with the company for more than ten years.

So – based on the information in Chapter 6

– we can use 95% as the attrition rate.

Step 5: I found from my one-year test

of the Nu Skin program that to conduct a

successful recruitment campaign is

expensive. Including products and services

from Nu Skin, I spent over $18,000 (at least

$25,000 in 2008 dollars), and others at

higher levels were spending considerably

more than that.

Of course, Blue Diamonds at Nu Skin

claim that good money can be made just

selling products to friends, neighbors, etc.

This deceptive claim has been discussed in

chapter 4. The compensation plan for Nu

Skin, like for the hundreds of other MLMs I

have analyzed, is heavily weighted towards

building a huge downline in order to get to

where profits are even possible after

expenses, including pur-chases from Nu

Skin.

So I am completely comfortable placing

the breakeven bar (the amount above which

profits are possible after subtracting costs) at

$25,000 per year, allowing for cost of living

adjustments (Chapter 5).

Step 6: Based on the above, only those

achieving status of Ruby and above were

likely (on average) to have risen from a net

loss to actual net profits, since all those

beneath do not earn enough in commissions

to meet expenses of $25,000 a year. In actual

fact, however, since these are only averages,

it is highly likely that many below Diamond

With the odds of profiting being

about one in 3,922, it is more

appropriate to call MLM programs

like Nu Skin a “loss certainty” than

an “income opportunity.”

7-10

Exhibit 1: Average earnings statistics for Nu Skin Enterprises, Inc. –

Extracted from Nu Skin’s “2008 Distributor Compensation Summary”

Average number of “Active Distributors” in the United States during 2008 – 75,710

Commissions paid to distributors in the United States in 2008 – approximately $107,686,324

Average commissions paid to U.S. Active Distributors $1,421.75 on an annualized basis.

On a monthly basis, an average of 13.11% of U.S. Active Distributors earned a commission check.

2

Active Distributors represented an average of 40.71% of total distributors” [of record]

3

How data are presented by Nu Skin Enterprises, Inc.

Monthly

Average

Commission

Income at Each

Level for 2008

Annualized

Commissions

4

Average

Percentage

of Active

Distributors

5

Average

Percentage of

Executive and

above level

distributors

Active Distributor

earning a check

(non-Executive)

$62.00

$744.00

7.89%

N/A%

Qualifying

Executives

228.00

2,736.00

1.29

N/A

Executives

441.00

5,292.00

2.96

59.9

Gold Executives

800.00

9,600.00

.93

18.9

Lapis Executives

1,405.00

16,860.00

.53

10.8

Ruby Executives

2,860.00

34,320.00

.19

3.8

Emerald

Executives

5,634.00

67,608.00

.09

1.8

Diamond

Executives

9,520.00

114,240.00

.08

1.7

Blue Diamond

Executives

42,710.00

512,520.00

.15

3.1

2

This number is calculated by adding the average percentage of Active Distributors in the above table.

3

This percentage is obtained by taking the total average of monthly actives and dividing it by the total average of

Distributors on a monthly basis. “Total Distributors” includes all U.S. Distributor accounts currently on file, irrespective

of their purchasing products,

promotional materials or services or earning commissions. “Distributor” numbers do not include customer or Preferred

Customer accounts.

4

These numbers are calculated by taking the monthly average commissions and multiplying by twelve. The column

labeled “Monthly Average Commission Income at Each Level for 2008” has been deleted, as it is irrelevant to this

analysis.

5

These percentages are calculated by taking the total monthly Distributor/Executive count and dividing it by the total

number of monthly Active Distributors. One must then add the average percentage of Active Distributors at each level

for each month during 2008 and divide by twelve. The column labeled “Average Percentage of Executive-and above

level Distributors” has been deleted, as it is irrelevant to this analysis.

7-11

Exhibit 2: Data with highlighted information that is important for

prospects to know, but which is not disclosed in Nu Skin’s report

Title

Annualized

Commissions

6

Average %

of Active

Distributors

7

Number of

Distributors

at that Level

Company

Payout by

Level

8

% of Co.

Payout by

Level

9

Active Distributors

not earning a check

$0

85.89%

65,027

0

0%

Active Distributors

earning a check

(non-Executive)

$744

7.89%

5,974

$4,444,298

4.15%

Qualifying

Executives

$2,736

1.29%

977

$2,672,139

2.49%

Executives

$5,292

2.96%

2,241

$11,859,457

11.07%

Gold Executives

$9,600

0.93%

704

$6,759,389

6.31%

Lapis Executives

$16,860

0.53%

401

$6,765,294

6.31%

Ruby Executives

$34,320

0.19%

144

$4,936,898

4.61%

Emerald

Executives

$67,608

0.09%

68

$4,606,742

4.30%

Diamond Exec’s

$114,240

0.08%

61

$6,919,288

6.46%

Blue Diamonds

$512,520

0.15%

114

$58,204,334

54.31%

Actually, it is even far worse than these numbers show, because dropouts are not included

for the same period as the period of activity for those at the higher levels who have stayed

with the company. We will address this issue below.

Ruby and above – 0.51%, or .0051 could have profited after expenses – not counting dropouts

Corrected for 5% retention – .0051 x 0.05 = 0.000255, or 0.0255%, or 1 in 3,922 recruits who

could have profited.

Thus, the loss rate is 1- 0.000255, or 99.997%. Rounded off, virtually 100% of recruits lose money.

Subtract Blue Diamonds, and the loss rate for everyone else is calculated as follows:

Ruby to Diamond – 0.36%, or .0036 x 0.05 = 0.000165, or 0.0165%, or 1 in 6,061 recruits

could have profited. A much smaller percent could have achieved significant profits

(well above minimum wage).

114 Blue Diamonds x 512,520 = $58,427,280

$58,427,280/$107,686,324 = 54.3% of total company payout is paid to the Blue

Diamonds (TOPPs), who comprise only a very tiny percentage of distributors (0.000075, or

0.0075%)

6

These numbers are calculated by taking the monthly average commissions and multiplying by twelve. The column

labeled “Monthly Average Commission Income at Each Level for 2008” has been deleted, as it is irrelevant to this

analysis.

7

These percentages are calculated by taking the total monthly Distributor/Executive count and dividing it by the total

number of monthly Active Distributors. One must then add the average percentage of Active Distributors at each level

for each month during 2008 and divide by twelve. The column labeled “Average Percentage of Executive-and above

level Distributors” has been deleted, as it is irrelevant to this analysis.

8

Calculated by multiplying the “Average Percentage of Active Distributors

”

(first column) by 75,710 (total U.S.

distributors), then multiplying that number by Annualized Commissions” (first column). Added to table by author.

9

Calculated by dividing number from prior column by total commissions paid by Nu Skin in 2008. Added Added to

table by author.

7-12

Eliminating Blue Diamonds, or TOPPs (top-of-

the-pyramid promoters), from the calculation

removes some of the statistical skewing, since

most of the money paid by Nu Skin to hundreds

of thousands of (present and past) distributors

goes to just 114 Blue Diamonds. (This visual is

used only to illustrate a point, not to show the

details of Nu Skin’s pay plan.)

Additional conclusions that could

be extracted from Nu Skin data

Eliminate TOPPs from the

calculations of average earnings. In the

fourth column of Exhibit 2, I have calculated

the total payout by the company to all

participants at each level, and in the fifth

column is shown the percentage of total

payout paid to each level. The average for this

column reveals a startling fact – 54.3% of

company payout goes to only 114 Blue

Diamonds – out of 75,710 current distributors,

not including over a million who dropped out in

the past ten years.

Because over half of company payout

to Nu Skin participants goes to Blue

Diamonds, or TOPPs (top-of-the-pyramid

promoters), the results for averaging

purposes are extremely skewed to make

averages appear larger than they really are

for the vast majority of participants. A more

useful calculation of average income would

exclude these TOPPs

from the calculation.

Assuming you subtract only $1,200

minimum “pay to play” purchases is

substracted for each “active Blue Diamond

distributor (not counting operating expenses),

the average net income/loss per participant

for the year is figured as follows:

$107,686,324 total distributor payout less

$58,204,334 to Blue Diamonds = $47,658,648

75,710 – 114 Blue Diamonds = 75,596

distributors

$47,658,648 / 75,596 = $630.44 average

com-missions per distributor.

– (subtract) $1,200 “pay-to-play” purchases

= average of minus $559.66 per distributor –

and a far greater loss if you subtract operating

expenses.

“Residual income” far more elusive

than just “profits.” But how many earn the

large “residual income” bragged about by Nu

Skin promoters? (Minimum operating

expenses would be much higher for levels

higher than Executives.) We could speculate

what level would pay enough after heavy

recruiting expenses to constitute a significant

income as TOPPs often suggest can be

earned.

My close observation of Nu Skin’s top

promoters when I was involved tells me that no

one below Diamond level would be netting

enough to qualify as significant income, and

they constitute only 0.0008 of Active

Distributors, or 0.00004 of all distributors over a

ten-year period. Therefore, after eliminating

Blue Diamonds, or TOPPs, at best only one

out of every 25,000 recruits could have

received the “residual income” touted by Nu

Skin promoters.

Most of the incentives are paid to Blue

Diamonds, or TOPPs (top-of-the-pyramid

promoters.) I’d color him blue if I could.

All three statistical measures of

averages are abysmal for Nu Skin (and

other MLMs). There are three statistical

measures of averages:

(1) the arithmetic mean, which

would be the total amount divided by the

number of participants,

7-13

(2) the mode, which is

the number that appears most

often, and

(3) the median, which is

the figure that falls in the middle

of the entire range of

participants.

It is clear from a careful study of

Nu Skin’s own data that the

mode and the median are zero,

and the arithmetic mean is a large minus

figure. To call Nu Skin (or any other MLM) an

“income opportunity” or “business opportunity”

is a major misrepresentation.

Results when backing off on

assumptions. Even if an analyst accepts

the MLM/DSA arguments that costs of

participation and rate of attrition is far less

than those used in this analysis, the results

are not favorable for Nu Skin participation.

Let us assume that recruitment is much

easier than I experienced (in a more virgin

market, for example) and that total costs of

incentivized purchases and of the

recruitment campaign were only half of

$25,000, or $12,500.

We might also

assume that attrition was

only 90% over ten years (a

highly unlikely assumption

and one that could easily

be debunked if honest

attrition data from Nu Skin

was made available). Even with these

assumptions, the loss rate would be high.

Lapis distributors and above exceed

$12,500 in commissions. Total percentage of

distributors at levels of Lapis and above is

1.04%. And if 10-year attrition is 90%, retention

is 10%.. Therefore, 0.0104 x 0.10 = 0.00104,

or 0.104%. This means that less than 1/10

of 1% of distributors would have earned a

profit – even with such liberal assumptions in

Nu Skin’s favor!

I should remind readers that I rose to

Executive status and almost to the level of

Gold Executive, placing me well in the top

1% of distributors (assuming all recruits for

a given time period are included). Yet I was

losing over $1,000 a month. Based on my

personal experience and observations, as

well as the Utah tax study (Utah is where Nu

Skin is based) I seriously doubt that anyone

below Emerald

Executives were

reporting a profit on

their taxes from

participation in the Nu

Skin program.

:

My personal ex-

perience with Nu

Skin. As I mentioned

above, in 1994 I was heavily recruited into

Nu Skin and finally decided to join and give

it my all for a year to test its validity.

Obviously, I would never have joined had I

any idea these numbers were so abysmal –

and neither would anyone else who had a

rudimentary math background.

On the other hand, my Nu Skin

experience was the beginning of a journey

of discovery into the deceptive world of

multi-level marketing. It has taken me years

to fully debunk the many deceptions inherent

in these schemes. Fortunately, my wide

experience as a home entrepreneur,

graduate business education, analytical and

research skills, and desire to get at the truth

have yielded this rich outpouring of key

information which can

be used to provide

some consumer

awareness where law

enforcement agencies

have failed to meet this

challenge.

Perform your own calculations.

Of course, anyone is welcome to

challenge my calculations, although I believe

they are as accurate as could be performed,

given the deceptively presented reports of the

MLMs I was able to gather. For obvious

reasons, none presented their information in a

format that made it easy to see how

unprofitable their programs were.

A person considering an MLM program

would be wise to take the information

furnished by the company and perform the

same calculations as those done here with

Nu Skin. If the company is unwilling to

disclose average income data and

percentages for the various levels, consider this

a red flag in itself.

. . . the mode and the median

are zero, and the arithmetic

mean is a large minus figure.

To call an MLM like Nu Skin an

“income opportunity” or

“business opportunity” is a

major misrepresentation.

. . . less than1/10 of 1% of

distributors would have earned a

profit – even with such liberal

assumptions in Nu Skin’s favor!

7-14

These conclusions on abysmal

loss rates apply to all recruitment-

driven MLMs for which we were able

to obtain data.

Proponents of some MLM programs will

likely argue that “while the numbers for Nu

Skin (and other MLMs) are horrible, our

particular MLM is “different. In fact, we offer

one of the most generous compensation

plans in the industry.” I have heard this type

of argument so often, that it seemed

important that I and those assisting me

spend considerable time gathering average

earnings data from as many MLMs as would

provide such data, however skewed (as

explained above). The 30 MLMs for which

we have obtained sufficient data for income

analysis is included in Appendix 7A.

With every MLM, where such data was

available, and after debunking the

deceptions in their reporting, the loss rate

was at least 99%, using liberal assumptions

relating to retention and cost of partici-

pation, as explained in subsequent sections

of this chapter. The average loss rate for the

30 MLMs reported here was 99.6%.

I believe it is safe to assume that MLMs

for which promoters do not provide such

data are not likely to be more profitable

because if they were, at least some would

have provided data for competitive

advantage. So it is highly likely that others

of the 350 MLMs that I have also found to

be recruitment-driven and top-weighted

would have similar loss rates.

Carrying this logic a step further, since

all (100%) of the MLMs for which I have

been able to obtain an explicit

compensation plan have at least four of the

causative and defining characteristics

(CDCs) of a recruitment-driven MLM,

hundreds of additional MLMs would have

these same basic characteristics. This

provides conclusive support for considering

MLM a fundamentally flawed system.

From all my research and from

worldwide feedback, I can say confidently

that as a general rule, the more a new

recruit invests in an MLM program, the more

he or she loses. This, of course, is true of

most any scam.

Even though MLM defenders may

challenge these figures and assumptions, I

have done my best to remove the deceptions

in MLM reporting, and I firmly believe my

conclusions drawn from this analysis to be as

close to the truth as is possible.

As a general rule, the more a

new recruit invests in an MLM

program, the more he or she

loses. This, of course, is true of

most any scam.

7-15

Exhibit 3:

Analysis of recruitment-driven MLMs for which we have received earnings data

Based on my analysis of their compensation plans, using the four causal and defining

characteristics (“red flags”)

10

as a checklist, ALL (100%) of the 30 MLMs included in this

analysis are recruitment driven and top-weighted. This means that rewards are paid

primarily for the aggressive recruitment of a large downline, not for retailing products; and

most of the money paid by the company goes to participants at the highest levels. I have

analyzed the compensation plans of over 350 MLMs and found that ALL (100%) are

recruitment-driven and top-weighted, so it seems justifiable to assume that the same results

could be expected for other MLMs.

11

NOTE: These calculations are based on actual company reports and the best independent

analyses used by the author, as explained in the preceding chapters. Of course, anyone is

welcome to perform their own calculations, but calculations using assumptions by those in the

industry should be questioned. As in other reports I have prepared, the same legal disclaimer

applies. Note also that I am giving these MLMs the extreme benefit of the doubt, using only

10% of the amount of total costs of purchases and operating expenses in my one year test and

doubling the retention rate for 10 years and increasing by 50% the retention rate for five years.

MLM company

and year of

average earn-

ings report

12

Estimated min.

annual costs

for effective

recruitment

campaign.

13

Level at and

above which

net profits

possible

14

Approx. %

of active

participants

at that level

or above

15

Maximum

retention

rate

16

Approx. % of all

partic’s that

could have

profited from

participation

17

Approx.

% of all

partic’s

who lost

money

18

Advocare

(2009)

19

$2,545

Silver

9.23%

10%

0.92% (0.009) – or

1 in 111 profits

99.1%

lost money

Ameriplan

(2008)

20

$2,545

SRSD

7.5%

10%

0.75% (0.0075) –

or 1 in 133 profits

99.25%

lost money

Amway/Quixtar

(2001)

21

$2,090

Platinum (no

“pins” below)

1.02%

10%

0.1% (0.001) – or

1 in 1,000 profits

99.9% lost

money

For the full table of 30 recruitment-driven MLMs that were analyzed, go to Appendix 7A.

10 See Chapter 2 for these characteristics (“red flags”) – also the full report on web site – mlm-thetruth.com

11 We have average income data for other MLMs besides these 29, but without adequate data to do this analysis.

12 The most recent report available to the author at the time of the analysis.

13 Minimum costs of conducting a successful recruitment campaign, based on the author’s one-year test of a leading

MLM. Costs includes incentivized purchases plus minimum operating expenses, corrected by COL (cost of living

adjustment, based on Consumer Price Index) since the MLM’s founding – See chapter 5. Here we use the extremely

liberal assumption that total costs were only 10% of those of the author.

14 Estimated average net profits assume all expenses (including incentivized purchases and minimum operating

expenses) are subtracted from income. This is the “pin level” at and above which profits would be possible.

15 Referring to the level in the previous column – per MLM company reports

16 See chapter 6 for how approximate attrition (and retention) rates for MLMs are estimated. The inverse of attrition

is retention, which is used to estimate the percentage who could profit. Retention is estimated to be a maximum of

10% if in business for four to nine years, 5% for ten or more years. However, for this report, we use the liberal

assumption of15% for four to nine years and 10% for ten or more years.

17 Average income exceeding all expenses for conducting a successful recruitment campaign.

18 In calculating percentage who lost money, those who dropped out are included. This is assuming that participants

who had arrived at such a high “pin level” that they were profiting would stay in the program – since they enjoy the

“residual income” that promoters imply at opportunity meetings is possible and a highly prized goal.

19 “2009 Income Disclosure Statement” - published by Advocare

20 “AmeriPlan Independent Business Owner Income Disclosure Statement for 2008” - published by AmeriPlan

7-16

Why the breakeven point for

expenses is so high before MLM

participants can net any profits

Recruitment expenses are significant.

In the above and subsequent analyses, the

minimum operating expenses – about

$25,000 – for MLM participation assume that

the person is conducting an aggressive

recruitment campaign such as I found

necessary to climb the hierarchy of

distributors at Nu Skin. Of course, MLM

defenders will argue that it is not necessary to

do this and that it is a matter of choice

whether or not one elects to be a “business

builder,” to just sell products to meet more

modest goals, or even to merely be a

customer of the products because they love

them so much.

Review of rationale for high breakeven

figure. In case a reader missed some critical

information in this and prior chapters, I will

reiterate some important findings in my

research that justify such a high breakeven bar

for those seeking to calculate the percentage

of participants who gain or lose money – and

average amounts of profits or losses at the

various levels. Let’s review these findings.

First, based on extensive comparative

research, I identified the four causative and

defining characteristics of recruitment-driven

MLMs, or product-based pyramid

schemes.

22

(A fifth characteristic applies to

most, but not all.) These are characteristics

(or “red flags”) that clearly separate

recruitment-driven MLMs from legitimate

direct selling programs or any other

business format or model. Coincidentally,

these are the very same characteristics that

lead to such huge loss rates for the

continuing stream of new recruits who

iinvest in the program and drop out, only to

further enrich those at the top.

Second, I was able to establish an

amount of minimum operating expenses for

conducting a successful recruitment

campaign

23

from my one-year test of the Nu

Skin program. Unless one were recruiting in a

22 See Chapter 2

23 See Chapter 5

virgin market (outside the U.S.), I can assert

that it would not be possible to recruit

successfully for much less than that, and in

fact it is likely much more expensive for those

at the higher levels in the hierarchy of

distributors.

Third, using these defining

characteristics, I was able to analyze the

compensation plans of over 350 MLMs. (See

Appendix 7B.) In every case, I found that the

plans reward primarily those who recruit large

downlines of participants; i.e., the “TOPPs”

(top-of-the-pyramid promoters). All of the

MLMs could be said to be recruitment-driven

and top-weighted.

(The only class of MLMs that may be

exceptions are in-home demonstration

programs, or “party plans,” which may reward

enough for sales to non-participants to be

profitable. I left them out of the analysis, as

they are quite different in their approach, and I

have not been able to obtain either detailed

compensation plans for all levels or average

com-missions and overrides paid to

participants by the companies. This is not to

recommend or excuse such programs. To

evaluate a party plan, one would have to

obtain a detailed compensation plan and go

through the same analysis, factoring in actual

validated sales to non-participants.)

Fourth, the MLM compensation plans

do not reward those working part-time,

seasonally, or with minimal commitment.

Except for those initiating the endless chain

of recruitment, participants who profit have

to climb to a level where commissions and

bonuses from the company exceed

expenses. This requires aggressive and

long-term recruitment, using the deceptive

dialog necessary to get prospects to go

along with them.

24

Only a tiny few manage

to recruit enough people to build a profitable

downline.

And finally, the oft-repeated claim by

MLM defenders that most new recruits join

to get the products wholesale rings hollow if

one objectively looks at the prices for MLM

products. Comparisons of products sold

through MLMs and through retail outlets

show huge differentials – often several

24 A whole litany of these deceptions are listed in

Chapter 8.

7-17

times as much.

25

It is an insult to the

intelligence of MLM recruits to assume that

all those who don’t build a downline are

merely “customers” because they are sold

on the products and don’t want to be

“business builders.” True, some fall for the

“unique value of the products” hype of the

MLM promoters, and others are buying from

friends or relatives out of sympathy for

them. But we cannot assume all “inactives”

are so naïve as to pay exorbitant prices for

products with no connection to the

“opportunity.”

Based on my analysis of all the MLMs

in my research, at best only one in 1,000

achieve a level at or near the top of the

pyramid of participants where they could

report a significant profit (more than a

minimum wage) on their income taxes. And

far less earn the amounts of money that are

thrown out to prospects at opportunity

meetings as possible to attain. Of course,

they protect themselves by saying there are

no guarantees the new recruits will earn

than much. They would be much more

honest saying that it is virtually guaranteed

that they will not earn those huge

paychecks – but will in fact lose money.

Even if we assume lower

expenses and attrition, loss rates

are abysmal.

Even though MLM defenders may

argue that in my calculations I exaggerate

estimated expenses and attrition rates,

when one assumes much lower expenses –

even 10% of what I spent - and far higher

retention rates of 15% for four to nine years

(or 10% for ten years or more, the resulting

loss rates are still over 99%. (See Appendix

7A.) And the percentage of participants that

achieve the large incomes shown as

possible in opportunity meetings are but a

tiny fraction of one percent. Probably less

than one in 25,000 new recruits will ever

achieve the substantial “residual income”

touted at opportunity meetings.

25 See Chapter 4

MLM loss rates are not

comparable to those for

legitimate small businesses,

including franchises.

MLM promoters often claim that the failure

rates of small businesses is in the range of 90-

95%. They say this to excuse the widely

recognized failure rate in MLMs. What they fail

to do is quote statistics from reliable

organizations not affiliated in any way with

MLM. So let’s debug that myth once and for all.

For example, the SBA (Small Business

Administration) found that 44% of small

businesses survive at least four years, and

31% at least seven years

26

. Also, according to

the NFIB (National Federation of

Independent Business), one nationwide

survey of small businesses

27

showed that

over the lifetime of a business, 39% are

profitable, 30% break even, and 30% lose

money. Cumulatively, according to this

study, 64.2% of businesses failed in a 10-

year period.

The following quote from an article in

Journal of Small Business Management

28

is

highly relevant here:

When aspiring business owners

compare the options of franchise versus

independent business ownership, an

important consideration is the relative

risk of business failure. To date, the

primary referent for examining franchise

failure rates has been surveys

conducted by Andrew Kostecka

(1988)(1) under the auspices of the U.S.

Department of Commerce, which

indicate that less than 4 percent of all

franchises fail each year. This figure

compares favorably with various

estimates of independent small

business failures (e.g., Dun and

Bradstreet 1989).

If only 64.2% of businesses failed (or

terminated) in ten years, this totally refutes

26 “Frequently Asked Questions. SBA, Sept. 2008.

U.S. Dept. of Commerce, Bureau of the Census.

27 William Dennis, Nat’l Federation of Independent

Businesses, reported by Karen E. Klein in Business

Week, September 30, 1999.

28 Franchise failure rates: an assessment of

magnitude and influencing factors. By Castrogiovanni,

Gary J., Justis, Robert T., and Julian, Scott C. (April

1, 1993)

7-18

the argument of MLM defenders that “MLM

is just like any business. Those who work at

it succeed. Most fail because they didn’t

really try.”

My research – and that of other non-

MLM analysts – leads to the conclusion that

MLM does not qualify as a legitimate

business. If less than 1% profit and 95% or

more quit in ten years across the entire

MLM industry, there must be something

fundamentally wrong with MLM as a

business model. Incidentally, it should be

noted that MLM participants do not qualify

for SBA loans, SCORE assistance, or other

small business funding and assistance

programs.

29

The fundamental deception of MLM is

that of selling it as an “income opportunity” In

fact, it is misleading to call MLM a “business

opportunity.”

For a graphical depiction of how loss

rates for small businesses, direct selling,

no-product pyramid schemes, and gambling

compare with MLM, see Appendix 7C and

7E. Appendix 7E is especially revealing.

MLM does not offer a part-time or

seasonal income option. MLM/DSA

defenders, often justify small payments to

participants by claiming they are merely

seeking part-time income or a little spending

money for Christmas or to pay off some

debts, etc. But because the rewards in any

of the hundreds of MLM compensation

plans I have analyzed are heavily stacked in

favor of building huge downlines, it is not

realistic or even possible to earn part-time

or seasonal income from any of them.

Again, part-timers and seasonal participants

are not profiting, but are merely contributing

to the coffers of the company, founders, and

TOPP's.

29 From SBA (SCORE), banking, and Internet

sources.

How does MLM participation

compare with gambling? Comparisons of

odds of profiting from gambling with

participation in MLM have shown

conclusively that participants in many

games of chance fare far better.

30

For

example, in an earIier analysis, I found the

odds of winning from a single spin of the

wheel in a game of roulette in Las Vegas

31

 286 times as great as the odds of

profiting after enrolling as an Amway

“distributor.”

 48 times as great as the odds of

profiting after enrolling as a Nu Skin

“distributor.”

 22 times as great as the odds of

profiting after enrolling as a

Melaleuca “distributor”

Referring to the Utah tax study discussed

above, an interesting fact emerged.

Wendover, Nevada, is on the border between

the two states and a gambling mecca for

some Utahns visiting there. I called 16 tax

preparers in Tooele County, Utah, which

borders Nevada. While none of them had any

clients who reported profits from MLM

participation (6% were active in MLM), they

reported over 300 clients who reported profits

from gambling!

BUSINESS OPPORTUNITY?

30

See “Shocking Statistics” report on our web site –

www.mlm-thetruth.com

31

Statistics published for Caesar’s Palace in Las Vegas,

April 6, 2001. Calculations are based on MLM average

earnings statistics at the time.

While none (of the tax clients)

reported profits from MLM

participation, over 300 clients

reported profits from gambling.

7-19

This chart (not an MLM) illustrates the typical

growth pattern of MLM stock prices – a

sharp rise during the momentum phase,

followed by a leveling off or decrease.

MLM does not qualify as a legitimate

business any more than gambling, and in

fact gambling is more honest because

gambling establishments do not promote

participation at gaming tables as a

“business opportunity.” See Appendix 7 F

for a very revealing chart comparing MLM

with gambling and with legitimate income

options.

32

Does MLM participation qualify

for tax write-offs?

Many MLM promoters tout MLM

participation as an opportunity to write off

many household and travel expenses as

business expenses. But expenses from a

business that does not produce profits for

more than three years may not qualify for

business expense deductions, but are more

likely classified not as business losses, but as

“hobby losses.”

33

As suggested above, MLM is far less

profitable than some games of chance at

gambling casinos. Gamblers can only

deduct expenses from winnings in any given

year.

34

If MLM losses were treated as “hobby

losses” – or in the same way as gambling

for tax purposes – the IRS could gain

billions in tax revenues it is now losing.

Actually, in this sense all of us as taxpayers

are paying for this abuse of our tax system

promoted by the MLM industry.

32

Separate pdf file

33

“Instructions for Schedule C: Profit or Loss from

Business”

34

Ibid

Do MLM company stocks make

good investments?

Those MLMs that are publicly traded

often draw attention to periods of rapid

growth unlike other typical stocks for

legitimate companies traded on the stock

market. Properly understood, this hyper-

growth is to be expected of any company

using a multi-level or pyramid selling scheme

featuring an endless chain of recruitment.

They can be extremely viral at the outset, as

is true of most pyramid schemes, whether

product-based or not. Then they level out or

decline as their market becomes saturated.

(See Chapter 3.)

All of this reminds me of a consultant for

a hedge fund who reviewed the data I had

gathered on the MLM industry and was

astounded at what he discovered. As I drove

him back to the airport, he was shaking his

head all the way, as he exclaimed something

like this:

Now let’s see. This is an industry with

few if any real customers (other than

participants) and that is totally dependent

on a network of tens of thousands of

distributors, 99% of whom lose money!

How is it possible for such an industry to

exist in America?

7-20

The Network Marketing Payout

Distribution Study

In 1999, I gathered the data I had,

together with feedback I was receiving from

tax accountants, and issued a challenge that

continues to this day. I wrote the presidents of

60 of the most prominent MLMs at the time,

challenging them to prove me wrong in my

conclusions – that network marketing

companies were in fact pyramid schemes,

with most of the money paid to participants

going to those at the highest levels, and

everyone else losing money, after subtracting

incentivized purchases and minimal operating

expenses.

These presidents were supplied forms

that could be used to break down money

paid out to partici-pants in various percentiles

with money they paid in to the company for

products and services in order to conduct

their “business.” My challenge to these

executives was to “Prove me wrong” by

furnishing this data as requested.

The response from most of these

company presidents was interesting. Most

did not bother – or dare – to respond.

Company communicators from about a half

dozen of the MLMs said they would get

back to me with a response, but when they

ran the challenge by their superiors, the

answer in every case was negative. They

apparently did not want the truth to get out –

which is no surprise, given the damning

reality of the numbers, as reported here.

This challenge has been posted since

that time on either my web site or on the

Pyramid Scheme Alert web site. To this day,

no company president has met the

challenge. Details of the Network Marketing

Payout Distribution Study can be found in

Appendix 7F (separate pdf file).

These conclusions about MLM

are confirmed in other studies.

I am not alone in coming up with these

abysmal odds of success for MLM programs.

I have already mentioned the Wisconsin

study of Amway tax returns. Another

revealing study is the "The Myth of 'Income

Opportunity' in Multi-level Marketing," by

Robert FitzPatrick, sponsor of the web site

pyramidschemealert.org. He used different

assumptions than those used here - not

attempting to correct the deceptions in the

reporting of the 11 MLM companies he

analyzed. But he still concluded – based on

the companies' own reports – as follows:

A statistical analysis of income disclosures

made by 11 major multi-level marketing (MLM)

companies and the largest of all MLMs,

Amway/Quixtar, reveals that, on average, 99%

of all participants received less than $10 a week

in commissions, before all expenses.

Additionally, the report shows that on average

no net income is earned by MLM distributors

from door to door "retail" sales. . .

The data analyses prove that virtually all

MLM participants never earn a profit and that

MLM claims of a broad-based MLM "income

opportunity" are false. The report reveals that

the majority of all commission payments are

awarded only to a small group of promoters at

the top. More than 50% of all commission

payments were transferred to the top one-

percent in ten of the eleven companies. In

several cases, more than 70% of all

commissions were paid to the top one percent.

The top-loaded pay plans of the MLM

companies are based on "endless chain"

recruiting in which the investments of the latest

recruits are transferred to the earliest ones, and

the vast majority of all participants are always

situated at the bottom levels of the chain, where

profit is impossible.

35

Comparing MLM to other options, it is

safe to say that that MLM is the most unfair

and deceptive, and the most viral and

predatory of all business practices and

should be illegal per se, as are pay-to-play

chain letters and no-product pyramid

schemes.

Therefore, to promote as a “business

opportunity” an endless chain or pyramid

selling activity (MLM) that in fact leads to

almost certain loss for all but the founders

and primary promoters (who are enriched

from the purchases of victims/recruits), is a

misrepresentation of the facts, and can lead

to the defrauding of large numbers of

participants. MLM is the epitome of the type

of business activity the FTC) is pledged to

protect against – “unfair and deceptive acts

or practices.”

35

Fitzpatrick, Robert, The Myth of “Income

Opportunity” in Multi-level Marketing, 2008.

7-21

MLM’s candlestick income distribu-

tion. When I first became interested in the

abysmal numbers associated with MLM

profit/loss rates, I was struck with a

phenomenon I had never seen in decades

of analysis of financial and entrepreneurial

business models. When I spoke at

conferences and workshops for law

enforcement personnel, I attempted to

display on a graph the distribution of income

across the entire spectrum of MLM

participants.

On the left of an income distribution

chart I would show a tiny few making huge

sums of money on the left of the horizontal

axis and the balance losing money on the

right side. The problem was that no display

media was wide enough to display the huge

disparity between winners and losers.

Those who made money would be less than

a half inch in width, while those who lost

money (after incentivized purchases and

expenses) would spread across the length

of the entire building in which we were

meeting – if not the whole block.

In the UK’s case against Amway

36

, this

extremely unfair income distribution was

aptly described as a “candle stick.” The

following description by the finder of fact is

very revealing. If you have the patience to

read it and the statistical background to

understand it, you will be rewarded with

some very useful insights in just how

incredibly unfair MLMs can be.

(Conversions from pounds to dollars will

vary, but you can still grasp the

comparisons from relative size of the

numbers.)

Having set out the structure I turn to

my findings of fact as to what, in truth, this

structure produces for individual IBOs. The

case for the Secretary of State is that the

reality of the Amway business is that the

nature and rewards of becoming an IBO

and participating in that business are such

that only a very small number of IBOs make

any significant money from their

participation. In fact, the substantial

majority of IBOs make no money and

indeed by reason of their payment of the

36

Approved Judgment: The Secretary of State for

Business Enterprise and Regulatory Reform v.

Amway (UK) Limited May 14, 2008. §42-43

registration fee and the annual renewal

fees, lose money from their participation.

In its Points of Defense Amway does

not assert that this is not so, nor does it run

any positive case. It merely puts the

Secretary of State to proof. The Secretary

of State proves the case by statistical

analysis. For the period from 2001 to 2006

(a) 95% of all bonus income was earned by

just 6% of the IBOs; and (b) 75% of all

bonus income was earned by less than

1.5% of IBOs. In 2005-2006 there were

39,316 IBOs who shared a bonus pot of

£3,427 million. But of this total, 27,906

IBOs (71%) earned no bonus at all, and

101 IBOs (0.25%) shared £1,954 million

between them. That leaves a group of

11,309 IBOs to share a bonus pot of £1,473

million. Within that category there was a

group of 7,492 IBOs (earning 3%

commission) who between them shared

£101,400. This gave them an average

annual bonus income of just over £13.50, a

sum less than the annual renewal fee of

£18.00.

(I do not, of course, overlook the "retail

margin" earned on product purchased. from

Amway and not self-consumed: but the 3%

commission is earned when the monthly

points value is 200 PV, so the total retail

margin, allowing for self consumption, and

even assuming full-price sales, will be low).

If one were to represent this bonus

distribution on a graph with, a central

vertical axis containing the commission

bands (with 0% at the base and 21% at the

top), and the horizontal axis calibrating the

number of people in the class, then the bar

graph would resemble not a pyramid but a

candle stick, with a large solid base of IBOs

who earned nothing or virtually nothing and

a thin column of lBOs arising out of it who

earned 6 to 2l% commission.

A feature of that graph would be that

the group at the top of the candle would be

those who had been IBOs longest. So,

Trevor and Jackie Lowe earned a total

bonus of £141,000 (having been IBOs

since 1979). Of that bonus only £1,788

related to commission on their personal

volume (which suggests that they had

personally purchased about £8500 worth of

product in a year for on-sale to their own

customers). £30,000 was attributable to

the differential bonus earned on sales

made by their down line, and the rest was

attributable to the higher awards scheme to

which I have referred. The Stranneys

earned a total bonus of £59,142. They too

7-22

had joined in 1979. The bonus payable on

their personal purchases was £ 1,963. The

differential bonus earned on sales by their

down line was £15,660. The balance was

made up of the higher awards to which I

have referred. The Melvilles earned a total

bonus of £32,058. They joined in 1980. The

bonus earned on their personal volume was

£788. The differential bonus earned on

sales by their down line was £20,078. The

balance was made up of the higher awards.

On the other hand at the base of the candle

stick are almost all the recent joiners

together with a very considerable number

of people who have been IBOs for years,

but not made a financial success out of

their business.

The picture can be presented in a

variety of ways: but it is consistent.

Between 2001 and 2006 the proportion of

IBOs not earning any bonus income varied

between 69% and 78%. In year 2004/5 only

74 out of 25,342 IBOs earned over £10,000

by way of bonus. In that year only 4,076

IBOs earned enough bonus to cover the

annual renewal fee: 21,266 did not even

cover

their most basic running cost from bonus

payments (though there may be retail

margin).

If very modest business expenses are

factored in (say £1 00 on petrol or the

purchase of BSM) the picture is even

starker, with only 1,820 IBOs making

sufficient from bonus payments to cover

those expenses and 23,521 IBOs failing to

do so. In the period from 2000 to 2005

Chris and Sharon Farrier's bonus-income

ranged from £21,495 to £7,971 and

averaged £12,850 Over the same period

the income of Dr. Anup Biswas ranged from

£137 to £433 and averaged £306. These

are the people whose testimonials said

respectively that they were earning "the

equivalent of good executive size income",

or was deriving an income that "continue[d]

to climb to replace my full professional

salary".

I would add that – as bad as these

numbers are – they do not account for all

expenses. So the loss rate is actually far

worse than described above. I would also

like to emphasize that the extremely unfair

distribution of income described above does

not apply just to Amway, but to all MLMs for

which I have been able to obtain data on

average earnings of participants. It is not

just a few MLMs that are conducting unfair

and deceptive marketing practices, but

virtually all of them, as all MLMs are built on

a fundamentally flawed system of endless

chain recruitment of participants as primary

customers.

MLMs are the most unfair and

deceptive of all business oppor-

tunities, and of all pyramid

schemes.

In the original FTC v. Amway ruling in

1979, the “retail rules” supposedly used by

Amway to assure that products were sold

and not just stockpiled are based on the

questionable assumption that even though

Amway was structured as a pyramid

scheme, retail sales would serve as a

mitigating factor to minimize the harm. But

since the loss rate is so much higher for

product-based pyramid schemes (MLMs)

than for classic, no-product schemes, this

assumption should be challenged as totally

untenable.

In a classic 8-ball (1-2-4-8) no-product

pyramid scheme all the money from 14

downline participants goes to the person at

the top. Assuming the pyramid schemes

continues, that person would leave and

recruit another pyramid of participants.

Those on the second level of the original

pyramid would move up to the number one

position, and those on the bottom level

would each move up a level in the new

pyramid and recruit another two persons for

the bottom level. Those at the top would

cash out and go on to form other pyramids,

in an endless chain of recruitment of new

participants into an ever growing number of

pyramids. [See Appendix 7C for profit and

loss rates for classic, no-product pyramid

schemes.]

The inevitable result of such pyramid

schemes is that eventually recruitment will dry

up as the market becomes saturated or law

enforcement steps in and stops it. In any

event, when the pyramid ceases, the vast

majority of participants are guaranteed be in a

losing position at the bottom.

7-23

In a typical product-based scheme, or

MLM, like Amway or Nu Skin, investments are

disguised or laundered through product

purchases. Revenues from product sales are

channeled through a large infrastructure, with

not even half of the money going back to

those who generated it. And instead of going

to the top person of the 14 participants in a

no-product scheme, company payout must be

shared with tens of thousands, or even

hundreds of thousands of participants – most

of it going to those at or near the top levels;

i.e., the TOPPs who are the driving force

behind product-based pyramid schemes. So

only a tiny amount is paid back to lower level

participants – almost all of whom lose money.

Thus the loss rates for MLM

participants (averaging at least 99.6% as

shown in Appendix 7A) is far greater than

for participants in classic pyramid schemes,

which is approximately 90%.

Put another way, the odds of profiting

from a classic 8-ball no-product pyramid

scheme (close to 10% depending on how

many continue) is in the range of ten to 100

times as great as the likelihood of profiting

from a typical MLM program (less than 1%).

MLM is the worst of all classes of pyramid

schemes by any measure – loss rate,

aggregate losses, or number of victims. (For

a chart comparing no-product with product-

based pyramid schemes (MLMs) – and with

legitimate income options, see 7F.)

MLM is a mathematical trick played

on the unwary. MLM promises significant

rewards to those who invest time and

money in an MLM program, but delivers

losses to all but those at or near the top of a

large pyramid (or beginning of the chain) of

participants - who profit from the failed

investments of those beneath them in the

pyramid. As discussed above, MLM's, or

product-based pyramid schemes, cause far

more harm than other types of pyramid

schemes by any measure – loss rates,

aggregate losses, number of victims, etc.

Based on figures released by the Direct

Selling Association, aggregate losses

amount to tens of billions of dollars and are

suffered annually by tens of millions of

victims worldwide. Of course, the DSA

refers to MLM revenues as “sales,” when in

fact with a 99% loss rate, such “sales”

represent losses for the vast majority of

participants.

In this regard, the following comment

from the trier of fact in the UK’s case

against Amway

37

is instructive:

. . . In my survey of the evidence I

have recorded some instances of

those who did have some success.

But they are the equivalent of one in

many thousands. If the reality of an

opportunity is fairly presented,

members of the public are free to try

and free to fail; and the mere fact that

some do fail would not compel the

conclusion that the opportunity was

not being fairly presented. But if

almost all do not achieve then I think

the inference is fairly raised that the

disparity between expectation and

experience is arises from a failure to

make a fair presentation of the actual

(as opposed to the theoretical or

exceptional) chance of success.

All of the foregoing supports the

obvious conclusion with which any rational

analyst would agree. There exists a critical

need for adequate disclosure of information

crucial to an informed decision by an MLM

prospect on whether or not to participate.

This will be the topic of the next section.

37

Approved Judgment: The Secretary of State for

Business Enterprise and Regulatory Reform v.

Amway (UK) Limited May 14, 2008. §54 (c )

The loss rate for MLMs is at least 99%.

This means that less than one in 100

MLM participants make a clear profit,

and at least 99 out of 100 participants

actually lose money! In fact, classic

no-product pyramid schemes are ten

to one hundred times as likely to result

in profits as are product-based

pyramid schemes, or MLMs.

7-24

The critical need for adequate

disclosure is herein under-

scored.

Persons who are considering buying

into an MLM are surprised to learn that the

numbers are so abysmal. A typical reaction

is “I knew that few people make any money,

but I had no idea MLM was that bad.” Even

consumer advocates say that it is far worse

than they imagined. And of course, those

who have already invested money in MLM

are sickened by the awareness of the scam

they have fallen into. “If I had only known,”

they say.

While the DSA/MLM lobby has mounted

a fierce resistance to providing transparency

in MLM reporting that could provide some

protection for consumers, it should be clear

from these studies that adequate disclosure is

absolutely essential. The

argument the FTC used for

exempting MLM in its

Revised Business Oppor-

tunity Rule was that it

would be “too much of a

burden” for participants to

hand out a one-page

document of disclosures to

prospects. Apparently

anticipating the outcry of

consumer advocates, they

pledged to deal with MLM

abuses by using Section 5

of the FTC Act. The

problem is that the FTC admitted to

prosecuting only 14 MLM companies in the

preceding ten years. Since virtually all MLMs

are violating Section 5, as clearly

demonstrated here, this would require that the

FTC increase its staff at least twenty-fold just to

handle the MLMs just commencing, not to

mention the hundreds that are still operating.

A rule requiring adequate disclosure is

the only cost effective way for the FTC to

handle the hundreds of deceptive MLM

programs. This problem was magnified

when an FTC administrative judge ruled that

Amway was not a pyramid scheme in 1979,

assuming compliance with some

exculpatory “retail rules,” which have never

been adequately enforced – and probably

never could be, as they only address

behavior of participants, not underlying

flaws in the business model - or the

compensation plans which actually

discourage a retail emphasis.

In one of my many comments to the

FTC, I suggested a disclosure form that could

be very helpful in making more transparent to

consumers what the MLM opportunity was –

or was not. For the form I proposed (revised

some), see Appendix 7D.

MLMs as “pay more” buyers’

clubs

Perhaps I am too harsh in my

judgment of MLM as an unprofitable – even

fraudulent – system. Actually, I would be all

right with any MLM continuing to operate, so

long as its promoters do not

present it as an “income

opportunity” or as a

“business opportunity.” If

they want to call it a

“buyer’s club,” where

participants are told they

get to pay more for some

good – and some highly

questionable – products,

and that they won’t make

any money doing so, that

would be fine with me.

Note to persons being recruited

by an MLM participant:

If someone tries to recruit you into an

MLM, you can save yourself the trouble of

researching the MLM and doing all this

debugging and calculating by asking the

person who is recruiting you to show you his

tax returns for the past year. Then ask that

others he has recruited in the past couple of

years show their tax returns – or some proof

that they have earned the promised rewards

(less expenses). Be prepared for some

blank stares and evasive answers.

To present MLM as an

“income” or “business

opportunity” is misleading.”

However, it may be

acceptable to sell it as a

“buyer’s club,” where

participants get to pay more

for some good – and some

highly questionable –

products.

7-25

Conclusions

This book – especially this chapter –

presents the most thoroughly researched

independent analysis ever done of the

viability and profitability of MLM as a

business model. It has been long overdue,

as it is information that is vital for consumer

awareness and for regulatory rule-making.

This would have to include the FTC’s

Business Opportunity Rule, for which

comments received by MLM spokesmen

and participants (with the encouragement of

MLM promoters) were full of the

misrepresentations discussed in this and

preceding chapters.

With every MLM, where such data was

available, and after debunking the

deceptions in their reporting, the loss rate

was at least 99%, using liberal assumptions

relating to retention and cost of

participation. The average loss rate for the

30 reported here was 99.6%. And I believe

it safe to assume that the hundreds of

MLMs (with the four causative and defining

characteristics in their compensation plan)

38

that do not provide such data are not likely

to be more profitable because if they were,

at least some would have provided data for

competitive advantage.

This means that at best less than one

in 100 participants in all MLMs make a clear

profit, and at least 99 out of 100 participants

actually lose money! And a much smaller

percentage realize the earnings held out as

possible at opportunity meetings – which is

usually those who joined very early in the

chain of recruitment. Newer recruits are

being sold a ticket for a flight that has

already left the ground.

As indicated above, one can do much

better at the gaming tables in Las Vegas.

And a person need not risk his or her social

capital – treasured relationships with friends

and family one has spent a lifetime

cultivating. (NOTE: I am not promoting

gambling.)

38

See Chapter 2.

The fundamental flaws discussed in

this and prior chapters are confirmed with

this analysis. At the very least, it is safe to

conclude that MLMs are not legitimate

income opportunities. Recruitment-driven

MLMs are truly scams.

As a business model, MLM is likely

the most successful con game of all time.

The very people who are out recruiting are

themselves victims until they run out of

money and quit. And because victims

seldom file complaints, law enforcement

rarely acts. It is a vicious cycle, No

complaints, no law enforcement action; no

law enforcement action, no complaints. So

the game goes on.

7-26

Appendix 7A: Analysis of loss rates of recruitment-driven MLMs

for which we have received earnings data

Based on our analysis of their compensation plans, using the four causal and defining

characteristics (“red flags”)

39

as a checklist, ALL (100%) of the 29 listed below are

recruitment driven and top-weighted programs. This means that rewards are paid primarily

for the aggressive recruitment of a large downline, not for retailing products; and most of

the money paid by the company goes to participants at the highest levels. We have

analyzed the compensation plans of over 350 MLMs and determined that ALL (100%) are

recruitment-driven and top-weighted, so it seems justifiable to assume that the same results

could be expected for other MLMs.

40

NOTE: These calculations are based on actual company reports and the best

independent analyses available to the author, as explained in the preceding chapters. Of

course, anyone is welcome to perform their own calculations, but we should question any

calculations using assumptions by those in the industry. As in other reports we have

prepared, the same legal disclaimer applies.

41

MLM company

and year of

average earn-

ings report

42

Estim. min.

annual costs

for effective

recruitment

campaign.

43

Level at and

above which

net profits

possible

44

Approx. %

of active

participants

at that level

or above

45

Maxi-

mum

Reten-

tion

rate

46

Approx. % of all

partic’s that could

have profited from

participation

47

Approx.

% of all

partic’s who

lost money

48

Advocare

(2009)

49

$2,545

Silver

4.61%

10%

0.46% (0.0046)– or 1

in 217 profits

99.54% lost

money

Ameriplan

(2008)

50

$2,545

SRSD

7.46%

10%

0.75% (0.0075) – or 1

in 133 profits

99.25% lost

money

39

See Chapter 2 for these characteristics (“red flags”) – also available as a full report or summary at – mlm-thetruth.com

40

We have received average income statements for several other MLMs, but without adequate data to do this analysis.

41

It is important that you make your own decision on whether or not to participate in an MLM based on your own

evaluation. These reports, lists, and opinions are intended purely as a communication of information in accordance

with the right of free speech. They do not constitute legal or tax advice. Anyone seeking such advice should consult a

competent professional who has some expertise on endless chain or pyramid selling schemes. Readers are

specifically advised to obey all applicable laws, whether or not enforced in their area. Neither the Consumer

Awareness Institute nor the author assumes any responsibility for the consequences of anyone acting according to

the information in these reports.

42

The most recent report available to the author at the time of the analysis.

43

Estimated minimum costs of conducting a successful recruitment campaign, based on the author’s one-year test

of a leading MLM. Costs includes incentivized purchases plus minimum operating expenses, corrected by COL (cost of

living adjustment, based on Consumer Price Index) since founding – See chapter 5. Here we use the extremely liberal

assumption that total costs were only 10% of those of the author.

44

Estimated average net profits assume all expenses (including incentivized purchases and minimum operating

expenses) are subtracted from income. This is the “pin level” at and above which profits would be possible.

45

Referring to the level in the previous column – per MLM company reports. If only “Active” participants

(“Distributors,” “Associates,” etc.) were counted, we can safely assume that the numbers on the report represent no

more than half of the total. If the requirement to be listed as Active is very restrictive, a factor of 25% is used instead.

46

See chapter 6 for how approximate attrition (and retention) rates for MLMs are estimated. The inverse of attrition is

retention, which is used to estimate the percentage who could profit. Retention is estimated to be a maximum of 10% if

in business for four to nine years, 5% for ten or more years. However, for this report, we use the liberal assumption

of15% for four to nine years and 10% for ten or more years. Newer MLMs are not included, as data to establish long-

term retention rates has not yet been established.

47

Average income exceeding all expenses (second column) for conducting a successful recruitment campaign.

48

In calculating percentage who lost money, those who dropped out are included. This is using the assumption that

participants who had arrived at such a high “pin level” that they were profiting would stay in the program – since the

enjoy the “residual income” that promoters imply at opportunity meetings is possible.

49

“2009 Income Disclosure Statement” - published by Advocare

7-27

MLM company

and year of

average earn-

ings report

Estim. min.

annual costs

for effective

recruitment

campaign.

Level at and

above which

net profits

possible

Approx. %

of active

participants

at that level

or above

Max.

Reten-

tion

rate

Approx. % of all

partic’s that could

have profited from

participation

Approx.

% of all

partic’s who

lost money

Amway/

Quixtar (2001)

51

$2,090

Platinum

0.60%

10%

0.06% (0.0006) – or 1

in 1,667 profits

99.94% lost

money

Arbonne Int’l

(2007)

52

$2,450

Area

Managers

0.59%

10%

0.059% (0.0006) – or

1 in 1,659 profits

99.94% lost

money

Cyberwize

(2006-2007)

53

$2,381

Director

5.75%

10%

0.57% (0.0057) – or

1 in 175 profits

99.43% lost

money

Ecoquest

(2005 - now

Vollara)

54

$2,306

Fast Start

Distributor

1.46%

Since

2000 -

-278,024

Dealers

55

0.44% (0.0044) – or 1

in 227 profits

99.56% lost

money

FHTM (2009)

56

$2,545

Executive

Sales

Manager

5.19%

15%

0.78% (0.0078) –

or 1 in 128 profits

99.22% lost

money

FreeLife Int’l

(2008)

57

$2,545

Ambassador

4.18%

15%

0.63% (0.0063) – or 1

in 159 profits

99.37% lost

money

Herbalife

(2008)

58

$2,545

World Team

5.71%

10%

0.571% (0.0057) – or

1 in 175 profits

99.43% lost

money

Ignite –Stream

Energy (2009)

59

$2,306

Senior

Director

1.77%

15%

0.27%, (0.0027)

or 1 in 370 profits

99.73% lost

money

Immunotec

(2007)

60

$2,450

Silver

0.71%

10%

0.071% (0.00071) – or

1 in 1,408 profits

99.93% lost

money

iNetGlobal

(2009)

61

$2,545

Diamond

Executive

2.9%

15%

0.87% (0.0087) – or 1

in 115 profits

99.57%

lost money

Isagenix

(2007)

62

$2,450+

Star

Consultant

2.1%

10%

0.21% (0.0021) – or

1 in 476 profits

99.79% lost

money

Mannatech

(2007)

63

$2,450

Regional

Director

7.16%

10%

0.72% (0.0072) – or 1

in 139 profits

99.28% lost

money

Melaleuca

(2008)

64

$2,545

Director

III/IV

2.9%

10%

0.29% (0.0029) – or 1

in 345 profits

99.71% lost

money

50

“AmeriPlan Independent Business Owner Income Disclosure Statement for 2008” - published by AmeriPlan

51

52

Independent Consultant Compensation Summary – U.S. “ (2007), published by Arbone, Int’l

53

“Cyberwize Income Disclosure Statement for 2006-2007” - published by Cyberwize

54

“Income Disclosure Statement” - provided by Ecoquest Int’l (now Vollara)

55

Ecoquest reported what all MLMs should report – the total population base of recruits since the company’s

founding, or the year during which the first TOPPs (that are included in the report) joined the system. So we did not

need to estimate attrition rate.

56

“Income Disclosure Statement,” January 23,2009 – January 20, 2010. In business since 2006.

57

“2008 Annual Income Statistics” - published by FreeLife Int’l

58

Herbalife: “Statement of Average Gross Compensation of U.S. Supervisors in 2008” – published by Herbalife

59

“Income Disclosure” July 2008 – June 30, 2009” - published by Ignite

60

“Immunotec: INCOME DISCLOSURE REPORT – 2007” – published by Immunotec

61

“INCOME DISCLOSURE STATEMENT FOR INETGLOBAL.COM” 1 Jan 2009 – 31 Dec 2009

62

“Annual 2007 Isagenix Independent Associate Earnings Statement” - published by Isagenix

63

“2007 U.S. Income Averages: 2007 Annualized Income Averages by Status” – published by Mannatech

64

“2008 Annual Income Statistics” – published by Melaleuca. This Melaleuca report is one of the most obfuscated

reports I have analyzed. All buyers are designated “customers.” A certain percentage are deemed “business

builderfs,” and percentages of these are in turn percentages of all customers, and a percentage of these are in

“development” or “leader” status. Thus, those who are in the profit category are made to appear a much larger

7-28

MLM company

and year of

average earn-

ings report

Estim. min.

annual costs

for effective

recruitment

campaign.

Level at and

above which

net profits

possible

Approx. %

of active

participants

at that level

or above

Max.

Reten-

tion

rate

Approx. % of all

partic’s that could

have profited from

participation

Approx.

% of all

partic’s who

lost money

Mona Vie

(2008)

65

$2,306

Star 500

1.95%

15%

0.29% (0.0029) –

or 1 in 345 profit

99.71% lost

money

MXI Corp

66

(Xocai - 2009)

$2,232

Silver

Executive

3.75%

67

15%

0.56% (0.0056) – or 1

in 179 profits

99.44% lost

money

Nikken

(2007)

68

$2,450

Gold

0.82%

10%

0.082% (0.00082) –

or 1 in 1,216 profits

99.12% lost

money

Nu Skin

(2008)

69

$2,545

Qualifying

Executive

70

6.22%

10%

0.62% (0.0062) – or 1

in 161 profits

99.38% lost

money

Reliv

(2005)

71

$2,306

Key

Director

72

3.12%

10%

0.312% (0.0031) – or

1 in 321 profits

99.69% lost

money

SendOutCards

(2009)

73

$2,232

74

Senior

Manager

4.22%

15%

0.35% (0.0035) - or 1

in 286 profits

99.65% lost

money

Sunrider

(2007)

75

$2,450

Business

Leader

11.19%

10%

1.12% (0.0112) – or 1

in 89 profits

98.9% lost

money

Symmetry

(2003)

76

$2,175

$201-500/mo.

income level

3.3%

10%

0.33% (0.0033) – or 1

in 303 profits

99.67% lost

money

Tahitian Noni

Int’l (2007)

77

$2,306

Jade

3.59%

10%

0.36% (0.0036)–

or 1 in 278 profits

99.64% lost

money

Tupperware

(2008)

78

$2,545

Manager

2.85%

79

10%

0.285% (0.0028) –

or 1 in 351 profits

99.71% lost

money

USANA

(2005)

80

$2,545

Achiever

4.7%

10%

0.47% (0.0047) – or 1

in 213 profits

99.53% lost

money

percentage than would appear in the report. I doubt that anyone looking at the numbers to decide on participation

could get the true likelihood of profiting from the information provided.

65

“Income Disclosure Statement Global 2008” – published by Mona Vie. Mona Vie calls those who made a purchase

in the past 12 months but failed to meet four criteria are classified “wholesale customers,” lessening the percentage

of distributors who would otherwise be considered customers.

66

Xocai 2009 “Income Disclosure statement” – published by MXI Corp.

67

The percentage of Associates who did not qualify under strict standards as “Active Associates” is not disclosed. A

liberal assumption of 50% of all Associates being “Active” is used here.

68

“Average Consultant Income Sheet” – published by Nikken. Nikken has two sets of income statistics, one for sponsoring

levels and one for leadership levels. I assumed that leadership levels come out of and do not exceed the top sponsoring level

(Bronze).

69

“Nu Skin Enterprises, Inc.: 2008 Distributor Compensation Summary” – published by Nu Skin

70

This illustrates how these assumptions are extreme in favor of the MLMs in this table. In my own personal

experience withNu Skin, I was losing $1,250 per month even at Executive level – almost to Gold level.

71

“2005 Earnings Statisics” – published by Reliv

72

Reliv only lists earnings for Director and above, with six levels below all essentially losing money

73

“2009 Income Disclosure” – published by SendOutCards

74

Still in hypergrowth stage typical of any new MLM, or product-based pyramid scheme

75

“ Income Disclosure Statement: January – December 2007” – published by Sunrider

76

“Vision: Earnings Matrix Based on 2003” – published by Symmetry

77

“Average Incomes of U.S. IPCs” – published by TNI

78

“2008 Income Disclosure Summary” – published by Tupperware – which appears to have changed their

compensation plan in April of 2005 to provide greater rewards for high level participants (“Directors”). Reported in

Presentation Summary, S2Sales Force Structure.Earnings Conference Call, Jan. 31, 2007.

79

This number is likely inflated because Tupperware did not report the plan participants who received no commissions.

80

“2005 Average Income of Associates” – published by USANA. I would have used their 2008 report, but they began

selectively reporting only the most active of participants (“Associates”) and suggested their numbers represented

average total earnings – a huge deception. Apparently the 2005 numbers did not look good enough, so they changed

7-29

MLM company

and year of

average earn-

ings report

Estim. min.

annual costs

for effective

recruitment

campaign.

Level at and

above which

net profits

possible

Approx. %

of active

participants

at that level

or above

Max-

imum

Reten-

tion

rate

Approx. % of all

partic’s that could

have profited from

participation

Approx.

% of all

partic’s who

lost money

World Ventures

(2008)

81

$2,306

Senior Rep-

resentative

0.2%

15%

0.03% (0.0003) – or 1

in 3,333 profits

99.97% lost

money

Xango (2007)

82

$2,545

5K

1.22%

15%

0.18% (0.0018) – or 1

in 556 profits

99.82% lost

money

Yor Health

(2010)

83

$2,545

Copper

2.52%

84

15%

0.378% (0.0038) –

or 1 in 263 profits

99.62% lost

money

Your Travel

Biz (YTB-

2007)

85

$2,545

$2,500-5,000

per month

N/A (only total

since 2001)

N/A

0.207% (0.002067) –

or 1 in 484 profits

99.79% lost

money

Approx.

average

profit and

loss rates

of partici-

pants

N/A

0.4.2% (0.0042)

– or 1 in 238

profits

99.6%

lost

money

Observation from Appendix 7A:

In every case, using the analytical framework described above, the loss rate for all of

these MLMs ranged from 99.12% to 99.97%, with an average of 99.6% of participants

losing money. On average, one in 238 actually profited after subtracting expenses,

and 996 out of 1,000 lost money – to say nothing of the time invested.

The most liberal assumptions that could reasonably be used in favor of the MLMs

were applied to this table of MLM loss rates. Using the more realistic assumptions

discussed in prior chapters, the average loss rate for these MLMs would have

averaged no better than 99.9% - with less than one in 1,000 profiting significantly.

Also, I would estimate that the number of new recruits who wind up

receiving the promised substantial “residual income” held out at MLM

opportunity meetings is no better than one in 25,000 recruits!

their reporting to make them look better. For more on USANA’s deceptive reporting, search “USANA” in The Fraud

Files at – www.sequenceinc.com

81

“World Ventures Marketing. LLC: Annual Income Disclosure Statement” – published by World Ventures

82

“Income Disclosure Statement: 2007 Average Monthly Earnings by Rank for All Markets” – published by Xango

83

“YOR Income Disclosure Statement”

84

Total population of reps from beginning of company was reported to be 224,440 - which is what was needed for the

calculations.

85

“Rep Earnings Report July 2007”

As a general rule, the more a new recruit invests

in an MLM program, the more he or she loses.

This, of course, is true of most any scam.

7-30

Appendix 7B: List of MLMs for which compensation plans have been

evaluated by Jon M. Taylor, MBA, Ph.D. (as of January 1, 2011)

1Cellnet

4Life Int'l

5Linx

A. L. Williams

Acai Plus

Achievers Unlimited

ACN

Adcalls

Advantage Conferences

Advantage Marketing Systems

Advantage Neutraceuticals

Advocare

Affordable Energy

Agel

AIM

AliveMax

All-star Entrepreneur

Amazon Herb

Ambit Energy

American Longevity

Ameriplan USA

Amerisciences

Amkey

Amsoil

Amway-Quixtar

American Marketing Systems

American Petroleum Promotions

Amigo Health

Annasa

Apeus

Arbonne

Ardyss International

Ascend Technologies

Ascential Bioscience

At Home America

Avalla-Distributes Nutrimetrics

Avon

Baby Crazy

Beach Body

BeautiControl Cosmetics

Bel'Air

Better Universe

Beyond Freedom Seminars

bHIPGlobal

Big Planet (Nu Skin)

Biogen

Biometrics

Bioperformance

BioPro

Bodywise

Bookwise Books

Brain Garden

Business in Motion (BIM)

Celebrating Home

Cell Tech

Cell Wireless

Ceres Living

Champion Communications

Cie Aura

Citizenre

Cleur

Cognigen

Conklin

Cookie Lee Jewelry

Creative Memories

Cyberwize

Daisy Blue

Digital Crown Holdings Ltd.

(DHCL)

Direct from Vatican City

DoTERRA

Drink ACT

DSX

Dubli

Dynasty of Diamonds

E. Excel

Earth Essence

Easy Daily Cash (2-up)

Ebiz.com

Ecoquest

eFoods Global

eFusion (acai)

Eido

Eiro

Elur

Emerald Passport (Profit Masters)

Empire Dreams

Empower Net

Enagic (Kangen water)

Enfinitia

Eniva Gold Marketing

Enliven

EnvisionCC

Epic Network

Escape International

Essante

Essentially Yours

Evolution International

Excel Telecommunications

eXfuse

Extreme Research

EZ Wealth by Design

First Financial Security

First Fitness International

Fuel Freedom International

FFSI

FM Group World

For You

Forever Green

Forever Int'l

Forever Living

Formor Int'l

Forte Builder (New Vision)

Fortune Hi-tech Marketing

Free Life International

Freedom Rocks

Fruda Vida International

Frutaigo

Fuller Brush

Fun Unlimited

Gano Excel

GBG

Gemcap

Gem Lifestyle

Genewize Life Sciences

GDI - Global Domain Int’l

Global Equity Marketing and

Global Equity Lending

(World Leadership Group)

Global Health Trax

Global Research Network (1-up)

Global Resorts Network

Global Travel Trends (PRT Travel)

Global Wealth Trade

GNLD

GoHFT

Gold Mine International

Golden Neo-life Diamite

GoldQuest

Goldshield Elite

Good Life International

Goyin

Great Life Int'l

HBW Insurance and Financial

Herbalife

Heritage Health Products

Heritage Makers/li>

Hsin Ten Enterprise USA

iBuzzPro

Ignite/Stream of Energy

Igonet

Immunotec

iNet Global

Inner Light

Integris Global

IDN (Nu Skin)

International Galleries, Inc. (IGI)

Isagenix

ITV Ventures

It Works

IV-7 Direct

Jafra

Jewelry by Park Lane

Jus International

K-Link

Kaire

Kangivity Global

Kanosis

Karemore

Kleeneze

Kyani

Ky-Ani Sun

Learning Global USA

Leaving Prints

Legacy for Life

Lexxus

Liberty International

Liberty League Int’l (LLI)

Life Force International

Life Max

Life Plus

LifeWave

Life without Debt

Lifestyles USA

Lightyear Alliance

The Limu Company

7-31

Livinity

Longevity Network

Mandura

Mannatech

Market America

Mary Kay Cosmetics

Matol Botanical

Mavericks (World Health Card)

Max GXL

Max International

Maxxis 2000

Me2Everyone

Melaleuca

Menage International

ML International

MMOGULS

Mona Vie

Monarch Health Sciences

Mona Vie

Morinda (Tahitian Noni Int’l)

Moxxor

MPB Today

Multi-pure

MXI-Xocai

My4Life

My7Diamonds

My Leisure Business

Narc that Car

NAA - National Agents Alliance

National Lending Corp.

Native American Nutritionals

Natural Air Products

Nature's Own

Nature's Sunshine

NeutroGenesis

Neways

New Quest International

New Vision USA

NextFit

Nexx

NHT Global

Nikken

Noevir

Nouveau Cosmeceuticals

Nouveau Riche University

NSA (Juice Plus)

Nucerity

Numis Network (coins)

NuLegacy Rx card

NuMed

Nu Skin/Pharmanex/Big Planet

Nussentials

Nutronix

Nuvante

Ohana Health

Omegatrends

Ominex

Omnitrition

One24

Online Exchange

OnPoint Direct

Orender International

Organo Gold

Orovo

Our World Network

Oxyfresh

Palmary

Passport LLC

Petromagic

Pharmanex (Nu Skin)

PhotoMax (Nu Skin)

Plexus Pink

PM International AG

Power2Marketing (P2M)

Power Mall

Prepaid Legal

Primerica Financial Services

Prixdale Ventures

The Profit Masters (Emerald

Passport)

Pureworks

Purse Party

Qing Mei (cards)

Quixtar (Amway/Alticore)

Questnet

RBC Life Sciences

RMP Infotech

Refer Life

Reliv

The Right Solution

Rodan & FIelds - Victoria

SkinCare

Royal Body Care

Saraha of India (Saraha

Conserve & Comosale)

Scent-sations

Sendoutcards.com

Sene Gence Int'l

Sensaria

Sevea

Shaklee

Share the Wealth

Sibu

Silver Cache

Slender Now

Soteria/ It Works Marketing

Southern Living at HOME

Sportron

Spring Wellness

Stampin' Up!

Stem Tech Health Sciences

Stimulife

Success University

Sunrider

Supralife

Sweet Living

Swiss Just

Symmetry

Synergy Worldwide

Syntec

Tahitian Noni Juice ( Morinda)

Talk Fusion

Take Shape for Life

Team Everest

Team LIfe Changes (Nutraburst)

Team National

The Traveling Vineyard

Tiens Biotech Group

Tianshi

Transcend Mktng Int'l, Inc. (TMII)

Tomboy Tools

Tom Danley's Tape of the Month

Top Line Creations (TLC)

Traverus Travel

Trilogy

Triunity Int'l

Trivani

Trivita

Tupperware

TVI Express

Ubifone

UltraStore

Unicity

Univera Life Sciences

USANA Health Sciences

Vemma

Visalis

Vision for Life

Vision Travel

Vitagenesis

Viva Life Science

VM Direct (Hello world)

Votre Vu

Xyngular

Waiora

Watkins

Wealth Pools Int'l

Wellness International Network

(WIN)

Woosh

World Financial Group

World Group Securities

World Leadership Group

World Lending Group

World Marketing Alliance (WMA)

World Ventures

Wowgreen

Wynlife Healthcare

Xango

XELR8

Xocai

Xooma

XOWii

Xzotto

Yoli

YOR Health

Young Living Essential Oils

Youngevity

Your Travel Biz (YTB Travel

Network)

Zamu

Zamzuu

Zermat International

Zija

Zrii

Zu-B

Zulian

Zurvita

7-32

Appendix 7C: Winners and losers

in a classic no-product 8-ball (1-2-4-8) pyramid scheme

Cycle

Number of

pyramids

Total number of

participants*

Number

who profit**

Percentage

who profit***

Percentage

who lose

1

15

1

6.67%

93.99%

2

3

31

3

9.68%

90.32%

3

7

63

7

11.11%

88.89%

4

15

127

15

11.81%

88.19%

5

31

255

31

12.10%

87.84%

6

63

511

63

12.33%

87.67%

7

127

4123

127

12.41%

87.59%

8

255

2047

255

12.46%

87.54%

9

511

4095

511

12.48%

87.52%

10

1023

8191

1023

12.49%

87.51%

Profits broken down in a classic no-product 8-ball (1-2-4-8) pyramid scheme:

Order of participants’ Revenues to each Number of participants

entry into the scheme participant at that level at that level

Initiator $140,000 1

2

nd

participants entering the system $120,000 2

3

rd

“ “ “ “ $112,000 4

4

th

“ “ “ “ $98,000 8

5

th

“ “ “ “ $84,000 16

6

th

“ “ “ “ $70,000 32

7

th

“ “ “ “

$56,000 64

8

th

“ “ “ “ $42,000 128

9

th

“ “ “ “ $28,000 256

10

th

“ “ “ “ $14,000 512

Total number of participants who would profit 1,023

Number of participants at the lower levels who would

lose money 7,168

Total of all participants in the scheme 8,191

Per cent who profit (assuming all those who profit reinvest in

new cycles of the pryamid 12.49%

Percent who lose money at the 10

th

level 87.51%

* This includes all who participated, regardless of how many times.

** This is the number of participants who have cashed in at least once and some multiple times.

*** This assumes every profiting participant keeps investing in new pyramid cycles. The

percentage profiting would be slightly higher or lower depending on how many participants

dropped out and when.

7-33

Appendix 7D: A simple form that would disclose crucial information

to prospects

Average payments to – and purchases from – all WealthPlus

1

participants

who had enrolled

2

within the past three years

Total number of participants

3

recruited during the three-year period of the report 100,000

Total of all purchases

4

of products and services for the past year from WealthPlus

by (the same group of) participants who were enrolled and authorized to recruit

other participants within the past three years $87,835,000

Total payments in commissions to these participants for the past year $25,390,000

Percentage of distributor-generated revenue rebated to these distributors (payout) 28.9%

Average purchases of products and services

5

by these participants from WealthPlus $878.35

Average commissions and bonuses paid by WealthPlus to each of these participants $253.90

Average income/loss of participants in this group of participants – (minus) 624.45

Range of annual Average

Commissions

6

purchases Total commissions

received by from com- paid by company

participants pany for % of total Number of to distributors

from WealthPlus each level participants* participants at each level

Over $500,000 $20,000 0.001% 1 $1,500,000

$250,000-$499,999 $18,000 0.005% 5 $3,500,000

$100,000-$249,999 $16,000 0.01% 10 $3,000,000

$50,000-$99,999 $14,000 0.05% 50 $3,500,000

$25,000-$49,999 $12,000 0.01% 100 $3,000,000

$10,000-$24,999 $10,000 0.03% 300 $3,600,000

$5,000-$9,999 $8,000 0.05% 500 $3,500,000

$1,000-$4,999 $3,400 2.0% 2,000 $3,000,000

$1-$999 $1,200 7.0% 7,000 $700,000

$0 – participants who made purchases

but did not qualify

for commissions

6

$400 80% 80,000 0

$0 – participants who enrolled but made no

Purchases

7

since enrolling $0 10% (approx.)10,000 (approx.) 0

Totals $87,835,000 100% 100,000 $25,300,000

__________________________________________________________

See “Explanatory Reference Notes for FTC Officials” on the following page.

7-34

Explanatory Reference Notes for FTC

Officials:

1

WealthPlus International, Inc. is merely a

fictitious name used for illustrative

purposes. Also, all of the numbers used in

this chart are fictitious and for illustration

only.

2

Enrolled participants are persons who

signed a contract allowing them to buy

products at discounted or wholesale prices

from the company and authorizing them to

recruit other persons into the company,

from which the enrolled participant could

profit (in commissions, bonuses, etc.) from

sales to said persons.

3

These statistics include ALL persons who

contracted with the company as

participants within the past three years (or

other designated time period). This is to

correct the typical deceptive reporting

practice of MLM firms of counting only

“active distributors” in the past year (or

other limited time period). They eliminate

the recruits that dropped out. Their base for

comparison thus represents only a small

slice of the total recruits. Note that while

eliminating participants that contracted to

join and then dropped out, this small base

of participants is compared with participants

who may have been with the company for

five to twenty years at a certain level –

often from the beginning of the chain of

recruitment. The statistical results are

extremely skewed, making the MLM

“opportunity” appear to be profitable for

more recruits than is actually the case. The

above form would help correct these

deceptions. Those that had been with the

company for longer than three years would

not be included in this disclosure.

4

This number must include ALL purchases

from the company, including products,

training, sales aids, telecommunications

and other electronic aids, etc. This makes it

possible for recruits to see if it is likely that

more money will be received from the

company than is paid to it. It also will help

determine if the company is a legitimate

business opportunity or merely uses the

“business opportunity” as a ruse to get

participants to buy products – with few real

customers outside the network of

participants. NOTE: Because only

participants recruited in the past three

years are counted, the percentage payout

is unusually low, even for an MLM. This is

because the early entrants, who joined at or

near the beginning of the recruitment chain

and who are harvesting a disproportionate

portion of the commissions, are not

included in this figure.

5

Additional expenses would include any

“sales tools” sold by upline participants –

and normal operating expenses, such as

travel and telephone and Internet costs

6

Instead of reporting income by designated

payout levels (Blue Diamond, Diamond,

Ruby, etc.) these dollar categories make

possible comparisons between MLM

companies and make transparent the

income distribution that hitherto has been

obfuscated by complex compensation plans

that are difficult to compare. Note that the

breakdown of payments includes some

very high income levels. This is to validate

the claims of some MLM promoters of huge

incomes.

7

Listing persons who bought products but got

no payout from the company makes

transparent the persons who did not “qualify”

for commissions due to failure to buy (sell) a

minimum number of products in order to

qualify for commissions or to advance in the

scheme.

NOTE ON SIMPLICITY AND PRIVACY – Companies today use computers that

would make the processing of this information fast and relatively simple. It would

not be a burden for them and none to individual participants. And no person

would need to have his/her information associated with his/her name, so privacy

should be of no concern.

7-31

APPENDIX 7F: Network Marketing Payout Distribution Study – Letter to

Presidents of 60 Prominent MLM* Companies

May 13, 1999

ATTN: ___________, President

Company name & address

Dear Mr./Ms._____________:

For the past two years I have researched the field of network marketing (a.k.a. multi-level

marketing or ―MLM‖*) and have interviewed hundreds of people who had been involved in a

wide variety of programs. My research, while initially positive, uncovered more and more very

unsettling problems with MLM.

When speaking on the subject of MLM to local groups I have received much feedback from

participants and critics of MLM. One tax accountant who was a principal of H&R Block in northern

Utah stated that over the years he and his staff had prepared thousands of tax returns, and of the several

hundred of these who he knew had been involved in MLM, he could remember only one who had ever

reported a net profit on his return.

Though I already knew that the actual success stories were far less than one would be led to

believe from attending a typical MLM opportunity meeting, this tax man’s report was shocking

to those of us who heard it. So I called tax accountants and preparers in other areas to see if their

experience was the same. Each of them claimed similar experiences with their clients over the

years. Others who work with peoples’ money, such as certified financial planners, insurance

underwriters, and bankers, have relayed similar feedback.

I will soon be publishing this information for the benefit of consumers, educators,

legislators, and regulatory agencies who have an interest in this topic. The page that follows

presents the essence of my conclusions, which unfortunately are not favorable for the MLM

industry. So I felt it only fair to allow for rebuttal from you and others who may have an interest

in seeing a balanced treatment of the subject. So I am offering you that opportunity and the

format for doing so.

Your assistance in gathering objective information will be greatly appreciated. I am not

interested in anecdotal material, which may be no more valid than stories of persons who won a

lottery or a sweepstakes. And vigorous arguments to the contrary will not help – I believe I’ve

heard them all. What will carry weight is data which breaks down the distribution of payouts to

your distributors, extracted from your data base of distributors. The information you provide

must be verifiable by independent audit, as consumer protection agencies and legislators may

choose to validate this material. Following this letter are instructions for providing the

information.

You should be able to access this information readily from your database. However, if you

prefer not to provide this information because it won’t reflect well on your program, I can

certainly understand your reluctance. But such refusal will be interpreted to be an answer in

itself. I shall be looking forward to your response.

Appreciatively,

Jon M. Taylor, Ph.D., President

Consumer Awareness Institute

* Originally, ―NWM‖ (for network marketing) was used in the letters, instead of ―MLM‖ (rev. 6-30-06

Letter to MLM Presidents, page 2

7-32

Network marketing has wide appeal.

Network marketing (aka ―multi-level market-

ing,‖ or ―MLM‖ for short) offers the opportunity

for an individual to conduct a business without

having to bother with expensive resources such as

physical plant or retail storefront, warehousing,

employees, advertising, or other costs typically

associated with running a business.

MLM promoters claim that with MLM, large

(leveraged) incomes can be produced by

recruiting a downline (network) of multiple layers

of distributors upon which a distributor can draw

commissions and bonuses, the amount depending

on the type of compensation plan and the size and

character of one’s ―downline.‖ Such an

organization can be built from one’s own home

without the expenses and complications typically

associated with other types of businesses.

MLM promoters claim that MLM offers not

only financial independence with minimal

investment, but a level playing field in which

anyone can participate, regardless of sex, age,

education, or financial resources. Other

advantages include the social benefits and

recognition of building one’s own organization

and the backing of a MLM company that provides

the products and infrastructure necessary for

success.

Network marketing poses problems for

most participants, resulting from

pyramidal concept, motivation, and effects.

When the Federal Trade Commission ruled

in 1979 that Amway was not an illegal pyramid

scheme—mainly because legitimate products

were offered, the floodgates were opened and

multi-level marketing programs began to

proliferate. But what is often ignored is the fact

that MLM programs are still pyramid schemes,

modified by a variety of compensation systems

that change the character of the pyramid, but not

the essential pyramidal concept, motivation,

and effects.

The pyramid concept in MLM is seen in

multiple layers of distributors, with lower level

distributors contributing income to an ―upline‖

who may have little to do with a given sale. This

is distinguished from the typical retail scenario in

which a retailer may get two or three times the

return per sale as the wholesaler, whereas with

MLM the upline distributor may get as much or

more of a return per sale (in commissions and

bonuses paid by the company) as the front line

distributor who actually sells the product.

Because MLM compensation systems reward

front line distributors only a small commission

(usually less than 10% - not counting assumed

resale of expensive products at retail markup) for

selling products, recruiting to gain income from

downline distributors is vital to earning a

significant income. This is distinguished from

other direct sales programs, in which the person

selling and servicing the product typically is paid

commissions from the company of from 20% to

50% of the sale – enough incentive to concentrate

on the end user as a valued customer.

The motivation of most MLM is the

opportunity to make large amounts of income

for a minimal investment of time and money.

One of the primary appeals of MLM is the

concept (touted at MLM opportunity meetings) of

―time freedom‖ or ―leveraged income,‖ which

allows a person to gain an income flow from the

efforts of others without having to work directly

for one’s own income. But because of MLM

compensation systems, this requires success at

recruiting a downline, more than on selling the

products directly.

Critics complain that many MLM distributors

place too much emphasis on the ―opportunity‖ as

opposed to the product, thus blurring the

distinction between the product and the

opportunity. As I mentioned, this can be

accounted for by the reward structure of MLM

compensation systems, which benefits primarily

top upline distributors – who may receive

extremely large commissions from their aggregate

downline. An inordinate appeal to greed often

becomes the primary motivation.

A most troubling aspect of MLM is its

effects on people. Because the compensation

plans are heavily weighted to reward upline

distributors for their recruitment efforts and

because of the pyramidal nature of these

systems, extraordinary income differentials are

created between upline and downline

distributors. In fact, after deducting expenses for

building and maintaining a network, only a tiny

fraction of MLM distributors ever report a

positive income on their income taxes.

Letter to MLM Presidents, page 3

7-33

And if products purchased from the company (that

likely would not have been purchased were they

not participants in the program) are subtracted, far

less than one out of 100 distributors earns more

than a minimum wage for their efforts. A high

percentage of distributors lose money – much

higher than most other legitimate business and

income pursuits.

Careful examination of most MLM

programs reveals a pattern of exorbitant

incomes accruing to relatively few top

distributors at the expense of hundreds and

even thousands of downline distributors who –

even with diligent effort – come away empty-

handed. In this respect MLM is akin to illegal

(no-product) pyramid schemes.

It is interesting to compare the odds of

success of MLM schemes with legalized gambling

in Nevada. It appears that on average one could do

better at most any of the gaming tables or slot

machines in Las Vegas – without investing all that

time and placing valued relationships at risk.

Some zealous MLM distributors will

mortgage their homes or max out their credit cards

(buying MLM products and other expenses) to

finance their ambition to achieve top levels in

their organization—which is seldom achieved.

Others focus so much on recruiting to meet

escalating volume requirements for higher

distributor levels that they ignore the needs of

spouse and family members.

Sometimes the recruiting practices of MLM

distributors are deceptive and overbearing. Often

MLM distributors will alienate friends and family

members they endeavor to recruit for what seems

to them a self-centered pursuit of a vaporous

dream.

Summary and invitation for rebuttal

In summary, with network marketing, what

appears on the surface to be a fair and enabling

marketing system for participants is in reality a

pyramid scheme with characteristics of concept,

motivation, and effects similar to those of clearly

illegal no-product pyramid schemes.

You are invited to prove me wrong—at

least for your company. This can best be done

by providing full disclosure on payout

distribution to your distributors on the

attached form. For the purposes of this study,

this information must be broken down by

percentiles, not by distributor level.

Please note that I am not asking you to reveal

sensitive information, such as individual

distributor incomes or even your annual profits,

which you may wish to keep confidential. It is

average payout to distributors by percentiles (as

indicated on the attached form) that will satisfy

the objectives of this study for the benefit of

consumers.

Please also note that I am offering two

options for your response – an easy one (Option

A) and a more

comprehensive one (Option B). It is assumed that

Option A could be competed quickly and easily

from your existing accounting system. Option B

requires a more extensive breakdown, but

would offer to those interested more conclusive

evidence that your company does or does not

base its compensation to distributors on a

pyramidal structure, as discussed above. For

the purposes of this study, Option B would be

much preferred, if you can return such data to

us within a month or so.

We are not making any assumptions about

how much effort was put into any given MLM

program or compensation system, as it relates

to success of failure of any specific distributor

or program. So it is important that all

participants in your MLM program for the

year be included, even those who only bought a

distributor starter kit or set of samples—

whether or not they have done anything with it.

Please mail completed form to:

Network Marketing Payout Distribution Study

Consumer Awareness Institute

Letter to Presidents of 60 Prominent MLMs, page 4

OPTION A: Distribution of Payout to Distributors for the Most Recent Fiscal Year

Beginning____________ and Ending ___________

Company name______________________ Address______________________________________________________

City, state, zip__________________________________ Contact person_________________ Tel. no. (_____)_______

Please check ( ) one:

___a. We are willing to provide the information below and have it made available to the public.

___b. We are providing the information below with the understanding that it may be used for compiling industry statistics

but not identified with our company in published reports.

___c. We are not willing to provide the information requested. We realize that in refusing to do so we may be tacitly

conceding the conclusions drawn in the preliminary two-page report, entitled, ―Network Marketing Payout Distribution

Study.‖

If you are interested in receiving information on the completed report when it is done, please check here_____

(This research report is to be sold for a reasonable price—yet to be determined—to recover costs.)

Important instructions: For purposes of analysis, distributors are to be broken down by distributor payout percentiles, not

company-established distributor levels. Also, it is important that every person who has enrolled as a distributor (i.e.,

purchased starter kit or samples, or signed a distributor agreement) be included in these statistics, including those who have

not sold anything or quit, even after one day.

Average net payout*

Average total company Less: average total per distributor – deduct

Percentile break- payout per distributor dollar amount per total products & services

down in payouts (all commissions and distributor of distributors purchased

to distributors Total number of all bonuses paid by the purchases of goods from your company,

(by percentile, not of your distributors company, but excluding and services from total commissions

distributor level) at this payout level retail margins) from your company you paid them

Top 1/10 of

the top 1%

of distributors _________________ $____________________ $_______________ $________________

Bottom 9/10 of

the top 1%

of distributors _________________ $____________________ $_______________ $________________

Next 9/10 of

the top 10%

of distributors

(the 2nd to the

10th percentiles) _________________ $_____________________ $_______________ $________________

Bottom 90%

of distributors ___________________ $_____________________ $_______________ $________________

(Total 100%)

*It is recognized that net income reported here does not take into account operating costs to distributors for conducting their

MLM business. Such costs may include, travel, postage and shipping, long distance and other telephone costs, advertising,

rental of meeting rooms and/or office space, fees for company conferences or retreats, supplies, sales materials, and other

expenses.

Letter to Presidents of 60 Prominent MLMs, page 5

OPTION B: Distribution of Payout to Distributors for the Most Recent Fiscal Year

Beginning____________ and Ending ___________

Company name_______________________ Address_______________________________________________

City, state, zip_______________________________Contact person_______________Tel. no. (____)________

Please check ( ) one:

___a. We are willing to provide the information below and have it made available to the public.

___b. We are providing the information below with the understanding that it may be used for compiling industry

statistics but not identified with our company in published reports.

___c. We are not willing to provide the information requested. We realize that in refusing to do so we may be

tacitly conceding the conclusions drawn in the preliminary two-page report, entitled, ―Network Marketing

Payout Distribution Study.‖

If you are interested in receiving information on the completed report when it is done, please check here_____

(This research report is to be sold for a reasonable price—yet to be determined—to recover costs.)

Important instructions: For purposes of analysis, distributors are to be broken down by distributor payout

percentiles, not company-established distributor levels. Also, it is important that every person who has enrolled

as a distributor (i.e., purchased starter kit or samples, or signed a distributor agreement) be included in these

statistics, including those who have not sold anything or quit, even after one day.

Average net payout*

Aver. total company Less: average total per distrib. – deduct

Percentile break- payout per distrib. dollar amount per total products & services

down in payouts all commissions and distributor of distrib’s purchased

to distributors Total no. of all bonuses paid by the purchases of goods from your company,

(by percentile, not of your distrib’s company –excluding and services from from total comis-

distributor level) at this payout level retail margins) your company sions you paid them

Top 1/10 of