If you find it strange that your mother had parties to celebrate Tupperware or that your Facebook friend is trying to sell you steak knives, you're not alone. These are examples of multilevel marketing (MLM), a direct sales strategy in which members not only sell products but also encourage and recruit others to be sellers. Multilevel marketing strategies, from companies like Amway, Cutco, and Herbalife, are legal. Pyramid schemes, which are similar but don't usually involve selling products, are illegal.
Read on to find out more about the history behind the multilevel marketing industry and pyramid schemes.
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A 1979 FTC Case Against Amway Established Three MLM Guidelines
In 1975, when Amway was the giant of the direct sales industry, the Federal Trade Commission accused the company of being a pyramid scheme.
After four years of litigation, Amway's tactics weren't deemed illegal, but the judge did come up with three guidelines that Amway and other MLM companies had to continue following to operate legally:
1. Disclose distributors' average earnings.
2. Require distributors to sell "at least 70 percent of the total amount of products... bought during a given month" at wholesale or retail price (instead of just buying the products themselves to meet quotas).
3. Require that distributors "make not less than one sale at retail to each of 10 different customers that month" (again, to create an actual chain of commerce vs. one person buying everything).
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The First Multilevel Marketers Were Avon And Nutrilite In The 1920s And '30s
In 1878, David McConnell sold books door-to-door, mainly to women. When he realized his potential customers were more interested in the perfume he provided as a persuasive gift, he left the book biz and created the California Perfume Company in 1886.
McConnell hired women to sell the perfume, and sales went through the roof. In 1920, the company began to sell toiletries and cosmetics under the name Avon. By 1929, women were selling Avon door-to-door all over the US.
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The Man Who Started Amway Also Shaped Modern Politics
The late Richard DeVos, who made a fortune from his company Amway, donated millions and was an influential voice in US politics for more than 40 years. Amway is one of the original MLM companies, selling everything from household cleaning products to nutritional supplements through tiered direct sales.
DeVos, who died in 2018, was a strong supporter of conservative causes, including the Heritage Foundation, the Federalist Society, and Focus on the Family, and served as finance chairman of the Republican National Committee. Amway donated millions of dollars to Republican candidates.
His daughter-in-law, Betsy DeVos, was US Secretary of Education during the Donald Trump administration.
The DeVos family's net worth was an estimated $5.4 billion as of 2018.
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About 1 In 13 American Adults Have Participated In Multilevel Marketing
According to a 2018 study, 1 in 13 Americans has participated in an MLM company.
New MLM companies pop up constantly, promising vulnerable people success, wealth, and community. The allure of overnight success can capture just about anyone under the right circumstances.
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A Pyramid Scheme In One Country Might Be A Legal MLM Company In Another
MLM companies walk a very thin line between "business opportunity" and pyramid scheme. One company in particular, Herbalife, has faced numerous lawsuits alleging that the company intentionally deceived recruits.
The line gets thinner when MLM companies have international operations. As laws in different countries change, MLM tactics can quickly become punishable. In 2013, for example, the CEO of Amway India, William S. Pinckney, was detained for "luring people to invest" and for "illegal money circulation."
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Multilevel Marketers Use The Tactics And Practices Of Cults To Recruit Participants
Fewer than 1% of MLM members make a profit, and even less make a living wage selling their products. Still, millions of people join MLM companies every year, and millions make no money or even lose money yet stay loyal to the company.
Douglas M. Brooks, an attorney and researcher, presented a study at the annual conference for the International Cultic Studies Association in 2019 about the similarities between MLM companies and cults. Like cults, multilevel marketers recruit people by appealing to their emotions and vulnerabilities. They build trust; immerse members in a loving, accepting community; and promise that the work is important and life-changing.
Often, new members are encouraged to "cut negative people out of their lives," including concerned friends and family members who question their new business venture, leaving members even more in need of a community. The big earners, leaders, and company founders are rarely questioned.
Also similar to cults, multilevel marketers make it seem impossible to leave. Former MLM members have disclosed the barrage of texts they received every morning from their "up-line," or the MLM members who recruited them. MLM companies often offer weekly meetings, conferences, or outings with other members that create a real community. Members are pushed to keep hustling because success is right around the corner. It becomes harder and harder to admit defeat.