When I was taken to court in 2005 by a multi-level marketing company which was annoyed at my mentioning that the Federal Court of Australia had found them to be operating an illegal pyramid scheme, I had to prepare an extensive affidavit in reply. As part of that affidavit I had to put down some thoughts about why I don't like multi-level marketing schemes. This is what I wrote. (I have retained the legalistic style of writing.)
I have always been suspicious of multi-level marketing schemes. In my view they almost never represent real business opportunities for participants at lower levels. There is thus a real need created on the part of participants to advance to the next level and this need can, in my view, almost lead to the same kinds of consequences as an addiction, with people becoming obsessive about the people-recruitment aspects of their "business" and the objective of advancing to a higher level to chase an ever attractive prospect of better returns. These views derive from what I see as the following classic elements of all such arrangements:
I would like to emphasise that the problem of financial viability applies to the people brought in at lower levels who are invariably led to believe that they are establishing independent commercial businesses. It does not necessarily apply to the organisations and corporations who construct and manage these schemes. These can be very sound businesses indeed. When Jay Van Andel, one of the founders of Amway, died earlier this year he was worth $US2.3 billion and was ranked as the 231st richest person in the world.
It is also necessary to point out that, despite what many people seem to think, a multi-level marketing scheme is not necessarily legally a "pyramid" scheme. The laws of various countries (in Australia, the Trade Practices Act 1974) set out definitions of what constitutes a pyramid scheme and companies generally try to stay within the boundaries set out in the law. They usually run into difficulties when addressing point "a" above as they attempt to increase the potential income of participants in the lower levels. One way is to increase the commission percentages as people get higher in the matrix (which is contrary to the practice in normal sales operations, where the highest commission goes to the person actually making the sale). Another is to pay bonuses based on the number of participants (either distributors or end customers) brought in through the participant's downline. Both of these approaches increase the problem mentioned in point "b" above and encourage participants to recruit to the scheme rather than find customers for the products. The second is the more dangerous for the sponsoring organisation, because one of the ways that the law defines pyramid selling is to consider the extent to which participants are induced to pay their entry fee on the prospect of recouping it by earning income based not on their own sales of the organisation's product or service but on the sales or recruitment activities of those that they recruit and all who come after them in that branch of the "tree".