I’m what’s known as a “skeptic”. Skepticism has been defined as “the process of applying reason and critical thinking to determine validity”1. As such, I don’t believe in things like ghosts, astrology, homeopathy, or supernatural beings. Show me some solid evidence then I’ll change my mind. Skepticism though, suffers from the same flaws as any other reasoning system – if you start with incorrect assumptions, or your “facts” are wrong, then you’ll almost certainly come to false conclusions.
Alas that’s something I often see happen with many “skeptics” and the world of multi-level marketing. They have little knowledge of the area, and they unfortunately tend to start their application of reason and critical thinking from a position of false assumption, often based on cursory internet research. It’s no surprise then that they finish with false conclusions. If you want to apply reason and critical thinking to an area, the first thing you need to do is collate facts.
One of the most popular “skeptical” resources on the internet is a website (also now a book) by Robert Todd Carroll known as The Skeptic’s Dictionary. Bob Carroll has two articles that relate to Amway, once is titled Amway® (Quixtar®) (Team of Destiny®) (TEAM®) (Network 21) and the other is multi-level marketing (a.k.a. network marketing & referral marketing). Both are full misrepresentations and display a shockingly poor understanding of the business model and how it functions. How has Carroll managed to write such poor articles? Simple – false assumptions and poor research.
Let’s start by looking at his sources, to understand where he’s getting his information. In the MLM article he cites the following sources as “additional reading” –
- Fitzpatrick, Robert L. and Joyce Reynolds. False Profits – Seeking Financial and Spiritual Deliverance in Multi-Level Marketing and Pyramid Schemes (Charlotte, N.C.: Herald Press, 1997). See my review of this book.
- Klebniov, Paul. “The Power of Positive Inspiration,” Forbes, December 9, 1991.
- Taylor J. M. 2011. The Case for and against Multilevel Marketing: The Complete Guide to Understanding and Countering the Effects of Endless Chain Selling and Product-based Pyramid Schemes. Consumer Awareness Institute.
That’s two self-published books by two self-promoted MLM “experts” (FitzPatrick & Taylor), both of whom earn a living attacking MLM and have been rejected by mainstream academics and most legal authorities. His other source – a journalist. That’s it! That’s his sourcing and recommended reading! He doesn’t reference probably the seminal historical work on multi-level marketing, Professor Nicole Woolsey Biggart’s (1998) Charismatic Capitalism: Direct Selling Organizations in America. He doesn’t reference Professor Dominique Xardel’s (1993) book The Direct Selling Revolution: Understanding the Growth of the Amway Corporation. Nor does he mention Professor Charles W. King’s book, The New Professionals: The Rise of Network Marketing As the Next Major Profession. No mention of peer-reviewed published papers like Peterson & Wotruba (1996) What is Direct Selling? – Definition, Perspectives, and Research Agenda or Albaum & Peterson (2011) Multilevel (network) marketing: An objective view. Nor does he reference any of the other nearly 100 academic works on network and multilevel marketing that I’ve so far been able to collect.
No, he completely ignores all of that work, instead apparently basing his articles on one news article and, frankly, a couple of internet crackpots.
I spent years as a research scientist at world class University. A large part of my job was collecting, collating and assessing previous research so we could get an understanding of the existing knowledge in the particular area we were studying. Alas, we’d often find a lot of research, even peer-reviewed published research, was poorly done and unusable. I wonder how much effort Mr Carroll put in to evaluating the sources he uses? What’s their quality? What’s their credibility? In the case of FitzPatrick and Taylor, that’s worth entire article (or two!) in itself, so for now, let’s go back to Carroll’s article on Multi-level marketing. I’m going to cite each section and comment on it. This makes for a lengthy post, but Carroll covers many of the same absurd claims that other MLM critics espouse, so it’s worth doing.
Carroll: The idea behind multi-level marketing (MLM) is simple. Imagine you have a product to sell. A common MLM product is some sort of panacea, such as a vitamin or mineral supplement.
Yes, “wellness” products are common in multilevel marketing – making up around a quarter of sales. According to the Direct Selling Association though, fully 73% of sales are in other areas, with Home & family care, durables, personal care, services, clothing, leisure, and education materials all coming under the direct sales/MLM umbrella.2 In other words the vast majority of MLM is not “vitamin or mineral supplements”.
Carroll: You could do what most businesses do: either sell it directly to consumers or find others who will buy your product from you and sell it to other people. MLM schemes require that you recruit people not only to buy and sell your product, but who will also recruit people who will not only buy and sell your product but also recruit people….ad infinitum. Only there never is an infinitum to move towards.
No Bob, this isn’t true. First of all, no MLM that I’m aware of “requires” you to recruit people. Secondly there is no more “ad infinitum” in the MLM world than there is in any other business. You can go and buy widget X from some manufacturer, and resell it someone, who can resell it to someone, who can resell it to someone ad infinitum! You can recruit as many resellers as you want, and so can those resellers. Does that happen? No, of course not! There are natural limits to resale of a product, just like there is in MLM. Indeed, when the FTC investigated Amway in the 1970s, clearing it of being a pyramid scheme, they discovered that the number of “middlemen” layers in Amway was much the same or less than traditional distribution systems.3
Carroll: This may seem unusual to traditional business people. Why, you might wonder would you recruit people to compete with you? For, isn’t that what you are doing when you recruit people to sell the same products you are selling? MLM magic will convince you that it is reasonable to recruit competitors because they won’t really be competitors since you will get a cut of their profits.
I’ve covered this silly canard about recruiting competitors before. No Bob, as a member of “traditional business people” I can assure you I don’t find this odd at all. This is exactly what other companies do when they recruit wholesalers and retailers to resell the product. In my town there are Coca-Cola machines owned by Coca-Cola. If I buy from them, I’m buying direct from Coca-Cola. I can also go to the local supermarket and buy Coca-Cola. The local supermarket is in competition with Coca-Cola to sell me a Coke. Why would Coca-Cola do that?!?! They’re recruiting competitors! Do you find that absurd? I doubt you do. Companies recruit “competitors” all the time. The idea is that the decrease in profit margin is made up for by the increase in sales volume, so your overall profit increases.
Carroll: This will take your mind off the fact that no matter how big your town or market, it is finite. The well will go dry soon enough.
Mr Carroll here indicates he appears to be completely ignorant of how MLM works, and indeed some of the advantages of MLM. Nobody is restricted to their own “town or market”. When I started my Amway business, I, obviously, started in my home town. It grew, and I have personally introduced people in 7 countries and many more towns. Because of the low startup costs, the handling of logistics by the parent companies, and the lack of need for major infrastructure, MLM reps are not restricted to their home towns.
Having said that, will “the well” go “dry soon enough”? More than 30 years ago the FTC investigated the exact claim. What did they find?
The preponderance of the evidence in the record does not support the allegation of ‘saturation.’ (Findings (Findings 14852)) From my observation of the demeanor, inconsistencies and uncertainties in the testimony of the witnesses called in support of the complaint in this regard, I believe the reason for their failure was more accurately described by a marketing expert who testified about this subject (Patty, Tr. 3109): ‘I think generally speaking when a saleman tells you that a market is saturated, he has become discouraged for some reason, usually he is simply not making the sale effort that is required.’ 
Carroll: There will always be some distributors who will make money in an MLM scheme. The majority, however, must fail due to the intrinsic nature of all pyramid schemes.
Carroll let’s slip the entire flaw in his “reasoning” here. He hasn’t mention “pyramid schemes” before in the article at all. Now he mentions it as if it and MLM are interchangeable terms. He is stating from the basis of believing that all MLMs are pyramid schemes, and then assigning the very real flaws of pyramid schemes to Multi-level Marketing. It appears that not only is Carroll ignorant of all of the academic work addressing multi-level marketing, he is ignorant of seminal legal cases like FTC vs Amway. Here’s some quick quotes from the decision for Mr Carroll’s edification –
- The Amway Sales and Marketing Plan is not a pyramid plan
- Specifically, we have determined that the Amway Sales and Marketing Plan is not an illegal ‘pyramid scheme’
- It is not a pyramid sales plan
- The Amway Sales and Marketing Plan, not being a ‘pyramid’ plan, has not led to any significant difficulty in recruiting new distributors.
Several years of research, and hundreds of witnesses and affidavits went in to the FTC decision. It was published more than 30 years ago. It is cited in virtually every legal case and peer-reviewed published work on the topic. Yet Mr Carroll appears to be completely ignorant of it’s findings. Perhaps he’s just confused? Perhaps he doesn’t believe Amway is a Multilevel Marketing Company? No, later in the article he states “the most successful MLM scheme is Amway”.
So Carroll believes Amway is an MLM, and that MLMs are pyramid schemes. Perhaps he feels he’s discovered some flaws in MLM that the FTC didn’t address? Here’s a direct quote of one of the complaints assessed –
- Complaint counsel argue that the Amway Sales and Marketing Plan is inherently unlawful because it is ‘a scheme to pyramid distributors upon ever increasing numbers of other distributors.’ They argue that the Amway Plan, even without actual proof of economic failure, is ‘doomed to failure’ and contains an ‘intolerable potential to deceive.’
- it is alleged that the Amway Sales and Marketing Plan is inherently deceptive, as it holds out the promise of ‘substantial income . . . as a result of . . . sales activities from . . . endless chain recruiting activities’; this is essentially a way of saying that the Amway Plan is an illegal pyramid scheme.
These are precisely the kind of claims Carroll is making. Claims dismissed, after a thorough investigation, nearly four decades ago.
Carroll: Multi-level marketing is system of marketing which puts more emphasis upon the recruiting of distributors than on the selling of products. As such, it is intrinsically flawed.
This is nonsensical. The entire purpose of recruiting distributors is to sell products. If you recruit a million distributors in to Amway, and nobody buys any products, how much money do you make? ZERO.
Carroll: MLM is very attractive, however, because it sells hope and appears to be outside the mainstream of business as usual. It promises wealth and independence to all.
Where does “MLM” promise that? This is nothing but a straw man. Any evidence for this assertion, Carroll?
Carroll: Unfortunately, no matter what the product, MLM is doomed to produce more failures than successes. For every MLM distributor who makes a decent living or even a decent supplemental income, there are at least ten who do little more than buy products and promotional materials, costing them much more than they will ever earn as an MLM agent.
Firstly, this is a non sequitur. His claims about “failure rates” does not logically lead to the conclusion he begins with. Secondly, his claims don’t seem to be supported by any evidence. Analysis by an independent expert for the Pokorny et.al vs Quixtar class action settlement estimated that only between 13% and 18% of all Quixtar (now Amway) IBOs over a 9 year period had even $100 in expenses for “business support materials”. That’s not monthly or yearly – that’s total. Yet according to Amway’s income disclosure, the 54% they categorise as “active” (which doesn’t mean they’re actively building a business) earned an average of over $2400/yr, not including the very substantial yearly bonuses. Furthermore, when the independent class administrators contacted over 97% of former Quixtar/Amway distributors from a nearly 10 year period, and offered them compensation if they lost money (without any proof required) only 3% submitted claims.
His scenario might be mathematically possible, with some convoluted set of data, but I’d like to see some supporting evidence!
Secondly, he seems to believe that MLM earning should be covering products costs. That’s a reasonable belief, if they’re a business expense. But how many are? If you purchase products for resale and can’t sell them, you can return them for a refund, so no expense there. If you purchase them for personal use, then they’re not a business expense. The only business expenses would be samples and demo stock – yet the BERR vs Amway UK case revealed to us that only 6% are retailing – so very few have that expense.
So let’s summarise some know facts –
- Less than 18% have even $100 in “promotional material” expenses
- 6% or less have product related business expenses.
- 54% are earning bonuses exceeding an average of $2400/yr, not counting yearly bonuses or retail customer profit
- when offered compensation for losses running an Amway/Quixtar business, only 3% claimed it.
These are known facts.
Carroll’s conclusion, based on who knows what: There are 10 times more people losing money than making money.
Evidence please, Mr Carroll.
Carroll: The most successful MLM scheme is Amway. It has millions of distributors worldwide with sales in the billions. At the turn of the century, the average Amway distributor earned about $700 a year in sales, but spent about $1,000 a year on Amway products.
I’m not quite sure where Carroll apparently gets this data from. He cites a 1991 Forbes article by Paul Klebniov (that’s quite a few years before the turn of the century,) that says – “the average distributor in the US will net around $780 a year in bonuses and markups from selling Amway products. But in addition to the products the distributor sells to others, he will also consume, on average, $1,068 worth of Amway goods himself.”
Ok, so the distributor has made $780+ in bonuses, and purchased Amway products at a saving of nearly $300. Is that supposed to be a bad thing? Well it might be, if, like Carroll seems to believe (and Klebniov seems to imply) buying products for your own personal use is somehow a business expense. If they tried that with the IRS they’d be guilty of fraud! Speaking of fraud, or at least, illegal behaviour, Carroll republishes the entire Klebniov article on his website, which is a clear violation of Forbes copyright if he doesn’t have permission.
That’s only partially true. Active distributors, trying to build a network, may have these expenses – however the vast majority are not active. Data from the FTC vs Amway and TEAM vs Quixtar court cases tell us that less than 1 in 4 ever try sponsoring other people. The BERR vs Amway UK case tells us only 6% are engaging in retailing. The Pokorny class action settlement reveals somewhere less than 18% have even $100 in business support material expenses, and only 3% claim losses.
The evidence clear points to one conclusion – the vast majority of registered Amway “distributors” are not actively trying to build businesses, they are merely customers of the products, and as such their purchases are a source of profit for the active distributors.
For additional anecodtal support – ask anyone who has built any kind of significantly sized Amway business. They’ll tell you the vast, vast majority are not trying to build a business and earn an income. Why MLM critics refuse to accept this simple and obvious fact is beyond me.
Carroll: The reason MLM schemes cannot succeed is because MLM marketing is, in essence, a legal pyramid scheme.
This is just completely absurd. The first known implementation of multilevel marketing was by Mytinger and Casselberry with the products from the California Vitamin Company in 1941.4 That operation became Nutrilite and eventually grew in to today’s Amway corporation. The same basic MLM plan has been in operation for well over 70 years and last year generated sales of nearly $12 billion dollars. If that’s “cannot succeed”, then Robert Carroll has a very interesting definition of “succeed”!
Carroll then claims it’s a “legal pyramid scheme”. Pyramid schemes are illegal. There are no “legal pyramid schemes”. You may as well say “MLM is an legal illegal scheme”. It’s nonsensical.
Carroll: The basic idea is for a sales person to recruit more sales persons. This is very advantageous to those who own the company and supply the products, especially since the sales persons in MLMs are also customers. But it is puzzling why a sales person would think it is to his or her advantage to increase the number of competing sales persons.
Now we’re back to the absurd assertion that it’s “puzzling” that people would want to profit from wholesale sales.
Carroll: This is not to say there is no benefit to MLM membership. You get certain tax write-offs. You get to buy products, some of which you will be happy with.
“Some of which” you will be happy with? Why would you buy them if you’re not happy with them? Furthermore, unlike most of the retail world, most MLMs offer satisfaction guarantees. If you’re not happy with them, then you can return them for a refund.
Carroll:You get to go to inspirational meetings, some of which will make you feel good. You may meet new friends and you may even make a few bucks. But more than likely you will end up alienating some family and friends.
Any evidence Carroll? Or just more blanket assertions? Brody et.al. (2004) Public Perceptions of Direct Selling: An International Perspective found that 58% of encounters with direct sellers were with family or friends, and that “people who have already had dealings with direct sellers have very positive perceptions regarding direct selling”. In the US, 98% of respondents said they would buy again from a direct seller, and 94% would recommend it to others. And just to be clear, the majority of the sample had not ever been direct sellers, and just under 99% of direct sellers use MLM.
Carroll: You will probably end up buying more stuff than you sell.
Yes, probably, because if you’re an “average” person who registers with an MLM, you’re not trying to sell, you’re just buying stuff for personal use.
Carroll: You will probably end up buying more stuff than you sell. And you will learn a lot about deceiving yourself and others. You won’t be allowed to tell anyone how you are really doing, for example. You will always have to think positive, even if that means lying. You will have to tell anyone who asks that you are doing great, that business is wonderful, that you’ve never seen anything go so fast and bring you income so quickly, even if it isn’t true.
A bunch of silly unsupported (and indeed false) platitudes.
Carroll finishes by recommending a couple of self-published anti-mlm screeds. Documents that are probably the source of Carroll’s false beliefs about MLM, since he repeats many of the standard anti-mlm myths in his narrative.
Robert T. Carroll – you were lied to and misled. You have read and believed false information, and then uncritically repeated it to a larger audience, giving it credibility it does not deserve. That is not the way skepticism works.
Note: When I find the time I’ll update this article with further footnoting and sources.