The Mirage of Multilevel Marketing

Don't be surprised if a friend or acquaintance tries to sell you vitamins, herbs, homeopathic remedies, weight-loss powders, or other health-related products. Millions of Americans have signed up as distributors for multilevel companies that market such products from person to person. Often they have tried the products, concluded that they work, and become suppliers to support their habit.
Multilevel marketing (also called network marketing) is a form of direct sales in which independent distributors sell products, usually in their customers' home or by telephone. In theory, distributors can make money not only from their own sales but also from those of the people they recruit.
Becoming an MLM distributor is simple and requires no real knowledge of health or nutrition. Many people do so initially in order to buy their own products at a discount. For a small sum of money -- usually between $35 and $100 -- these companies sell a distributor kit that includes product literature, sales aids (such as a videotape or audiotape), price lists, order forms, and a detailed instructional manual. Most MLM companies publish a magazine or newsletter containing company news, philosophical essays, product information, success stories, and photographs of top salespeople. The application form is usually a single page that asks only for identifying information. Millions of Americans have signed up, including many physicians attracted by the idea that selling MLM products can offset losses attributable to managed care.
Questionable Financial Opportunity
Distributors can buy products "wholesale," sell them "retail," and recruit other distributors who can do the same. When enough distributors have been enrolled, the recruiter is eligible to collect a percentage of their sales. Companies suggest that this process provides a great money-making opportunity. However, it is unlikely that people who don't join during the first few months of operation or become one of the early distributors in their community can build enough of a sales pyramid to do well. And many who stock up on products to meet sales goals get stuck with unsold products that cost thousands of dollars. This strategy -- referred to as "front-end loading" -- is promoted with claims that it will push the new distributor to higher bonus and/or leadership levels quickly. Some companies permit direct ordering of their products, which avoids this problem. In July 1999, the National Association of Attorneys General announced that complaints about multilevel marketing and pyramid schemes were tenth on their list of consumer complaints.
An Amway Corporation report indicates that the vast majority of its distributors make very little money. Amway's 1998 "Business Review" tabulates figures gathered from April 1994 through March 1995 from distributors who attempted to make a retail sale, presented the Sales and Marketing Plan, received bonus money, or attended a company or distributor meeting in the month surveyed. The average "gross income" for these "active distributors" was $88 per month. The report defines "gross income" as the amount received from retail sales minus cost of products, plus any bonus. It does not take any business expenses into account. If this figure includes purchases for personal use, the potential profit would, of course, be less. The report also notes that "approximately 41% of all distributors of record were found to be active."
Dubious Health Claims
More than a hundred multilevel companies are marketing health-related products. Most claim that their products are effective for preventing or treating disease. A few companies merely suggest that people will feel better, look better, or have more energy if they supplement their diet with extra nutrients. When clear-cut therapeutic claims are made in product literature, the company is an easy target for government enforcement action. Some companies run this risk, hoping that the government won't take action until their customer base is well established. Other companies make no claims in their literature but rely on testimonials, encouraging people to try their products and credit them for any improvement that occurs.
Most multilevel companies tell distributors not to make claims for the products except for those found in company literature. (That way the company can deny responsibility for what distributors do.) However, many companies hold sales meetings at which people are encouraged to tell their story to the others in attendance. Some companies sponsor telephone conference calls during which leading distributors describe their financial success, give sales tips, and describe their personal experiences with the products. Testimonials also may be published in company magazines, audiotapes or videotapes. Testimonial claims can trigger enforcement action, but since it is time-consuming to collect evidence of their use, government agencies seldom bother to do so.
Government enforcement action against multilevel companies has not been vigorous. These companies are usually left alone unless their promotions become so conspicuous and their sales volume so great that an agency feels compelled to intervene. Even then, few interventions have substantial impact once a company is well established.
Dubious Promotions
During the past 15 years, I have collected information on more than 100 multilevel companies marketing health products. Here are some examples of improper marketing activities:
Body Wise International, of Carlsbad, California, markets "fitness" products and weight-management products. In 1995 the FTC charged the company with making unsubstantiated claims that Cardio Wise was "designed to give an extra margin of insurance against heart disease" and that its weight-management products would foster weight loss without dieting. The company signed an FTC consent agreement prohibiting it from making unsubstantiated health-related claims in the future.
At one time, Mary Kay, well known for its cosmetic products, marketed a $29.50-per-month daily supplement packet alleged "to help bridge the gap between what a healthy diet provides and what a woman needs for optimum health and beauty." Tufts University Diet & Nutrition Letter observed: (1) the supplements contain huge amounts of thiamin, riboflavin, vitamin B6, and vitamin B12, which almost all Americans get from their food; (2) they lack iron, which might benefit some women of childbearing age; and (3) more rationally formulated multivitamin/mineral preparations are available elsewhere for one tenth the cost.
In 1993, Melaleuca Inc., of Idaho Falls, Idaho, began offering a "wellness assessment" by a company that provided in-home testing. The procedure included a questionnaire, a blood cholesterol test, a blood-pressure reading, and an estimate of the percentage of body fat. The resultant report evaluated personal risk factors and recommends modifications in diet, exercise habits, and lifestyle. The recommendations include taking a "balanced vitamin/mineral supplement every day" and "working closely with a 'Vitality for Life counselor' (a Melaleuca distributor) to implement the suggested changes. Prospects were then encouraged to purchase a "Vitality Pack" of "55 different vitamins, minerals, and other nutrients, all in the proper amounts and proper proportions," which wholesales for $263.40 for an annual supply. Although the health-risk appraisal could provide useful information, the Vitality Pack is a waste of money. People who wish to take a multivitamin/multimineral formula can obtain equivalent nutrients at a drugstore for less than $50 per year. The company also marketed a patented "fat conversion activity bar," an expensive candy bar whose ingredients are claimed to make exercise easier by "inhibiting the body's ability to hold on to fat."
Matol Botanical International, a Canadian firm, markets Km, a foul-tasting extract of 14 common herbs. Km was originally marketed as Matol, which was claimed to be effective for ailments ranging from arthritis to cancer, as well as for rejuvenation. Canada's Health Protection Branch took action that resulted in an order for the company to advertise only the product name, price, and contents. In 1988 the FDA attempted to block importation of Matol into the United States. However, the company evaded the ban by adding an ingredient and changing the product's name. The product literature acknowledges that Km has never been tested for effectiveness against any disease and states that distributors should not diagnose or recommend its products for any specific disease. However, many distributors do so
Nature's Sunshine Products, of Spanish Fork, Utah, markets herbs, vitamins, other nutritional supplements, homeopathic remedies, skin and hair-care products, water treatment systems, cooking utensils, and a weight-loss plan. Its more than 400 products include many that are claimed to "nourish" or "support" various body organs. Its salespeople, dubbed "Natural Health Counselors," are taught to use iridology (a bogus diagnostic procedure in which the eyes are examined), applied kinesiology (a bogus muscle-testing procedure), and other dubious methods to convince people that they need the products.
Nu Skin International, Inc., of Provo, Utah, sells body-care products and dietary supplements. Nu Skin's Interior Design division markets expensive antioxidant, phytochemical, and "active enzyme" products. The enzyme products are said to be important because "the majority of cooked or processed foods we eat lack an ideal level of enzyme activity" needed for digestion. This statement is nonsense because the enzymes needed for digestion are made by the body's digestive organs. In 1993, the company and three of its distributors agreed to pay a total of $1,225,000 to settle FTC charges that they made unsubstantiated claims for Nutriol Hair Fitness Preparation and two skin-care products. In 1997, the company agreed to pay $1.5 million to settle charges that it had made unsubstantiated claims for five more of its products. The products, which contained chromium picolinate and L-carnitine were falsely claimed to reduce fat, increase metabolism, and preserve or build muscle.
Sunrider Corporation, of Torrance, California, claims that its herbal concoctions can help "regenerate" the body. Although some ingredients can exert pharmacologic effects on the body, there is little evidence they can cure major diseases or that Sunrider distributors are qualified to advise people about how to use them properly. During the mid-1980s the FDA ordered Sunrider to stop making health claims for several of its products. In 1989, the company signed a consent agreement to pay $175,000 to the state of California and to stop representing that its products have any effect on disease or medical conditions. The company toned down its literature but continued to make therapeutic claims in testimonial tapes included in its distributor kits. In 1992 a jury in Phoenix, Arizona, concluded that Sunrider had violated Arizona's racketeering laws and awarded $650,000 to a woman who claimed she had been misled by company representations and had become ill after using some of its products. On January 7, 1997, The Wall Street Journal reported that Sunrider's president Tei-Fu Chen and his wife Oi-Lin Chen were indicted for conspiracy, tax evasion, and smuggling. The article stated that they had (1) underreported their 1987-90 income by more than $125 million, (2) used foreign companies they controlled to overcharge Sunrider for ingredients so the company could understate its profits, (3) wired millions of dollars to pay the inflated charges, but "recycled" the money to purchase U.S. real estate and Chinese antiques, and (4) filed falsely low customs declarations to reduce the import duty on dozens of art works. In September 1997, the Chens and the company pled guilty to tax and customs frauds. Mr. Chen was sentenced to two years in federal prison, to be followed by two years of supervised release including six months of home detention. Mrs. Chen was sentenced to two years probation, including six months of home detention. The financial penalties totaled $99.8 million. The Corporation was fined $500,000 for filing a false tax return for 1989. Mr. Chen agreed to pay the Customs Service $4 million to avoid forfeiting antique items that had been seized. In related actions, the Chens had paid the Internal Revenue Service $93 million in back taxes, interest, and penalties, and paid the Customs Service $2.3 million in additional duties. In 1998, the FDA issued a warning letter citing manufacturing violations and stating that it was illegal for the company to market "spray vitamins" as dietary supplements.
Motivation: Powerful but Misguided
The "success" of network marketing lies in the enthusiasm of its participants. Most people who think they have been helped by an unorthodox method enjoy sharing their success stories with their friends. People who give such testimonials are usually motivated by a sincere wish to help their fellow humans. Since people tend to believe what others tell them about personal experiences, testimonials can be powerful persuaders.
Perhaps the trickiest misconception about quackery is that personal experience is the best way to tell whether something works. When someone feels better after having used a product or procedure, it is natural to give credit to whatever was done. However, this is unwise. Most ailments are self-limiting, and even incurable conditions can have sufficient day-to-day variation to enable bogus methods to gain large followings. In addition, taking action often produces temporary relief of symptoms (a placebo effect). For these reasons, scientific experimentation is almost always necessary to establish whether health methods are really effective. Instead of testing their products, multilevel companies urge customers to try them and credit them if they feel better. Some products are popular because they contain caffeine, ephedrine (a stimulant), valerian (a tranquilizer), or other substances that produce mood-altering effects.
Another factor in gaining devotees is the emotional impact of group activities. Imagine, for example, that you have been feeling lonely, bored, depressed or tired. One day a friend tells you that "improving your nutrition" can help you feel better. After selling you some products, the friend inquires regularly to find out how you are doing. You seem to feel somewhat better. From time to time you are invited to interesting lectures where you meet people like yourself. Then you are asked to become a distributor. This keep you busy, raises your income, and provides an easy way to approach old friends and make new ones -- all in an atmosphere of enthusiasm. Some of your customers express gratitude, giving you a feeling of accomplishment. People who increase their income, their social horizons, or their self-esteem can get a psychological boost that not only can improve their mood but also may alleviate emotionally-based symptoms.
Multilevel companies refer to this process as "sharing" and suggest that everyone involved is a "winner." That simply isn't true. The entire process is built on a foundation of deception. The main winners are the company's owners and the small percentage of distributors who become sales leaders. The losers are millions of Americans who waste money and absorb the misinformation.
Do you think multilevel participants are qualified to judge whether prospective customers need supplements -- or medical care? Even though curative claims are forbidden by the written policies of each company, the sales process encourages customers to experiment with self-treatment. It may also promote distrust of legitimate health professionals and their treatment methods.
Some people would argue that the apparent benefits of "believing" in the products outweigh the risks involved. Do you think that people need false beliefs in order to feel healthy or succeed in life? Would you like to believe that something can help you when in fact it is worthless? Should our society support an industry that is trying to mislead us? Can't Americans do something better with the billion or more dollars being wasted each year on multilevel "health" products?
Physician Involvement
During the past few years, many physicians have begun selling health-related multilevel products to patients in their offices. The companies most involved appear to be Amway, Body Wise, Nu Skin (Interior Design), and Rexall. Doctors are typically recruited with promises that the extra income will replace income lost to managed care. In June 1999, the AMA House of Delegates approved ethical guidelines emphasizing that physicians should not coerce patients to purchase health-related products or recruit them to participate in marketing programs in which the physician personally benefits, financially or otherwise, from the efforts of their patients. The guidelines clearly frown on doctors profiting from the sale of health-related nonprescription products such as dietary supplements.
Recommendations
Consumers would be wise to avoid health-related multilevel products altogether. Those that have nutritional value (such as vitamins and low-cholesterol foods) are invariably overpriced and may be unnecessary as well. Those promoted as remedies are either unproven, bogus, or intended for conditions that are unsuitable for self-medication.
Government agencies should police the multilevel marketplace aggressively, using undercover investigators and filing criminal charges when wrongdoing is detected. People who feel they have been defrauded by MLM companies should file complaints with their state attorney general and with local FDA and FTC offices. A letter detailing the events may be sufficient to trigger an investigation; and the more complaints received, the more likely that corrective action will be taken. If you possess a distributor kit that you no longer need, I would be pleased to add it to my collection. If you would like to help Quackwatch gather information on MLM companies on the Internet, click here.