Multi-level marketing: the misapplication of social capital

It’s not what you know – it’s who you know.

“Social capital” refers to the economic benefits an individual possesses based on the contents of a person’s social networks. You could think of it as an aspect of human capital – beyond the knowledge and skills a person possesses  the nature of a person’s relationships further impacts their human capital. Attending an Ivy League school creates a level of social capital from networking with others – even if an individual were not from a privileged background, the connections formed there will pay out greatly later in life.

Multi-level marketing (MLM) abuses the concept of social capital by focusing on network marketing. Rather than using your social networks as a way of gaining meaningful knowledge and opportunities, your connections are treated as an overt route to profit: sell to the people you know (rather than the general public seeking goods) and recruit them to sell to their networks.

pyramid

MLM and pyramid schemes have a fine distinction. A pyramid scheme, long outlawed for its deceptive nature, does not involve any actual goods or services – just recruitment of more people. The concept is simple: you pay to join an organization, with the promise to recruit more, who will then pay you their membership dues. Only those at the top ultimately profit, as the scheme collapses as soon as you run out of gullible people.  (Image from the U.S. Securities and Exchange Commission description of pyramid schemes.)

MLM is different in that there’s actually a product.  Scentsy, Herbalife, Pampered Chef, Ambit Energy, Advocare, JuicePlus, Avon, Mary Kay – and so many more – actually offer products that have generated consumer interest.  However, each of these operates under the same model: a person sells a product to a person, intertwining questions about if the would-be customer would like to make more money by becoming a distributor themselves.  The recruiter then earns a commission from those they recruit, who are in turn selling to their network and hopefully recruiting more… sound familiar?  It plays on the altruism of friends; if I buy a product that I’m on the fence about, my friend also benefits – so that could be the tipping point for my purchase. Katherine Chen over at OrgTheory has more on the mechanics of how these organizations work. Generally, becoming a distributor requires a buy-in of some kind: a starting kit to create your own events to then recruit your own team.  Many at the lowest levels never recoup their initial investment, though for others, the products gained in the starting kit are sufficiently valuable that the cost is hardly noticed. 

Is participating in a MLM organization a good avenue for part-time employment?  Some people do seem to make money from it – certain products have enough of a following that there is legitimate consumer demand.  Some Mary Kay and Pampered Chef products some to mind, though I wonder why they haven’t just earned themselves a place in a conventional store or specialty shop in a mall rather than relying on direct sales. However, most people lose money. (1, 2, 3, 4.)    You additionally have the issue of market saturation; if you get in early, you have much better chances of making money, but over time, everyone has all the kitchen products they desire or already has a contact for cosmetics. You’ll see a cycle of saturation and collapse, until a new person enters or a new demand for products appears.  The cold economic issues are diminished when the distributors view their business as a means to create social interaction, but ultimately it cheapens what networking and community are about by introducing the economic element.

MLM organizations take advantage of social networks, but not in a way which contributes to the value of relationships.  Rather than connections existing for mutual goals of networking and communication, they are treated as one-way avenues of profit.

FTC Bureau of Consumer Protection

Michigan Attorney General – Consumer Alert 

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