‘Multilevel Marketing’ Finds an Audience--and Critics

Internet veterans are all too familiar with the pattern: an e-mail session beginning with a message proclaiming that you too can earn hundreds of thousands of dollars selling potato cheese pirogi recipes.

Or, if dumplings don’t do it for you, there’s always the video “training tape” so effective that a 10-year-old can retire by the age of 12.

Bite into that pirogi, however, or take a gander at that tape, and you’ll find that these moneymaking miracles have remarkable similarities: They’ll claim to be examples of “multilevel marketing,” an increasingly pervasive direct-sales technique that tantalizes would-be entrepreneurs with jackpot dreams.

Denounced by its critics as a clever disguise for pyramid schemes, praised by its disciples as the last, best hope of capitalism, multilevel marketing--also known as “network marketing”--is thriving in cyberspace.

Like the Internet itself, multilevel marketing, or MLM, is a flourishing byproduct of the Information Age, connecting people via computers and telecommunications.

“There is an obvious synergy between the Internet and network marketing,” said Richard Poe, author of a series of books touting the wonders of MLM. “By its nature, network marketing is an industry designed for the 21st century. For people working out of their home, the Internet is relatively accessible and inexpensive--a perfect advertising vehicle.”

“It’s direct, quick and cheap,” added Joseph Ogden, spokesman for NuSkin International, a network marketing company that manufactures a line of skin-care products. “It’s both a way to communicate with our distributors and a recruiting tool to catch potential new distributors.”

Recruiting new distributors is the name of the MLM game. As the frequently-asked-question file for the bulletin board newsgroup alt.business.multi-level notes: “You get profit for any retail sales you make, plus you get a bonus on the sales made by people you enrolled into the company, and people they enrolled, and people THEY enrolled, and . . . by getting a small percentage of many people, your income can grow to a very large number.”

In MLM parlance, that network of distributors is called a “downline.” The fact that downlines are generally pyramid-shaped has led some critics to lambaste all MLM plans as pyramid scams. But there’s a key difference: Legitimate MLM companies sell actual products. Operators of pyramid schemes typically skim cash directly from new recruits.

Unfortunately for the reputation of the network marketing industry, a sizable portion of the junk e-mail that labels itself as MLM tends to fall in the scam category. Instead of pushing skin-care products or nutritional supplements, such advertisements seek to sell information about “foolproof turnkey business plans” and promise unrealistically high levels of monthly income.

Other warning signs include commissions for the recruitment of new distributors, and requiring would-be downline members to purchase inventory before being allowed to participate.

John Singer, an attorney with the Federal Trade Commission, said the number of such illegitimate online MLM scams has risen steadily over the last two years, “on pace with the overall growth of the Internet.”

The FTC now regularly schedules “surf days” on which it solicits reports of fraudulent advertisements and sends staff members out on the Net “to go look for MLM schemes and business opportunities that are too good to be true,” Singer said.

“Over the past year,” Singer said, “we’ve brought to court roughly half a dozen cases that are pyramid scams with an Internet aspect.”

Even if one discounts the fraud factor, critics of network marketing argue that most MLM companies fail, average distributor income is extremely low, and the basic business plans often require unrealistically high rates of growth.

But there is general agreement that the industry as a whole is surging forward. According to the Direct Selling Assn., a Washington-based lobbying group whose membership is dominated by MLM companies, gross revenues for the direct sales industry reached nearly $18 billion in 1995, up from $13 billion in 1991. Estimates of the size of the work force range from 5 million to 10 million.

“It’s a new feature in our lives,” said Robert Fitzpatrick, a critic of network marketing who recently co-wrote a book about the phenomenon: “False Profits: Seeking Financial and Spiritual Deliverance in Multi-Level Marketing and Pyramid Schemes.”

“The Internet has just provided another way to proselytize and promote MLM,” Fitzpatrick said. “The message in all of them is essentially the same. It’s not just get rich quick--it’s that the MLM system is a viable option for you. But you can’t really find out about the system until you participate, so it’s a sales pitch that’s custom-made for throwing out over the Internet.”

After all, there’s a reason the technique is called “network” marketing. The term, said Direct Selling Assn. spokeswoman Liz Doherty, “originally referred to a way of training salespeople to use their own personal networks in other contexts--your network of friends, college buddies and so on. These people could lead you to other people they know.”

Fitzpatrick said this creates a demeaning commercialization of personal relationships.

Good or bad, though, the appeal of e-mail and the Web are obvious.

“The Web generates a lot of leads for us,” said Donna Colson, a distributor of FreeLife nutritional products. “It’s a kind of validating media. If you’ve got a Web site and it looks good, then people are likely to take you more seriously.”

Colson also noted that it is significantly easier to communicate with her several thousand distributors via e-mail broadcasts than it is to call each one individually.

For network marketing evangelists like Richard Poe, focusing too closely on the Internet obscures the real reason for the rise of network marketing. The spread of personal computer technology and sophisticated telecommunication services has ushered in a whole new way of doing business, he said.

Before the arrival of the home computer, distributors were hard-pressed to handle as basic a task as calculating the intricate set of commissions owed to sales reps down the line. Additional services such as fax on demand, voicemail, cheap three-way conference calling, satellite broadcasting and the Internet “really make it easier for the rank and file to do the business,” Poe said.

“We wouldn’t be here without the personal computer,” said NuSkin’s Ogden, who noted that last year NuSkin unveiled NSI Online, a “complete package of Internet services” offering NuSkin’s 500,000 distributors a centralized location for ordering, product support and even the creation of personalized Web sites.

Still, some say there’s a limit to how far high-tech can take the network marketing industry.

“One of the things that characterizes direct selling is face-to-face contact with people,” Doherty said.

Sure, the Internet provides yet another medium for creating new personal connections, but it has also been widely criticized for facilitating impersonal, “virtual” relationships that aren’t solidly grounded.

Thus, on one level, said Fitzpatrick, online virtuality explains the endless flood of abusive junk e-mail. “You can do anything in an Internet relationship,” said Fitzpatrick, “because there is so little at stake.”

But, on the other hand, the Internet’s intrinsic non-face-to-face nature also poses problems for legitimate network marketers. After all, said FreeLife’s Colson, to make network marketing work, one must ensure that one’s downline distributors are effective salespeople.

“You need to train people one person at a time, and that takes time,” she said. “A lot of times people think they are going to be able to build their entire downline via the Internet. But you can’t just use the Internet. At some point you have to begin talking to them.”