Introduction

The Legal and Ethical Problems of MLMs and Existing Measures to Deal with them

Illegal Pyramid Schemes

Misrepresenting the Business Opportunity

Harming Customers

(Mis-)using Trust in Private Social Relations

Total Institutions: Colonizing Every Aspect of Distributors’ Lives

Understanding how MLMs Operate: A ‘Prevailing’ and an ‘Extended’ Model

The ‘Prevailing Model’ of MLMs

An Extended Model of MLMs

Why Legal and Ethical Problems Persist, Despite Exiting Countermeasures

Illegal Pyramid Schemes

Misrepresenting the Business Opportunity

Harming Customers

(Mis-)using Trust in Private Social Relations

Total Institutions: Colonizing Every Aspect of Members’ Lives

Summary of why Legal and Ethical Problems Persist, Despite Existing Countermeasures

Reflecting on Additional Countermeasures

Conclusion

References

Abstract

Multi-level marketing companies (MLMs) such as Amway, Herbalife, or Tupperware differ from most other companies. They market their products and services by means of self-employed distributors who typically work from home, sell products to end consumers, and recruit, motivate, and educate new distributors to do the same. Although the industry’s growth seems to illustrate the attractiveness of MLMs, the industry has been facing several legal and ethical problems. In this paper, we focus on these problems and argue that an extended MLM model may help us to understand why such problems continue to occur, despite the countermeasures that have been implemented. By explicating how problems relate to a specific but often overlooked characteristic of MLMs, i.e., the socalled distributor network, we provide an extended understanding of (a) MLMs’ mode of operation, (b) the sources of their legal and ethical problems, and (c) the reason that currently implemented and suggested countermeasures may not suffice. Moreover, based on our extended understanding of MLMs and their problems, we propose additional countermeasures.

Introduction

Multi-level marketing companies (MLMs) such as Avon, Amway, Herbalife, Mary Kay Cosmetics, Tupperware, and Vemma represent a growing industry worldwide (WFDSA 2016). In 2015, more than 103.3 million people around the world worked for MLMs, creating a retail turnover of approximately 183.7 bn US Dollars (for worldwide as well as regional numbers see WFDSA 2016). Typically, selfemployed, unsalaried, and independent MLM distributors are entitled to earn money in two ways (Brodie et al. 2004). First, by selling company products ‘directly’ to consumers, i.e., on a ‘face-to-face [basis] … away from a fixed retail location’ (Peterson and Wotruba 1996, p. 2). Typical products and services sold to non-members (‘ultimate consumers’) are, for example, cosmetics, energy supply, food storage products, insurances, jewelry, loans, nutritional supplements, phone contracts, and wine (DSN 2012). Making money this way is characteristic for so-called ‘direct selling organizations’—to which MLMs belong. A second way for MLM distributors to earn money is by recruiting, training, and motivating new distributors, and building a so-called ‘downline’ of members (Brodie et al. 2002). When downline members buy products from the company or recruit new members to do the same, the recruiters (the ‘upline’) earn override commissions on the product purchases of their downline. This results in a ‘hierarchy of recruiters/sellers’ which is distinctive of MLMs. Almost all direct selling organizations employ this ‘multi-level marketing’ structure (DSN 2012), which means that almost all direct selling organizations are also MLMs.