Ep. 3 - The First Truth: What is Multi-Level Marketing?
"Business opportunity?" "Full time pay for part time work?" We have clarified in our first two episodes that MLMs are not direct selling. So what are they?
Listen to full episode :
Possible unfamiliar terms:
quota: a sales target that a company wants a salesperson or sales team to achieve for a specific period
capital: The capital of a business is the money it has available to pay for its day-to-day operations and to fund its future growth.
social capital (definition specific to MLM): a structure where members can access and mobilize both strong and weak social ties to gain customers and recruits (Strong social ties are what Robert describes as “friends and family.” Weak social ties may be dropping into the DMs of people who are barely acquaintances on Facebook.)
saturation: It means there is no possibility of any significant number of the recruits to lure in enough new people into their “downlines” in order to become “profitable” (get some of the money their recruits lose). Teachers and parents, if you want to learn more about MLM-related saturation, here is an article from Robert’s site. Saturation Reality and the Myth of MLM “Growth”
trademark: In the context of this lesson, trademark means what MLM is known for. What identifies MLM.
Lesson Ideas:
When preparing for this lesson, you may want to consider presenting your students with a question, scenario/dilemma, or image to prepare them for the context of the lecture, also known as the anticipatory set. Below are some examples.
Question for partner discussion:
From what you have learned so far in Lessons 1 and 2, would you recommend multi-level marketing to anyone or would you try it yourself? Why or why not?
Scenario:
Read the Indian fable, A Grain of Rice, and have students fill out the Excel spreadsheet provided with this link or do it together as a class: Grain of Rice
Image for Notice and Wonder discussion:
One option is to use the image below by itself to spark discussion before Robert’s lecture. Another option is to share this image after the students read the fable Grain of Rice. You could also choose to cover the words on the image until after the discussion or even until after Robert’s lecture. Students can guess what is covered.
This image could also be used instead as an exit slip at the end of class. Students could notice and wonder in writing and cite some of Robert’s points from the lecture or explain how the image relates to his lecture. It may help to provide students with the transcript of the episode.
You could choose to simplify the exit ticket to the student writing a Question, Quote (from Robert’s lecture), or Comment about the image below.
Note taking during Robert’s lecture:
Below are links regarding sketch notes and one pagers from the Now Spark Creativity website by Betsy Potash.
Discussion Ideas for after Robert’s lesson:
You could display the image above and have a whole class discussion, or provide groups with the image to discuss.
Here are two discussion structures from The Cult of Pedagogy Podcast/ Episode 28 to use when students discuss the image and/or Robert’s lecture. I chose these two since they are relatively low prep and they set up primarily the students to share their opinions and do the talking and thinking.
Socratic Seminar/Socratic Circle - In this case, the texts could be the transcripts from Episode 1, 2 and 3. Follow the link for more about this structure that is very common in middle school, high school, and college classrooms.
Philosophical Chairs - There are many variations to this discussion structure. Follow the link for more ideas. Podcaster Jennifer Gonzalez calls the following version of Philosophical Chairs This or That. The teacher can ask the class a question related to Robert’s lesson that can be agreed with or not agreed with and then students move to the part of the room that matches their opinion about that question. There can be a “hot seat” set up in each spot for students one at a time to share their evidence, opinions, etc. You could have an Agree and a Disagree area in the classroom or, as Jennifer Gonzalez shares in her podcast episode, a continuum from Strongly Agree to Strongly Disagree.
Links for Robert and Melissa:
Robert’s book: Ponzinomics
Robert’s Website: Pyramid Scheme Alert
Melissa’s Podcast: The Teacher As...Podcast
Transcript:
Melissa Milner 0:16
Welcome to Ponzinomics 101. I'm Melissa Milner. I'm a 30 year veteran teacher and host of The Teacher As... Podcast.
Robert FitzPatrick 0:24
And I'm Robert Fitzpatrick, author of the book Ponzinomics, the Untold Story of Multi-Level Marketing.
Melissa Milner 0:31
We are hosting Ponzinomics 101, a monthly educational podcast, for anyone who would like to learn more about multi-level marketing and why it should be avoided.
Robert FitzPatrick 0:41
We hope this podcast will be a resource for teachers and parents and provide valuable information that is not currently being taught in our public schools, colleges and universities.
Melissa Milner 0:54
If you are a teacher who has created lessons about MLMs, and you're willing to share your work with other teachers, please go to our website, ponzinomics101.com to contact us. If we get enough lessons from teachers, we may start a Teacher Resources tab on our site to share the great work we are all doing. In addition, if you use Robert's lessons from this podcast in your classroom, or with your own child, and you might have even tweaked his lesson, we would love to hear from you to know what you did with the lesson and how it went.
Robert FitzPatrick 1:27
The best defense is awareness. Be informed, think, question everything, and keep your mind engaged.
Melissa Milner 1:37
Lesson three will be useful and valuable on one condition. That condition is to maintain an open, unqualified inquiry of what MLM really is. This means setting aside any earlier beliefs or impressions, or what MLM recruiters have told you. It means examining MLM as if you don't know what it is. The only thing you do know from the last two lessons is that it's not direct selling. In the last two sessions, we used the definition of direct selling provided by the US Federal Trade Commission and then we examined the Seven Basic Requirements for Profit in Direct Selling. MLM failed all seven. If you have not listened to Episode One and Two, please go back and check them out before listening to this episode. It will make a lot more sense.
Melissa Milner 2:34
So, one teaching tip would be you could choose to leave Roberts lecture for the end of the class. Of course, leaving enough time for students to take notes and do the work they need to do as they listen. I do recommend that especially this episode, this lesson, that students listen on their own devices instead of listening whole class because some may want to investigate the math that Robert talks about. Some may want to do sketch notes. Others might want to do one pagers, but this way they can pause and take in the information and maybe rewind and listen again to certain parts that are confusing to them. This is good differentiation, not all students can listen and comprehend at the same pace or take notes at the same pace. The point of doing the lecture at the end is wanting to prime the students for the context of the lecture. So being able to show a visual and have a notice and wonder type of discussion. Having students look at an image. I've seen a lot of them on Google, and I'll provide some on the episode three page on the ponzinomics101.com website, images of a pyramid scheme, but with words taken out. So it won't say pyramid scheme on it, but it might show that lower level where there's a lot more people, it might show a dollar amount and then the level above that dollar amount is bigger and on up and they just notice. They can talk in little groups. What do you wonder about this? And then because they've listened to Episode One and Two, you could say, "Do you feel that this is possibly an image that matches a direct selling model? Do you feel this is an image that matches a multilevel marketing model?" From what they've learned so far? You could also say, "Is this an image that matches perhaps a Walmart model?" Once they have that context? Also, that's one idea is a visual image. The other is you could pose a like a question, open ended question that you think might get students talking, you could pose a dilemma. Once you as the teacher has listened to the lesson, you'll have a better idea of whether you want to use a visual or a open ended question or if you want to pose a problem or a dilemma related to the lecture, so that when the students listen to the lecture, they have that context. The other idea is providing scratch paper for the math, because I know there'll be students that will want to do out the math that Robert's talking about and figure it out. I'll provide some discussion ideas, different strategies on the Episode Three page as well. So I hope that's helpful. Here's Robert with if not direct selling, what is multi-level marketing.
Robert FitzPatrick 5:37
In this session, we're going to take MLM apart, dissect it and examine the components that every MLM in the world has. These are the universal elements that when assembled together, define MLM and show us what it is. There are four. They consist of one an endless chain, which includes a non diminishing market, infinite expansion and unlimited income promise. Second element is a pay to play characteristic. This includes entry fees, purchase quotas, computer costs, marketing costs, education costs, and those expenses by the participants constitute most of the scheme's revenue. Then there's a recruiting mandate, no recruiting, no reward. And finally, there is the mechanism for moving the money inside the scheme, which is called an extreme money transfer. More in total is paid per transaction to the people at the very top than to those that actually generate the payments. This type of pay formula is called top loaded. Let's look at each of these that when linked together and working together define MLMs... all MLMs from the oldest to the newest, and no matter what product they sell, or what country they operate in.
Robert FitzPatrick 7:10
So the first, the endless chain, this is the most important and most famous MLM characteristic. In fact, MLM is the only business in the world that is based on it. Yet few people think about what it means. The endless chain refers to MLMs claim to be able to expand its recruiting chain with money from the last recruit, flowing back to the first forever. Every person is told they have exactly the same opportunity as the very first person did. This means, for sales, there is no saturation, markets do not diminish. There is no limit to the number of recruits or customers in any area on any street or neighborhood. This also means that competition does not limit expansion. Neither does demand or consumer need for products. Expansion is not even limited by the prices MLMs actually charge for the goods. How could this be possible? McDonald's and Starbucks expand, but managers know there is definitely a limit to how many stores can survive in any one area. In MLM, there is no limit. No other business on Earth makes such a claim for infinite expansion as MLM does. All MLM income claims or references to wealth, luxury, steady income, passive income, money while you sleep and so on. All of that is based on the claim that MLM can expand forever, and every recruit can gain unlimited income from the ever expanding recruiting chain. The recruiting chain, not personal sales, is the foundation of the MLM model and its claim to be an income opportunity or, as it is often claimed, the greatest income opportunity in the world. Beyond taking note that the endless chain defies the laws and rules of markets, competition, and even physical reality, there is one more key to examining MLMs unlimited opportunity. The endless chain, which is the basis for the income promise has a design, a shape and a proportion. It requires that nearly all must be at the bottom. In the typical example, where one person recruits five who each get five more, each person would theoretically produce a total chain of 3,905 new recruits, just within the first five recruiting levels. One gets five, who get 25, who get 125, who get 625, who through recruit 3125. Add them together, that's 3,905. Each would, in theory, get a bonus from the payments of all those below. However, those in the bottom level would get no bonus at all, because, well, they have no others below them. That bottom level includes 3,125 of the total of 3,905 or 80% of the total. The next level consists of 625 people, which is another 16% of the total, they would also gain nothing or nearly nothing, because each member of that rank has only five others below them. Profit would only begin perhaps at the next level above, in which each would have 30 in their respective downlines. No matter how long the chain operates, or how many places or countries it expands to the bottom levels always contain more than 90% of the total, meaning that the vast majority are doomed by the design of the chain. This will never change. Only the few at the very top can benefit from an endless chain.
Robert FitzPatrick 11:47
Number two: pay to play. All MLMs require payment to join, payment to renew and quotas of purchases, or recruiting or both to gain override payments from your own recruits. But why? You have no protected territory. You cannot use media advertising. You don't have the benefit of company advertising or sales leads. The company keeps adding more and more salespeople in your area and encouraging you to recruit your own competitors. You cost the company nothing. You pay for your own marketing materials. You paid fees for motivation events, even business cards. On the other hand, you have severe restrictions, you can't sell your products on eBay or in a store. Why then are quota purchases imposed on salespeople themselves. As the other parts are fitted with the endless chain and the pay to play. The answer will become clear. Keep this part of the inquiry in mind. If retailing, that is direct selling are not profitable, where does the MLM company and the top level recruiters get their money. In reality, the purchases and sign up and renewal fees are only part of the payments and may be the smallest part. Additional cash may be expended for recruiting leads, travel, hotel, registration for motivation events, software, and processing and handling charges all paid to the MLM or the upline recruiters and the highest cost of all is not in dollars. The recommendation to recruit friends and family means expending precious social capital based on love, trust and shared experience. These will be cashed in to persuade and enroll.
Robert FitzPatrick 13:59
Number three: recruiting mandate. Now no one needs a PhD to know this one. All MLM recruits figure it out in a matter of days. To gain the promised income in MLM we'd have to recruit others who must do the same. Selling person to person, one at a time, at a marked up retail price is not feasible in the era of eBay, Amazon and Costco as we already saw. Selling online when 1000s of others are selling exactly the same products at the same pricing is similarly fruitless. Trying to develop customers while the company keeps adding competitors and offering your customers the wholesale price as a preferred customer or a discount buyer is also a waste of time and money. MLM may be called direct selling, but in reality, it's all about recruiting. If you don't recruit, you don't make money. The endless chain income based on five recruiting 25, who recruit 125, who recruit 625, etc, only works if you recruit the first five, and all of them do too. But now we are at the third universal characteristic. We can begin to fit the pieces together. We already know that it is impossible for everyone to recruit more people forever. And we already saw that the chain, no matter how large or how long it operates, always places over 90% at the bottom where there are no bonuses. The endless chain is the dynamic model. The fuel for the chain is money from the purchases and fees of the people on the chain, not the public at large. There is no money for anyone on the chain, unless the new recruit finds more new recruits. If recruiting stops, the MLM collapses... immediately. Recruiting generates the money, and the money comes from the recruits. But the latest recruits are always at the bottom, where over 90% cannot be profitable. So what happens next? What happens to all those recruits who can't be profitable based on their bottom position on the chain, and only a tiny few at the top can ever be profitable. The next universal characteristic completes the picture and also reveals the outcome and fate of all those new recruits.
Robert FitzPatrick 16:42
Number four: extreme money transfer. The endless chain is MLMs trademark, leading to its electrifying promise of unlimited income for all. The recruiting mandate is MLMs most notable trait showing up constantly on social media, and in awkward encounters with friends and family who say they want to share an exciting opportunity. Pay to play, requiring constant monthly purchases and other costs, is the one that causes most people to finally quit, almost everyone does quit within a year or so. But the last trait, extreme money transfer, is the one that causes the most confusion and leaves the losers believing they personally failed. The money transfer, which people don't understand, effectively guarantees that the newest recruits must fail and will soon quit without realizing what happened to them. Extreme money transfer involves the seemingly incomprehensible MLM compensation plan. The plan that people are told is the formula that creates quote, "wealth beyond imagination." It is MLMs special recipe. When MLM was first invented, the business was even called multi-level marketing, it was called simply "The Plan" referring to MLMs unique pay formula. Those who ask, "But how exactly do I get paid?" are directed to MLM websites where they encounter a bedazzling array of charts, rates, titles, rules and points. Most people's eyes finally glaze over after trying to trace the commissions, rules, and purchase quotas for as many as twelve or more levels. People end up blaming themselves for not understanding. In fact, no one gets it nor could they. There are too many variables. However, you don't have to solve the complicated math formulas. The main features are on the surface. If you know where to look, it works like this. As we saw earlier, the most important requirement in direct selling is that the person making the sale gets most of the profit on each sale with much smaller rates paid to upper managers. In the MLM plan, the opposite occurs. The formula assigns more of the money in extreme to the levels above than it does to the one that does the recruiting. This can be seen by just adding up the percentages assigned to each upper level. It results in more than 50% of the total payouts always going to the top 1% It can be as high as 70 to 80% of the total payout. The majority below that top 1% gain nothing at all because they fail to qualify according to the mystifying Pay Plan rules. In some cases, over 95% of all the so called salespeople receive no bonuses at all, zero. Now, we can begin to see how the components work together to define MLM. Recruiting a downline is the way to make bonus money, everyone on the chain makes purchases to qualify for bonuses. Bonuses to the upline come from the purchases and work of the download. The top weighted plan transfers most of the payments from the bottom who pay and make purchases, that's the pay to play, to recruiters, that's the recruiting mandate and owners at the peak of the pyramid. On a recruiting chain that is said to expand forever without end, the endless chain. What determines each person's pay on the chain is the total amount of purchase volume of those below them. The larger the downline, and the more they work and buy, the more per transaction is transferred directly to those at the top. That's the extreme money transfer.
Robert FitzPatrick 21:26
We stated at the start of this lesson that we would maintain an open inquiry without even giving the MLM system a name. We set aside the direct selling identity, after it failed every test for what is required for successful and profitable direct selling. So what do we now call MLM after examining its for structural components. Endless recruiting chain is not sustainable and places most people at the bottom where they earn nothing. Pay to play with fees and quota purchases generated by those inside the chain providing the money. Recruiting required to gain money from later recruits. And then a formula that transfers most of the money from bottom directly to the top. The answer is obvious. MLM is a pyramid scheme.
Robert FitzPatrick 22:27
More teaching ideas for this lesson are available on ponzinomics101.com on the Episode Three page. In future sessions, we examine the realities of a pyramid scheme. How do they operate? How does MLM perfectly fit the definition of a pyramid scheme? We will look further at how MLMs convince people this pyramid scheme could be their pathway, their only pathway, to the American Dream. And then we will look at what happens personally, socially, and financially to those who get involved with MLM. Thank you for listening. Please remember to check us out on Twitter, Facebook and Instagram at ponzinomics101.com and check out our website www.ponzinomics.com We hope you spread the word about this podcast because the best defense is awareness. Thanks for listening.