Jon M. Taylor, MBA, Ph.D., offers consulting services for attorneys, financial advisers, regulators, and others who confront problems dealing multi-level marketing and other endless chain recruitment schemes, as well as with direct selling and other alternative income models. He has served as consultant and expert witness in a variety of federal and state cases. He has the most extensive research background related to these fields and offers his extensive research and experience online as well as for a wide variety of clients.
Dr. Taylor tells how he developed his expertise and interest in MLM, or product-based pyramid schemes
Shortly after receiving my MBA degree, I worked on the administrative staff at two universities and taught on business and consumer topics as an adjunct instructor. Later, to perform research, provide financial planning tools, and to educate the general public on consumer issues, I founded the Consumer Awareness Institute (CAI), a non-profit research and education corporation. With the help of ad hoc assistants, we published financial planning tools and taught seminars nationwide on both consumer and management topics.
Having taught college classes in finance, entrepreneurship, and ethics, and having been a successful salesman and entrepreneur, I was skeptical of chain selling schemes labeled as “network marketing” or “MLM.” However, under pressure from respected friends to join various MLM programs in 1994, I decided to do a one-year test of a leading MLM to prove to myself and to others whether or not MLM was a legitimate business model. Though I became successful at recruiting and climbing the ladder of distributors (top 1% if you count ALL distributors — not just “active” ones), I was still losing money. It became apparent that to earn the huge income that was promised, I would have to be at or near the top of the pyramid — which I believed was possible. However, my wife threatened to leave me if I continued, as my aggressive recruiting was affecting our most treasured relationships and (she said) changing for the worse the man she married. So after carefully considering my situation, I quit MLM and decided to tell the world about what I had learned.
I wrote and published the book The Network Marketing Game, which exposed the ethical problems of exploiting friends and family for personal gain. While on a speaking tour promoting the book, I got feedback from tax accountants who asked why — with all the promises of MLM promoters of “residual income” — they were not seeing profits reported on tax returns of MLM participants. I decided to interview other tax professionals — almost 300 of them over a period of several years. I also interviewed programmers of tax software and persons involved in seminars for tax professionals. With a total of over two million tax returns represented, a clear picture emerged of who was making money in MLM — the TOPP’s (top of the pyramid promoters), at the expense of huge downlines of participants/victims who lost money.
I performed a thorough analysis of unique features of MLM and pyramid schemes and compared them with features of legitimate businesses with which MLM is often compared. Having taught entrepreneurship, sponsored an Income Opportunity Show, researched an (unpublished) Income Opportunity Directory, and experienced first hand the difference between a variety of marketing-intensive businesses and then MLM, I was able to make some clear distinctions missed by other analysts. In fact, I had not only done direct selling (which MLM adherents now claim they are doing), but had recruited, hired, and trained sales persons — so I knew what characterized legitimate direct selling. After months of comparative analysis and discussions with top experts, five causative and defining characteristics, or “red flags” became apparent that (1) caused the harm or extraordinarily high loss rates, and (2)clearly distinguished chain or pyramid selling schemes from legitimate direct selling businesses.
These features, which could be identified in the compensation plans of MLM programs, clearly contributed to huge aggregate losses by participants and helped to identify MLM’s that were in violation of laws in most states, as well as FTC guidelines. In fact, wherever I could get the earnings reports of participants in MLM’s with these “5 Red Flags” in their pay plan, approximately 99.9% of ALL recruits (including dropouts) lost money, after subtracting ALL expenses, including minimum operating expenses and “incentivized purchases” (needed to qualify for commissions or bonuses) of goods and services from the company. I called Nevada gambling casinos and learned that the odds of profiting from gaming tables in Las Vegas are far better. MLM’s even make obviously illegal no-product pyramid schemes look profitable in comparison. In fact, I found recruitment-driven MLMs, or product-based pyramid schemes (terms I coined to more accurately describe the MLM business model), to be the most harmful of all classes of pyramid schemes – by any measure, including loss rates, degree of leverage, aggregate losses, and number of victims.
All this was included in Chapter 1 of my e-book Multi-level Marketing Unmasked.”
From industry-wide research, I have identified over 100 typical misrepresentations or deceptive practices used in MLM recruitment campaigns. Taken together, they represent a giant con game. In fact, from my research if appears that the number of deceptions – and the number of people deceived – far exceed those of recent investment scandals, such as Enron, WorldCom, or even Madoffs’s infamous Ponzi scheme. Still, my communications with top MLM officials convinces me that few are aware of the extent of the inherent fraud in their respective schemes – and are in serious denial about the consequences for consumers.
Over a period of 20 years, I have analyzed over 600 MLM programs, and prepared numerous research reports and presentations for various law enforcement agencies and consumer advocates — and for consumers themselves. Many of these reports are posted on this web site, as well as on other websites promoting consumer awareness on these issues.