The Recruitment Trap

Everybody is searching for ways to increase income. Unfortunately, MLMs often look like an easy way to start a business without taking on the cost of a traditional company. The pitch sounds simple. Buy the product, follow the plan, and put in the work. The numbers behind those promises often tell a different story.

Today’s guest, Stacie Bosley, has spent years studying what really happens inside MLMs. She is a professor at Hamline University in Minnesota and holds a Ph.D. in applied economics. Her research covers multi-level marketing, consumer protection, income claims, and pyramid scheme fraud. She has also served as an expert witness in cases involving the Federal Trade Commission and the Securities and Exchange Commission.

We talk about what separates an MLM from a pyramid scheme or a Ponzi scheme. Stacie explains why these opportunities attract smart and motivated people. We’ll learn about the role of recruitment including those hidden expenses and fake or misleading success stories. We also learn questions people should ask before investing their money and time in any business opportunity.

Show Notes:

• [01:03] Stacey explains how her background in applied economics led to research on multi-level marketing, pyramid schemes, and income misrepresentation.
• [03:22] Early experiences in rural Wisconsin and changes in retail and internet commerce sparked an interest in how people pursue business opportunities.
• [05:07] Pyramid schemes rely on a pay-and-recruit structure that mathematically leaves most participants with losses.
• [08:57] Adding a legitimate product does not change the underlying structure when profits still depend primarily on recruitment.
• [10:33] Ponzi schemes generally use investment language, while pyramid schemes tie a participant’s compensation directly to recruiting others.
• [12:38] Products, demographics, religious communities, and other affinity groups can shape how MLM opportunities are marketed.
• [16:17] Reward-responsive people may be attracted to the recognition, status, and sense of competence these opportunities promise.
• [19:47] Anyone considering an MLM should define what they hope to gain and examine their realistic chances of reaching that goal.
• [22:53] The appeal of a turnkey “business in a box” can cause people to skip the research they would normally do before starting a business.
• [25:32] Earnings often look far worse after product purchases, training costs, conference fees, and other expenses are deducted.
• [28:13] Companies making income claims have a responsibility to explain what participants typically earn and spend.
• [31:02] Disclaimers such as “results not typical” do little to correct exaggerated success stories or earnings claims.
• [34:08] MLM losses can affect finances, relationships, social connections, and a participant’s sense of personal worth.
• [37:12] Limited time, money, and energy can be diverted into opportunities that fail to improve a family’s financial situation.
• [40:03] A company may be operating as an MLM regardless of its chosen label if participants earn from the activity of recruited sellers.
• [42:22] Important questions include the typical startup cost, ongoing expenses, earnings, profitability, and participant retention.
• [44:23] Claims that unsuccessful participants simply quit or failed to work hard can be used to dismiss troubling outcome data.
• [46:12] Encouraging sellers to recruit their own competitors conflicts with basic principles of supply and demand.
• [48:03] A large number of local sellers may be presented as community support even though it can indicate market saturation.
• [49:47] Resources such as Stacey’s TED Talk, Truth in Advertising, and her published research can help people investigate these opportunities.
• [50:59] A reminder to look beyond the sales pitch and ask what people actually earn after expenses.

Thanks for joining us on Easy Prey. Be sure to subscribe to our podcast on iTunes and leave a nice review. 

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Transcript:

Stacie, thank you so much for coming on the podcast today.

Thanks for inviting me.

Looking forward to our conversation. Can you give myself and the audience a little bit of background about who you are and what you do?

Sure. My name is Stacie Bosley. I have a graduate degree in applied economics. I am someone who looks at economics, but also has usually an empirical component looking what actually happens in the world often through data. Right now, I'm a professor at Hamline University, have been here for many years, primarily teaching undergraduates.

I love that. Then I also, as part of that role, I study multi-level marketing, pyramid schemes to some degree, Ponzi schemes, and other forms of financial fraud. In that capacity, I have also worked as an expert witness in cases that involve issues of pyramid scheme fraud and also misrepresentations of income.

Was there a particular story or incident that got you involved in that sub-niche of economics?

It's interesting because I was a little bit of an unusual academic, and then I was part-time when my kids were little, and in grad school and my PhD, I had studied labor issues, in particular, labor mobility and how that affected low-skilled workers. I just was generally interested in the choices people made in labor markets and the consequences of some of those choices.

You're always looking for things that people haven't studied, which is sometimes it's hard to find that space, or you really feel like you can make a contribution. When I started my full-time academic career, I had to restart my research agenda because it had been 10 years since my PhD and I was like, “What could be a pocket that people really haven't looked at, but still is in that space of things that people engage in with their precious time and skills and energy and how that turns out for them?”

I had observed a couple of things growing up that had stuck with me. I lived in rural Wisconsin growing up, and we would buy makeup from our neighbors because there was literally no alternative. Sorry, I'm old enough where there was no Amazon, Walmart was a long way away if it existed at all at that time in our state. There's just one alternative, so it was normal commerce in that environment.

It made good, rational sense. Then in the '90s, I saw people getting involved in things like that, but also the retail landscape was changing and the economics of that was changing, but also the internet was burgeoning. Then all of a sudden, I saw people in my community trying out different things. In many cases, spending their life savings, pursuing rabbit holes that didn't pan out for them because they were looking for ways, again, to devote their time and energy to things that they thought would pay off more than the traditional blue-collar work or whatever that they had traditionally been working.

I saw some of those things go awry, and it was a pocket that very few people were paying attention to. When I started looking at, “Well, maybe I'm interested in labor almost in a subculture-type setting,” I realized that this was a really untapped area, which was both a really exciting, also a little difficult as an academic who both is an empirical economist, like finding good data and all that kind of thing. It took me a little bit to get my legs under me, but it has sunk its teeth in and it's a super fascinating area and I haven't turned back.

Can you tell us the difference between MLM, a pyramid scheme, and a Ponzi scheme, just so we know what the differences are, and I know they're often used interchangeably, but there are some nuances to the differences.

Yeah, for sure. When I talk about pyramid schemes, I like to remind people that there's actually a number of ways in which pyramid schemes can be presented to people. Sometimes in our current culture, people even, when I talk to people, they'll say, “MLM, oh, you mean pyramid scheme.” It's very useful to step back.

Pyramid schemes have this pay-and-recruit underlying structure. The way in which it operates is, again, you pay into the system in some form, often that might be at the time of joining, possibly also on a more of a recurring basis. But the way in which you arrive at some or purportedly will

arrive at some positive profit from that is to then recruit other people who will repeat those same actions, who will pay in and subsequently recruit others who will do the same.

The act of recruiting new people in is fundamentally tied to your ability to recover your own investment and potentially prosper. That creates what people sometimes call the endless chain. It's like that same proposition is made to each person who joins. That creates some of the mathematical problems that that's just not a structure. By design, that type of structure will leave the vast majority in losses just literally mathematically.

But that type of offer can appear to you in many ways. One way that you can imagine the good old-fashioned chain letter, where you would receive it and it would tell you to maybe put money in, send it to this person who maybe you don't even know—often you wouldn’t—and then you're supposed to send off six letters of the same type, and eventually you'll receive an envelope full of money.

The modern version of that is often called a blessing loom or something similar to that, or a gifting scheme where join, pay in your money, nothing else. Just go recruit two other people, four other people, six other people who will do that same thing, and eventually you'll be the one who's the recipient of those new funds. But you understand that you won't get paid unless that recruitment occurs behind you, and people are, again, paying into the system.

Oftentimes, it might come to you in a pure form like that. There was a recently one called Blessings in No Time, where the founders, they were pursued through civil charges, but also now criminally and were just sentenced to 40 years each. For doing this exact thing, pay in $1,400, recruit two other people who will do the same, and eventually you will be at the center of this, you will get blessed out, and you will get an 800% return.

Now, it can also be presented to you as a multi-level marketing opportunity. What does that look like? Well, then that means that there's also a product or service that's attached to this thing, and maybe instead of just paying in $1,400, you pay $1,400 and you receive cases of energy drink, and then you're supposed to keep paying, maybe often on a monthly basis, and maybe you sell some, maybe you don't.

But if it's operating as a pyramid, what the basic bones of it stay the same as the blessing loom, stay the same as the chain letter. That the basic bones are, look, the way that you are going to recover your own investment and potentially profit is to go find those extra people who will also buy, pay, and get their cases of energy drink. Never mind what happens to the energy drink, right?

It's not about the energy drink.

Right. Sometimes people will say, “Well, it means that it's a pyramid scheme.” If there's no real product or service, and for listeners, I'm using air quotes if you're not watching. Because the problem is that's just definitionally, that's not a good way to differentiate it. That energy drink I mentioned may be very consumable. You could drink it and it won't kill you and it may not even taste good. You can have a product or service, but if the bones of it remain the same as that blessing loom, remain the same as the chain letter, then it's really that pay-and-recruit structure that's underneath, right?

I often think of, like, if I could give people, like, X-ray vision, and they see the bones are really about pay and recruit, then it's a pyramid scheme. Again, if it's got a product, then it might be presented as a business opportunity. You have to really try to figure out what is the essence of this thing. Is it really about selling to customers? The energy drink, is that really what this is, the name of the game, or is it really about those bones of pay and recruit?

Sorry, that's a long-winded answer. There's more because we can also talk about the legal principles. There's something called the cost-got test that's used in cases, but that's the essence of it.

I think we missed out on the Ponzi scheme.

Yes. Ponzi schemes, one of the ways that I try to differentiate this at a high level is that in a Ponzi scheme, your payment is not functionally tied. You're not told that structurally, you need to recruit people in order to be paid. Now, in terms of the way that people in Ponzi schemes actually get paid, they often do get paid because new people join. The funds of new people are used to pay early people, and they're then what are called songbirds, right?

They're like, “Oh, I got paid. This is great.” But you're not required to bring people in. You're not told that structurally your payment or your profit is functionally connected to you recruiting other people. That's one major difference between Ponzi's impairments is that there's no structural connection between your compensation and your recruitment of new people.

Is it also Ponzi schemes are generally promoted more as an investment opportunity?  It's not, “Hey, you're building a business.” It's not, “You're going to be selling product.” It is, “Hey, give this expert investor some money and you're going to get a good return on your investment.”

It's true that Ponzi tend to have more investment-style language. I will say that there are schemes that I've seen or offerings that I've seen that live in that space that use investment language and use business-building language. Occasionally, they'll try to have their cake and eat it too. It's like, “Oh, this is an investment that yields these residual returns and you're going to get to live off this forever by doing some initial work. By the way, there's a product here and you're building your business.”

But you're right. I think more often, Ponzi's are described in investment language, and pyramids, especially those that present themselves as MLMs, are described more as active entrepreneurship, business-building type.

Is there a particular difference in the type of person that either are drawn to them or are targeted by these different plans or schemes?

Yeah. I think, and I'll speak to MLMs; there's many flavors. Like with a lot of things, in an MLM, there's a product and so a product or service. It can target, as with many businesses, have their target markets of stay-at-home moms who maybe want to have a side hustle and sell these leggings on the side. You could have a type of product that is perceived as financial education.

“We're going to teach you how to operate in crypto markets.” Then that tends to be aimed more at young men, for example. What we know about MLMs broadly is that they are female-dominated. A lot of times in the MLM space, in the US, it's around 75 percent of people that the trade group identifies as MLM participants are women. In other countries, it's more than that. But you definitely see different flavors based on often the product that they've chosen to put at the center of it.

If it's a muscle-building protein formula, it's going to target guys who go to the gym. If it's perfume or cosmetics, it's more likely to target women.

I will say also we've seen instances as in Ponzi's where there's also affinity groups that are at the heart of it. Maybe it has a particular religious orientation and really speaks of the language of religion and attempt. For example, I had one of the early MLMs that was determined to be a pyramid scheme that I analyzed was propagated by Protestant pastors.

So really use the language of religion and flew very quickly through white evangelical churches.

It can be also pitched based on these affinity groups that it might, because it spreads through interpersonal transactions. This is the way because recruitment is structurally part of the deal, whether you're actually talking about an MLM or an MLM that's really covering for a pyramid scheme. That's one of the things that's fascinated me most about this zone is that your job is not just to send a check.

Your job is to work this thing and to work it with often the people that are closest to you in your life. Or your warm or your cool connections. The soccer mom that's across the field that you go and talk to. But you aren't a passive participant in this. Structurally, you are propagating this because it's structurally part of what you are told to do. I just think it has some different dynamics because of that interpersonal recruitment component.

Is that potentially why women, like in your research, is that why women are drawn, I shouldn't say drawn, why MLMs are more predominantly woman-oriented is because women are, there is more of an interpersonal association there, or is there other reasons why like, “Hey, it's just, hey, you could do this while being a stay-at-home mom”? I can see kind of, it's not the fact that they're women, it's just someone who is looking for a little bit of extra time and that could be often a stay-at-home mom.

Yeah, right. It's a little bit hard to know. We've studied what the characteristics of people who are more attracted and it tends to be people who are very reward-responsive, who want to have signifiers of their success, who maybe have a more entrepreneurial mindset, but who are also often are trying to meet an unmet need. But also within the constraints of their existing life.

It's hard to say whether like, well, are they drawn to it because there's gendered products. It's cosmetics, it's things that women are naturally more willing to sell. Is it because they're more willing to reach out to their friends and it's in, and that's a little bit more culturally sort of accepted, or is it because they are filling gaps, they'd have more constraints? It's probably a bit of all of that.

Gotcha, and you mentioned reward-responsive. How would you identify reward-responsive people in your life or in yourself? Because if that makes you more prone to getting involved, it's like, OK, if I'm reward-responsive, how do I know that I'm reward-responsive?

Yeah, well, and there are some, like, kind of, standardized questions that people use to measure this. But part of it is that, and I think this gets to the appeal sometimes to women who are maybe partially or fully out of the labor force, is that we all seek recognition, right, in our lives and, of course, unpaid labor does not offer that often. People are often looking for ways to both maintain relationships, maintain some skill-building.

Especially if they're, again, partially or fully disconnected from the labor force, ways to, again, demonstrate competence. But in your own selves, I think it is useful to kind of think, and this actually gets to a broader question of, like, if you're looking at multi-level marketing, how do you assess? Whether it's A, going to be worth it. What are you aiming for?

Because we've talked about the fact that it can overlap with pyramid schemes, but the other thing that you really need to watch for is just profitability. Even if you put aside the pyramid scheme concern because you feel like there's enough genuine, retail activity that you feel like, “No, this thing is centered on genuine products and services that are genuinely demanded by people in the marketplace.”

Let's say I'm not concerned about the pyramid scheme part. Well, then you have to worry about, “What are my prospects here? And how do I assess whether I'm really entering into this with, like, a clear sense of what I'm hoping to get from it, and whether I've got objective information of whether I'm likely to achieve those goals”? The reward responsiveness, you could ask yourself like, “Am I into this?”

Am I interested in this because I think that it's going to give me an ability to demonstrate my competence and reach higher ranks and be recognized on stage and things like that? Well, OK, let's look and see how many people actually achieve that, right? Like, what are people, what do they have to do to get there? What expenses do they take on? How much time does it tend to take them? What are my chances of actually arriving at these levels of recognition that I might be seeking?

Maybe most people who want to participate in MLM say that they're doing it for some degree of income. We've surveyed multiple times and continue to find that to make sense because it's advertised as a business opportunity or an income opportunity. What are the income prospects? Can I kind of clearly analyze for myself what are my chances of arriving at the goals that I have, whatever those goals might be?

I wonder, like, because of how it's promoted that if I'm thinking about going out, “OK, I'm going to go out and I'm going to start a restaurant. If I want to go to the bank, I've got to pull up a business plan. I've got to show where my expertise is. How am I going to fund building out the kitchen?”

Because there's a lot more, maybe, front end, front-end legwork on a brick-and-mortar business, does this kind of sidestep, maybe a lot of the work that someone might do before joining? Because, “Oh, well, they said it's really easy. It's no commitment. OK, I don't have to spend a quarter million dollars building out a kitchen. I can just start doing this on nights and weekends or whatever.”

Absolutely. I mean, that's a big part of the pitch, right? Is that it's what sometimes people call a turnkey business, right? It is literally a business in a box that you can—“We’re going to tell you how to do it. We're going to tell you the steps to take.” Especially in many cases, they'll tell, you know, if you do it with fidelity. We're going to you, turn that key, and you follow the steps that we've given you, you're going to arrive at your destination.

You're told much less of an investment that you're going to make up front over time. All kinds of regulatory hoops. The tricky part about that is I think it's really interesting because well, one, at first I would ask the question of like, “OK, so for the people who've entered this, who've turned the key, what actually has been their outcomes, especially net of expenses?” And what you see when we look at the FTC has looked at data, Federal Trade Commission, when we looked at data on in my experience in cases, the picture is pretty bleak.

The share of people that actually earn more than they put in is, you know, it varies, but it's the minority. It's a pretty small fraction. That especially once you take into account, like, any opportunity cost of your time, so it's not a pretty picture. You need to know those numbers in advance. Like, they should be willing to give them to you.

Are some of those numbers kind of difficult? Let's say you have a truly legitimate—there’s network marketing, MLM, we've got a product, there's very low incentive on the recruiting, or there's some incentive that there's a mix of these things. It's like, OK, there's definitely a product, there's some recruiting, but it's not really being pushed really hard.

Even if the company is producing income disclosures and saying, “Hey, this is what the average new person makes over this timeframe or this involvement,” because these aren't employees of the company, the company wouldn't really know what are the expenses associated with it. It’s kind of one of those, they can kind of wash their hands of that, or is that the responsibility of the person who, like, if it's the person who's promoting joining this organization, is it their responsibility to figure out what the average person is investing in terms of time and money to get it up off the ground, or is it the company who doesn't have access to that information?

Right. You raised a lot of questions there. First, I would say that it's true that some of the things that expenses you might take on may not immediately be observable to the firm. However, there's a lot of—first of all, the income profile tends to be very low, right? There tends to be this like really small group that's making substantial money and the vast majority are making zero or near, let's say, less than $1,000.

That's what the FTC analyzed. The recent analysis, which I can share a link that you can share to your listeners, they analyzed the share of people that made, say, less than $1,000 in a year, right? It's overwhelming majority. In many cases, like, most people are making zero dollars. You don't need much in expenses to offset that and put you in negative territory, and some of those expenses are observable to the firm.

For example, they know what you bought from them. They know what you bought in sales aides.

They know what you bought in products. They often might know what you spent on conference tickets, right, or trainings or any other thing. There's enough observable expenses that in my experience, like, once those observable expenses are deducted, I mean, in most cases, the vast majority of people are losing money.

It doesn't have to be perfect, and I guess I would apply a common principle here. Like, we can't let the perfect be the enemy of the good. If some expenses are incorporated that are observable and maybe there are other ways the firms could survey their distributors to find out other common types of expenses that they incur, but a lot is already observable.

The second point I make on that is that it's the responsibility of the firm, and state and federal regulators have said this, that they need to convey this information if they are going to make claims about income. If they say you can earn, even if it's that you can say, like, you can earn a thousand dollars a month or more, you can afford a new a trip or to leave your job. Doesn’t matter, like, what type of, what flavor of representation they make.

If the truth is of what the typical person earns and what most people earn is different from that, then it is their responsibility to provide that information so that they're left with an appropriate net impression. That's the phrase that's often used, like, what is the net impression you're left with? If you're going to say, “You can go gangbusters here,” in terms of, like, your income, then it is your responsibility to provide that, that complimentary information that brings them back to reality.

I would say that, you know, this group Truth in Advertising, and among others, have done this great job of documenting the degree to which MLMs use income claims in their promotions. You may not be surprised to hear that, like, their most recent analysis showed that 98% of companies that they analyzed of the MLMs used consistently atypical representations of earnings.

Therefore, those same firms are responsible for providing the kind of information that allows us to, if they aren't going to make claims, then maybe they aren't responsible for providing that information. But if they're going to talk about income, then they have to give you objective information about what people actually earn.

I suppose one of the challenges against the truth is that the people that are part of the—someone who's looking to recruit people has incentive to not represent the numbers accurately or not represent the amount of work that entails to get it.

I think that's a problem of this structure that they—firms—understand they're responsible for warding against, or the FTC and others have said you're putting these people in the position of recruiting others. You've laid out the incentive structure. And that incentive structure puts them in exactly the position you just set. Like, it's in their best interest to bring these people on board.

You have to monitor what the practices they're using to accomplish that. Because yeah, it's, I think it's, one of the reasons I hate the word share in this context. Like people always say, “I'm just sharing this information. I'm just sharing.” You're not sharing. I mean, to me, that's like, it's not what I would see is the appropriate use of the word share because you do have these incentives.

It's perfectly fine for you to have incentives and to be—but I think, right, it's appropriate to be explicit about those. Like, “This is the way this business works. I would like you to join me. Here's the information on what people made last year.” As long as you're abiding by those kinds of, like, you know, you're being explicit about how this works and what the reality looks like.

I'll draw an analogy to weight loss and you can let me know if it's legitimate or not. If you see lots of commercials for weight loss products, there's always, “Oh, hey. This is Bob. He lost 60 pounds over the course of 30 days.” And then there's fine print on the screen that says, “Results not typical.”

Right.

That, to me, seems very ingenuous, personal.

Yes, yes. Well, and that's really common practice. It's testimonials, success stories. Those are some of the things that we've tested in research are, if you're given certain success stories or claims, what does it take to correct those? The type of disclaimer you're talking about, fine print, results not typical. Research we're not the first to find, many found that's ineffective even if they read it.

Even if it's not in fine print, even if it's prominent results, not typical income, not guaranteed, we found in our most recent study on this that it doesn't change people's impression of what they could earn at all by saying that. What does change their impression is giving them, for example, a statement of what the typical person actually earned. That's actually something that we're, that I am, advocating for.

The FTC is currently considering, or has in recent years been considering, new regulations that might move the needle on some of these things, might more clearly articulate what's inbounds and outbounds. I mean, although I would say that it's been clear for some time, just another articulation of like, “Here's the conduct that's permitted. Here’s the information that's required.” It's been interesting to see the FTC understand that that problem may exist in lots of zones, but is particularly problematic in the MLM zone.

I kind of wonder—this is me pondering here for a moment—with the rise of influencers, is it changing some of the way multi-level marketing works in that, if I'm an influencer and I've got millions of followers, it might just be easier to pitch the product than pitch the business.

That all of a sudden you now have these people that are working there, they're pitching a product that's for a multi-level marketing company, but they're actually not participating in the business-building side. Is there something like the FTC is like, “That's what we like,” or no?

I will say that some MLMs have recently moved away from, so it might be useful to explain what MLM really means. Because multi-level marketing, sometimes you hear the word network marketing, you hear the term direct sales. There's many, and the industry is often starting to use the phrase direct sales more.

What makes it multi-level is that, sometimes I like to contrast this with the old days where a vacuum salesman or an encyclopedia salesperson would go to your door and they would make a commission on selling you a set of encyclopedias. That was single-level sales. There was no—it was commission-based, they were independent contractors, but there was no incentive or plan for them to earn off of recruiting additional sellers underneath them.

Multi-level, by definition, adds that extra layer, so you can make money off of, you know, selling the product or service to people, but you also have this incentive to recruit additional people, hence the potential overlap with parent schemes. But some MLMs have recently gone to an affiliate. Some people use the word affiliate, but they don’t—they're still using an MLM structure.

But some have actually abandoned the MLM structure and really are using the affiliate model with influencers or an influencer-type structure. I don't want to put words in their mouth about why they've done that. I think I’ve seen regulatory pressure increasing, and, but also may have seen that it's just, that there's a bit of a sea change a little bit and possibly a lower-risk way to pursue this kind of word-of-mouth-based advertising.

Yeah, it's word-of-mouth. You’re just a different word in a different mouth.

That's right; that's exactly right.

Someone joining one of these organizations—let’s leave out the Ponzi scheme—what kind of impacts does it have on them and those around them? Because if a large, the vast portion of them never actually see a profit out of it or very small profits, well, I'm gonna feel antagonistic with whoever recruited me.

It's another thing that has kept me interested in this zone because there are some kind of multiple layers of types of outcomes. There's sort of the impact on your social capital, maybe also psychologically how you feel about yourself as if you were setting out to be an entrepreneur and you really believed that this was your way to demonstrate entrepreneurial aptitude.

There's a lot of language that encourages the individual to take that responsibility as their own. It's not the structure; it was you. There's the personal scrutiny that one might, or in some cases, shame, and for having failed at a business. There's the potential guilt or changes in social capital that result from having brought other people in, absolutely. Then there's the financial aspect themselves.

This is not my area of research, but it's been interesting to hear people's stories, right, about what it meant even in their own interpersonal dynamic with a spouse. Because they might've been spending money that they weren't fully disclosing to their partner because they were trying to make a go of it and wanted to sort of make it get to net positive before they sort of fully disclosed what they were spending.

There's a lot of ways in which it can have these kind of multiple levels of impacts. In my case, a lot of the things that we measure are, “Would you have engaged in this multi-level marketing enterprise again? How about a different one? Did you feel that there was negative consequences for your social relationships?” On the regret questions in particular, we tend to see very small shares of people who say that knowing what they know now, that they would repeat that experience.

While I'm very interested in the psychological and sociological and ramifications as an economist, I'm really interested also in sort of this allocative and efficiency. I mentioned that I sort of started, like, being interested in, like, people's decisions with their scarce time and talent and what they—does it pay off? I think that that's particularly concerning to me, like a lot of people, right, are in some cases using their last dime or they're using that last hour.

That their resources are scarce, including their own energy, skills, time. To see that go sideways for a lot of people, possibly because they didn't, they lacked the information upfront to make a really educated choice, just concerning, there was one great example of this that has stood out to me. There was an analysis of a micro-lending program in New Jersey. People might've heard of Grameen Bank. It's this international micro-lending institution.

There's Grameen America, which lends small amounts of money to low-income people to fund, like, a small business or some kind of venture that would help them alleviate their financial stress and financial precarity. The people that were charged with analyzing the results were, ended up finding that there was just a heavy rate of MLM participation among the Grameen America participants. It's just really interesting, right, because by definition, these people, it was all women, low-income women, who were using these really scarce resources and trying to launch.

Push themselves forward, them and their families. And they found that for people who use the money to fund an MLM business, they saw no improvement in their financial standing where people who invested the money in other avenues, right, did see an improvement of the production and financial stress and improvement in their financial status. I just, it's a great example to me of like, I know not everyone is on their last dime.

Like for some people, the impacts look different. For some people, it's like, it just feels like time they wish they had back or for other people. Maybe they get positive benefits from it, but I'm all about just like full information on the front end. What are you trying to gain and what are your chances of getting there? Keep coming back to that. And for a lot of people, it's, you know, it's not the vehicle for what they're after.

What are the questions they should be asking when presented with an opportunity, whether it looks like a network marketing business? Like, what are the questions that they should be asking to identify? Is this really network marketing? And if so, or if not, is this a realistic opportunity for me?

Yeah, and it's a good question because I think that there’s—you or your listeners might know that there's a kind of burgeoning anti-MLM community. There's a really large anti-MLM writer community. There's anti-MLM content creators or people that identify themselves as anti-MLM content creators.

There's this growing sort of, like, perception that MLM is synonymous with pyramid schemes. There's definitely in many cases a distancing from the term itself. I've been in situations, even in legal contexts, where they will say, “We are not an MLM.” I'm like, “Well, definitionally, you are.” First step, as you're saying, maybe to just, like, identify like, “What is this?” Like, what is the nature of this business or income opportunity that’s being offered?

If there is a way to benefit from the activity of recruits, right? If you recruit people and they have volume or sales or, right, recruits of their own and you financially benefit from that, then you need to consider that this, you know, whether, no matter what it calls itself, may be operating as a multi-level marketing company. If you can earn in two ways by selling the product or service to other people or by recruiting other people who join as independent contractors.

Or typically, they're identifiers. You can earn off their activity and the activity of people they bring in and the activity. That doesn't matter what it calls itself. It's operating as an MLM. Maybe that's fine with you. But I would ask the questions about, “How much is this going to cost me? What does the typical person spend at entry? What does the typical person spend on a month-to-month, year-to-year basis?”

If they can't give you reasonable numbers, or unwilling, or they just say, “Well, it varies,” that's not enough information if it were me, right, to make an educated decision. Similarly, what income, right, do people have on a month-to-month, year-to-year basis? You can do the due diligence of somebody who's entering into a business or income opportunity of doing a little bit of that number crunching yourself.

In my ideal world, you would get more than just, like, a typical number. Like a lot of times what they might tell you is, “Well, the typical person or the average person makes blank dollars.” That's useful for sure. It is a single data point. I think one of the things that we've researched and advocate for is both information on what's typical in income and expenses, but also what happens to the majority of people. How many people tend to make more than what they spent in a year would be a really interesting data point to ask for.

If they say, “We don't know. We don't have that information.” Those kinds of things, I think that's, again, problematic. Either there's a reason for the withholding it or that, again, it's not good practice on their part to be withholding that type of information.

I suspect the attrition rate for me, the way I think about analytics, attrition rate to me would be an interesting number. “You recruited a hundred people three years ago. How many of them are actually profitable at above typical rate? Oh, two of them. Oh, OK. That's a really high failure rate.”

Yes, yeah, no doubt. They will sometimes compare it to small business failure rates and small business failure rates can be high and things like that. But yes, you mean you should, absolutely, like how many people are still doing this and are profitable? Because there are a lot of people who stay with it. Because they're told there's phrases like, “The only way to lose is to quit.” Because we've given you the key. You just keep driving, like we're telling you to drive and you will get there.

Eventually you'll make it.

Right, it's not enough to stay. Are you staying and you're profitable? Retention rates. It's interesting because, again, you're often told a story that like, “Well, oh, those are people who never really wanted the business to begin with or those are people who just didn't really want to work hard.” I think you also have to be ready to hear statements like that. “Oh, well, you're not typical. You're a harder worker than most. I can see, you know, you're gonna be excellent at this.” Trying to kind of wash away the data by suggesting that, like, “Well, you're different than what the majority of people are. The majority of people don't try. They leave. They don't make any money. You're gonna be in this elite group.”

In my mind, I always try to draw comparisons to, like, known examples. Like if I went to work for a brick-and-mortar company, if I found out that 99% of their employees quit in the first year, I'd be like, “Ah.” I'm like, “Clearly that's a talk, like there's something wrong.” If I looked at it like a brick-and-mortar equivalent, like, “Oh, like Costco has this incredible employee retention.” That says something about the work environment.

Yeah, and it's interesting because you're bringing up—I think it's a great practice, as you say, to sort of compare it to things that are in the non-MLM zone. Because one of the things that I think is really interesting is that they'll often take things like, “Well, anyone can,” like, there's no entry barriers. Anyone can do this, low startup costs, and then they'll often say, “Well, that's the very reason why, again, we have these terrible attrition rates is because, well, it's just a low-entry barrier.”

People just leave really easily too. But the thing is about, like, the saying, “Oh, anyone can do it, and effectively, we'll take every single person who will sign on the dotted line and give us $100 start or whatever.” That's a problem from an economic perspective. If this is supposed to be about sales, and you've got what economists would call, like, perfectly elastic demand for sellers, like, let's take everyone, right, who's willing to sign on.

“Not only will we take everyone, but we'll encourage you to go find your own competitors, right, by bringing in additional salespeople, who will bring in additional salespeople, who will bring in additional salespeople.” In my experience, you can have a product that people even genuinely want, and you can pair it with an MLM model. If the recruitment side is dominating, it's like the market falls out underneath you.

Because the whole structure is, like, any seller can join and so you're just, like, incentivized to bring those people in. It just defies the laws of economics in many ways by suggesting that sort of, like, there isn't like an actual demand. They'll often kind of describe it as, like, “Anyone could join as a seller, and there's unlimited demand for this product. It's an untapped thing. Don't worry about the fact that there's gonna be a million sellers.”

It drives me nuts as, like, somebody who teaches introductory economics, because I'm just like, “Wait, like, this breaks the models of supply and demand in terms of what it's promising it can do.”

I think it's been interesting. There are times where we might—you’re talking about the things people might want to know. Sometimes people will say, “Well, maybe they should need to know the number of sellers in their…within a hundred miles of that. My concern is that because of the way it's framed, it's not framed in a normal, non-MLM way. In a normal McDonald's, that would be, like, useful information. And you'd be like, “Wait, how many McDonald's competitors are there in my zone? I need to know that.”

But in an MLM zone, it's almost treated as social proof. Like, “There are other people doing this. There are other people who think this is a good idea, and therefore it's a good idea for me too.” I don't know that that data, like, data that would traditionally be useful is seen the same way because it's sort of seen in, like, the sort of magical economic properties of MLMs, right, sort of are, we're in that bubble.

And in that bubble, the number of sellers doesn't matter. Maybe it's even a good thing, because you've got this giant community around you and you can learn from them. It signifies a positive thing as opposed to competition.

Yeah, I wouldn't think, “Hey, there's a really successful McDonald's at the mall. Let me open up a second McDonald's at the same mall, because that was really successful. Therefore, if I open one, I'll be just as successful as that one.”

Because your brain is saying, “Wait, there's a demand for McDonald's in this zone.”

I'll give one exception to the model: airports.

True. No, I mean, again, there's something that can be said for, like, visibility. I mean, there are just limits for any company in terms of what does it mean to recruit your own competitors?

As we wrap up here, I know you've done a TED Talk on how to—what’s the TED Talk?

How to spot a pyramid scheme.

OK, and that's a great introduction for people who are wanting to, is this a pyramid scheme or not?

If you have, want five minutes of what are some red flags? I hope a good resource for that.

And then additionally, Truth In Advertising, is that truthinadvertising.com?

Yeah, you can go to tina.org, tina.org, as they cover a lot of deceptive advertising practices, but they have done some deep dives on MLMs. They have some really great resources on income representations, investigations they've done there.

And if people want to read more about the research that they're doing, where can they find that?

Yeah, that Truth In Advertising is doing?

No, that you're doing.

One easy way to do it is to go to Google Scholar and just look up my name, Stacie Bosley, and you'll see papers that I've been putting out. If anyone's interested, I'm always happy to chat by email, [email protected]. I'm always interested in scholars who are interested in this area. If anyone's listening and they want to do research in this area, this is a really untapped area and I'm always looking for people who want to study this as a phenomenon.

Awesome. We will make sure to include all of those in the show notes. Stacie, thank you so much for coming on the podcast today.

Thanks for having me.