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Attraction Marketing Challenges – Pyramid and Endless Chain Objections

In this article, we take a look at claims made by several “experts” in the industry who claim that most network marketing companies can be equated to endless chain or pyramid schemes. What is behind their opinion?   Is this really true for all companies, or just certain ones that tread close to the legal “limits?”

Robert Fitzpatrick, author of “False Profits” has recently accused various companies of operating based on the “endless chain” recruiting vs. product sales, including Pre-Paid Legal, USANA, and Herbalife.  MlmWatchdog.com points out that Fitzpatrick works closely with Barry Minkow’s Fraud Discovery Institute, which has a track record of short selling companies under their “investigations.”  So, is this a case of stock manipulation, or truly investigative work?  It should be noted that Minkow is a convicted felon who has served jail time for past fraudulent activities.

What does the law say about it?  State law seems to govern primarily in this area, although the FTC and SEC have had considerable involvement.  In leading decisions, there have been a variety of abuses target as potentially illegal:

  1. Products which have no “real world” marketplace
  2. Products which are sold at inflated prices
  3. Mandatory purchases of company product
  4. Plans which result in inventory loading distributors
  5. Large cash investment requirements
  6. Plans in which products are totally or substantially use by distributors
  7. Plans in which fees are paid to distributors for headhunting
  8. Plans in which commissions are not based on retail product sales
  9. Plans which contain elements of a lottery, rewarding based on chance

State laws differ on key points, including, most importantly, whether or not personal use by distributors constitutes “retail sales.”  Three states have recognized personal distributor use as legitimate “retail sales:”  Oklahoma, Texas and Louisiana.

The bottom line when evaluating whether a particular company meets legitimacy tests may be a simple question:  Would you honestly buy the product if there was not an income opportunity attached?  Keep in mind that your answer may be “colored” by a natural tendency to justify emotional buying decisions.   If you can answer yes, you’ve found a good company.

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