Multilevel marketing and pyramid schemes in the United States: An historical analysis
Abstract
Purpose
This paper aims to analyze the evolution of direct selling – a retail channel that successfully sold products ranging from cosmetics to radios to automobiles – to multilevel marketing (MLM), an industry now apparently heavily reliant on selling to itself. As the courts have found some MLM companies to be pyramid schemes, the analysis includes the overlap between the legal MLM model and an illegal pyramid scheme.
Design/methodology/approach
The development of direct selling in the USA was examined, followed by the factors contributing to the design and growth of the MLM model and its non-commission-based compensation structure. Then, the key legal decisions regarding illegal pyramid schemes operating under the guise of MLM, the relative stagnation of direct selling and the state of the MLM industry were examined.
Findings
As the MLM model operates on the dual premise of retailing through a network of distributors and recruiting new distributors to do the same, it was found that federal regulators and the courts consistently focus on the “retail question” – the existence and extent of sales to consumers external to the distributor network. The authors argue that without a significant external customer base, internal consumption by an ever-churning base of participants resembles neither employee purchases nor a buying club.
Social implications
As the MLM model facilitated the growth of pyramid scheme fraud, creating victims rather than customers, this research highlights successful efforts to regulate this type of consumer fraud.
Originality/value
Few papers have been written on MLM and pyramids schemes, and none thus far has taken an historical perspective.
Keywords
Acknowledgements
Disclaimer: The views expressed in this article are those of the authors and do not necessarily represent the views of the authors’ respective organizations. A determination of whether a given MLM is a pyramid scheme is intensely fact-specific and beyond the scope of this paper. We focus on areas of concern that threaten to tar the reputation of even a legal MLM.
The authors acknowledge the research assistance of Terrance Bennett and helpful comments from reviewers.
Citation
W. Keep, W. and J. Vander Nat, P. (2014), "Multilevel marketing and pyramid schemes in the United States: An historical analysis", Journal of Historical Research in Marketing, Vol. 6 No. 2, pp. 188-210. https://doi.org/10.1108/JHRM-01-2014-0002
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited