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I have always tried to explain to my friends and relatives on why MLM is something you should avoid at all cost, not just because of monetary reasons, but it involves things that are invaluable. I have found the perfect way to illustrate the evils of MLM, through the M - C - M relationship which was first discussed in The Money Nexus - What is money? It is strongly recommended you read the article to understand the context of this writing.

M - C - M

In the case of a MLM company, the management comes up with the capital to register a startup and bring in "goods" that are often dubious in nature when it comes to real-world benefits. In this case, whether there are actual "value" in the goods is secondary because the goods serves purely as the intermediary in exchange for more money.

If you’re unfamiliar with their practice, basically the top management offers some goods for "wholesale" to their staffs / agents. However instead of paying their agents_1, the agents_1 have to pay to have access to these goods. With this access, the agents_1 can now in turn recruit other agents_2 who will pay them for the access to these goods, and the management will take a commission from the "membership fees" and sales proceeds from agent_1 and agent_2. Agent_2 can now recruit agent_3 and the cycle goes on, the more the agents, the more money gets circulated around.

If you choose to look at it from another viewpoint, in order to sell a worthless goods, the market mechanism will not allow for the goods to sell. This leads agents to first approach their close circle of friends, and out of goodwill or lured by the promise of future profits, these close friends buy the products and join as an agent. They will in turn approach their close friends and the whole chain will stop when all the people around you or the neighborhood / community are saturated. In other words, the "market" has reached saturation. But what is this "market"?

The "Market" we’re talking about here is noting more than the trading of "relationships", Friendship and Kinship to be exact. By becoming part of an MLM network, you are contributing to their "economy" by offering your Kinship and Friendship in exchange of personal monetary gains.  How much are these relationships worth? $1k, $5k, $20k, $30k?

We know that eventually MLM will collapse due to "market saturation". When this happens, it is akin to the economy going burst, and the agents will be out of "jobs", stranded with the worthless goods which they have bought in exchange for the privilege to recruit other agents. I totally acknowledge the fact that early entrants will definitely turn a profit, but let me assure you that this is not a profit, but merely the cashing of your "relationships". This is because whatever profit you’ve made is the exchange rate for 1 x Friend to $1, and usually the longer you’ve known that person, the better the exchange rate :)

So now do you know why MLM is wrong and what is the implications? When everything collapses, just try calling your friends out for a drink or chit chat, and you will realize that you’ve actually "cashed" them out and have to start "saving" again.

You can also check out further readings on Multi-Level Marketing, Pyramid Scheme, and Ponzi Scheme.

Update 21/12/08 – If you still don’t get it, “Bernard Madoff” will show you how essentially “brillant”, “successful”, “analyst”, “gurus”, or whatever you call them are no different from you and me. Only they possess insider knowledge of the trade, and exploit the trait of greed in everyone of us. Paul Krugman talked about The Madoff Economy, which is worth a read to wake you up to the realities.