Pyramid Puzzle Part II

Q. A neighbor tried to sell me some cosmetics, and suggested that I could also make money by selling to others. Is this selling system ethical?

A. The phenomenon you describe is called “multi-level marketing.” The idea is to create a kind of pyramid where each customer in turn becomes a salesperson, creating a new level in the marketing pyramid. All salespeople obtain earnings from all sales beneath them in the pyramid: their own customers, their customers’ customers, and so on.

As we discussed last week, multi-level marketing is not inherently unethical, but it presents a large number of difficult ethical challenges that are not easily overcome. It is worth considering these challenges carefully before joining such a system. The aspect we discussed last week related to all kinds of neighborhood selling systems. This week’s column will relate to the specific challenges of MLM.

Multi-level marketing at its worst is no more than a pyramid or “Ponzi” system, a business model named after a legendary swindler who made a quick fortune with a business which rewarded “investors” with high profits which were no more than the investments of the newest victims of the system. When the supply of new investors ran out, so did the earnings, and the greedy investors at the bottom of the pyramid were left holding the bag, having lost even their capital which was distributed to earlier investors above them in the pyramid.

Ponzi’s brilliant system earned him many years in prison, and he never went back to this kind of swindle. (Instead he turned to a new swindle involving marketing Florida swampland as residential real estate.) Yet variations of this idea are constantly reappearing. Chain letters which promise getting more than we give, “investments in charity” and other systems which seem too good to be true usually turn out to be too bad to be ethical.

If the main inducement to customers is their own future profits, then MLM has become a pyramid system. The basis of any ethical business is selling a valuable product or service at an attractive price thereby creating a satisfied customer. If the basis of the system is selling the next level the promise of profits by creating yet another layer, then someone will be left holding the bag. This is definitely a case of misleading others.

Even a person near the top of the pyramid, who firmly believes that the customers he or she contacts truly will be able to profit, is still responsible for inducing these people to mislead others. Last week we mentioned the verse “Don’t place a stumbling block before the blind” and explained that this forbids giving advice to someone who is blind to our conflict of interest; an additional meaning of this verse is that it is forbidden to induce someone to stumble into transgression. Participating in a pyramid system definitely falls into this category.

In order for MLM to avoid falling foul of this problem, we need at the very least two criteria:

1. The main reason for participating has to be an earnest desire for the product. While it is hard to give hard and fast standards, if less than half of the buyers are interested solely in the product and don’t participate in further marketing then this is definitely a danger sign.

2. The system has to have a built-in protection against leaving someone holding the bag. Each salesperson needs to have an updated forecast of sales potential. If the first level of representatives is told that this product has an estimated market of 100,000 units, these representatives can’t just parrot this figure to the next layer. By the time this layer is reached 10,000 units have already been sold. When the market is near saturation, the game has to end, and customers have to know that all they are getting is a quality product, since extensive further sales are no longer projected.

In the ideal model of multi-level marketing, value is added by having salespeople who are knowledgeable and enthusiastic about a quality product because of their own personal experience, and who are familiar with the market because of their neighborly relations that they understand but don’t exploit. But more often than not, these systems involve unethical practices such as: concealing conflicts of interest; leveraging personal relationships for business advantage; giving promises of easy profits which are sure at some stage to be disappointed; finally, there is the problem of inducing others to fall into these very same ethical pitfalls.

Before entering into one of these systems, a person has to be convinced that he or she has the ability to adopt a professional attitude towards selling, and that all levels of marketing are provided with accurate and up-to-date information about their prospects. Most of all, the person has to be convinced that he or she is providing a quality product at a fair price without any connection to the possibility of future profits.