Monday, December 10, 2012

Trust me - I run a pyramid marketing scheme

This is a straight tip. I am slow to it - but go read Roddy Boyd's piece at the Southern Investigative Reporting Foundation. It is two weeks old - but hey - its good fun.

And now my review:

Multi-level marketing schemes are a highly profitable business for those running them. If you manage to get two to twenty thousand people selling things to their friends and giving you a cut you are going to get rich.

The road to those riches are laced with the dreams of all the people who hold tupperware or candle parties or even worse - sell weight loss schemes or insurance.

Listed multi-level marketing schemes (such as Nu-Skin) are a really strange investment. The basic proposition is that they offer investors is the claim they have a really profitable businesses conning people out of their money and getting them to cash in their friendships.

The pitch summarises: I am a crook but you can trust me. I am your crook.

That is a surprisingly common pitch in financial markets. Chinese property developers listed in Hong Kong make the same pitch - but in their case the pitch is that I am a guy with lots of guanxi. I can get a property forcibly acquired from peasants at a deflated price and have it rezoned high rise. And I can thus make a profit. But I don't have the money to develop it - so you - dear Hong Kong investor can help me out. You see I am a crook - but you can trust me. I am your crook.

It rarely ends well. The last person they always screw is the bag-holder with the equity.

Shorting multi-level marketing schemes or for that matter Hong Kong property developers however is an exercise in painful endurance. Stalingrad gets mentioned.

You can even get a real one - one that does distribute some of the loot to shareholders and can survive a long time (Avon, Tupperware). Some of the products even become respectable. [I used to share house with a lesbian Avon lady who was the best sales woman in Australia. And was surprisingly respectable to boot. And she never tried to sell me make-up.]

Spectrum: At one end there is Avon. Cosmetics are a product that overtly sell a dream and it is hard to argue anyone is defrauded.

At the other there is insurance and weight loss products.

Roddy takes us through ViSalus - the best weight-loss product MLM I have ever seen. And there are a lot of them. And he shows us some over-the-top sales techniques with sales people who look like models and party like rock stars.

And it is a good story - but I keep coming back to Mediolanum (an Italian insurance company). Nobody has ever beaten the sales culture of that place. I met Ennio Doris (the CEO) once with his not one but two beautiful translators. Life is good at the top of a sales machine.

This video is funny. But it is really funny when you realize that this is the boss of an insurance company trying (successfully) to excite a bunch of insurance salesmen. [If you have a higher resolution copy of this video please send...]

If this video is a guide then ViSalus could go for a very long time.



James Krieger said...

Would love to hear your comments some time on CDH Investments pulling out of the FMCN deal

James Krieger said...

Would love to hear your comments some time on CDH investments pulling out of the FMCN deal

CC said...

Nevertheless to say, Mediolanum's second-largest shareholder is Berlusconi.

John said...

My wife uses some tupperware products. I'm really impressed by the quality of their products and their service (they have life-time warranty and we replaced some broken parts a few times with no question asked).

I personally just can't reconcile MLM with a legit business with respectable products...

mpr said...

The video is scarier than it is funny, John. You knew that.

Carl HT said...

John - great piece.

This reminds me of the Belgian court decision regarding Herbalife, which basically surmised that it was generating the majority of its revenue by signing up new distributors, rather than being a supplier to consumers. ie. there is no true customer, just distributors who try to sign up other distributors - and the cycle spins on.

Anonymous said...

My first thought on seeing this is Mussolini.

Kris Tuttle said...

Reminds me of the oration skills often noted in leaders like Hitler.

Insurance does seem like a great business for this type of organization. It's only a disaster if you pay for a policy and they have no intention of honoring it. If the insurance is legit then finding a way to sell it to people who tend to resist it is a good way to make money.

Worst case scenario seems to be that people end up with too much insurance.

If the product is legit then MLM seems like it can work depending on efficiency, compensation and margins. In other words if the product is desirable, a good value and subject to repeat purchase then MLM can be okay.

David said...

Fascinating. Whether frightened or laughing out loud I can't shake the feeling of deceiving myself in ways I am yet to understand. If ever.

Anonymous said...

I had forgotten just how much I dislike Doris.

Anonymous said...

confessions of a tubby trader !

"Roddy takes us through ViSalus - the best weight-loss product MLM I have ever seen"

Moderator said...

FMCN deal is near complete despite CDH withdrawal?

There goes my Jan puts.... :(

James Krieger said...


That news is not showing up on any US newswires. Wondering if it's more smoke and mirrors

Jacob said...

Moderator, there is no "despite" in that title; it reads "Focus privatization transaction nearing completion [space] CDH withdraws."

There is no new information in the article, just an unsourced claim that CDH withdrew for internal reasons and that the other participants will pick up the slack.

Still wouldn't necessarily be hanging my hat on a January timeline though.

Anonymous said...

I don't know that I understand the problem with MLM in general. I understand that all sales orginizations are heirachical. So, what is more fair letting your ability to recuit, training and sell dictate your ability to succeed or some managers view on your ability. Absolutly MLM exploits people's delusions of their own abilities against reality, but so does just about every other money making opportunity. I personally wouldn't waste my time on selling something again unless I'm the low cost producer or have a unqiue selling proposition even then there's huge risk of failure.

Anonymous said...

Wealth management stockbrokering - Merril, MS, Met Life etc - has a lot in common with These MLM cos - both get people to pray on friends and family usually to buy an inferior or overpriced product.

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