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MLM Ethics


A discussion of MLM Ethics is essential to any serious talk of "easy money", "business ethics", or multilevel or network marketing specifically.

Since the appearance of the Amway Corporation, and the subsequent attack on it by the Federal Trade Commission, circa 1961, the MLM methodology has been regarded as suspect by many. My purpose in writing this article is to demonstrate that MLM ethics are generally superior (more ethical) than their non-MLM counterparts.

To this day there are large numbers of people, mostly in this country, who still credit the FTC's accusation that Amway (and hence all MLM businesses) is/was an illegal "pyramid" organization. From this follows the persistent suspicion that MLM ethics are somehow lacking.

These folks prefer not to take note of the fact that in/about 1962 the courts completely exonerated Amway of all charges against it – and further instructed the FTC to create a new definition of the "pyramid" using the Amway model as the very touchstone of legitimacy - MLM ethics at their best.

The FTC did this, but not before the media permanently damaged the reputation of the MLM ethics in the eyes of the public – thereby launching a controversy that continues to this day. There are many ways that one can clarify this issue, but the most fundamental is to examine it in the context of the "Formal Network".

 The Formal Network

In contrast with a casual network or a social network in which contact between existing members and new (candidate) members is essentially random and relationships between members are basically unstructured, the formal network is a very intentional organization.

A formal network has membership criteria. If you don’t meet the criteria you don’t join. One of the most common criteria is that you have been invited to join by someone who is already a member.

A formal network exists to fulfill a defined purpose; which could be any purpose defined by the network’s founders and in which the network’s members have an interest. As a member of a formal network you are expected both to benefit from your membership and also to contribute to the network’s resources in some defined manner.

A formal network is usually structured in such a way that there are specific benefits awarded to those who earn them. The earning of benefits (rewards) is usually based on the member’s productivity, or creativity (or both); but they may also be earned by teaching new members whom one has sponsored how to participate effectively in the environment of the formal network.

 Unethical Formal Networks

It must be noted that there is nothing inherently good or bad about formal networks as defined above. Depending upon how they are structured and what actions they engender, they may be either creative or destructive. Some examples of destructive (unethical) formal networks include:

  • Chain letters and “gifting clubs”, which serve only to transfer money from a large group of people to a smaller group of people,
  • Terrorist networks, which exist only to promote murder, mayhem, and intimidation,
  • Political parties (the Libertarian Party appears to be an exception) that exist today primarily to enable small groups of people to manipulate large groups of people, often for the underlying purpose of transferring wealth from those who are manipulated to those who do the manipulating,
  • Cartels such as OPEC and the Federal Reserve System, which exist only to provide their members with a monopolistic advantage over their competitors, and
  • Unethically run multilevel marketing (MLM) companies, which sell products that are intrinsically worthless to disguise the fact that they actually function as chain letters. For these folks "MLM ethics" is an oxymoron

 MLM Regulation

It should be noted too that the Federal Trade Commission set standards for MLM ethics in the early 1960s to distinguish ethical MLM businesses, which deliver real value to their customers, from (since then) illegal organizations that do not.

The latter organizations are called “pyramids” or “PONSIs” and Attorneys General everywhere are ever alert for the appearance of such organizations, because they enjoy the publicity to be had by destroying them.

According to the Federal Trade Commission’s regulations, it is not the sequential recruitment methodology that defines a “pyramid”. If it were, most corporations would be pyramids, because they almost all use sequential recruitment that results in a pyramid-shaped hierarchic organizational structure.

Nor is it the fact that only a small percentage of participants make significant money. Again, if this criterion were applied to typical corporations, most would be considered pyramids. So would state-run lotteries that are not considered pyramids.

The defining feature of the pyramid organization is simply the fact that nothing of real intrinsic value is sold to the "customers". Only the right to participate is sold, hence the similarity to chain letters. Proper MLM ethics forbids this practice

In a Libertarian society it would be legal for an organization to operate this way as long as the recruits are well informed of the realities of the situation. In U.S. federal law, and state laws based on federal law, there is a presumption of deceit, so pyramids are universally illegal.

By contrast, the formal networks that comprise legitimate MLM companies, and that have meaningful MLM ethics meet all the relevant criteria to be considered legal, though the possibility always exists that some ambitious Attorney General may decide to test such structures in court.

Most anti-pyramid laws define an illegal pyramid as an organization that exhibits one or more of the following characteristics (these are NOT MLM ethics compliant):

  • The organization sells no product or service of intrinsic value to non-members of the network.
  • The organization sells only information about how to participate in the subject network.
  • Members of the network are rewarded financially for recruiting new members – whether those members sell anything of intrinsic value or not. Books,tapes, websites, and seminars about how to succeed as a member of the network are not regarded in this context as being of intrinsic value to the public at large.
  • The organization requires new members to purchase an "initial inventory" of substantial value – yet provides little or no support for members to sell off their inventory to the general, non-member, public. This practice is usually referred to as "front end loading".

 Ethical Network Culture

In contrast to the destructive formal networks described above, the ethically structured MLM organization has much to recommend it. To see why this is so, we must examine the “culture” of formal networks.

In the field of Organizational Development one refers to “culture” as the basic building-block relationship between two people who interact within the organization. In this context most of our institutions are hierarchies; so the culture is that of superior/inferior or employer/employee. This usually takes the form of boss/underling.

Unfortunately, it is very easy within this culture for the boss to discourage corrective feedback. Imagine, you go to your boss and say, “Our Company is doing something wrong, something unethical. Let’s clean up our act.” In most hierarchical organizations the result is that the underling is fired; or at best passed over for promotions and ra ises until they decide to quit.

Alternatively, the underling may go to the boss and say, “I don’t seem to be doing my job properly. Will you help me to get it right?” If the boss agrees with the underling’s confession of incompetence the result is all too often the same. The relationship is severed.

Thus it is that, more often than not, hierarchies become bureaucracies - institutions in which corrective feedback is systematically discouraged, forbidden,avoided, or destroyed. By contrast, MLM ethics minimizes this destructive behavior.

For this reason the only real incentive in a bureaucracy is the avoidance of punishment; and the standard response within the culture is the “cover-your-ass” syndrome. In this way, small errors of judgment compound into major failures of policy.

Formal networks, such as properly structured MLM networks that adhere to proper MLM ethics, however, are much less susceptible to this problem. The classic example of the use of formal networks in business is the so-called multi-level marketing (or “network marketing”)organization.

To the uninitiated these organizations appear at first glance to be legitimized chain letters in which participants are seduced into working for “up-line” marketers for practically nothing; and in so doing are grossly exploited.

After all, how many participants actually get the rewards that the methodology seems to promise? This is how I thought of network marketing when it was first shown to me.

On the other hand, how many people get rich as employees of Standard Oil, or General Electric, or any other big corporation? Very few we observe. The interesting feature of well-designed network marketing organizations, the feature that makes MLM ethics superior to the ethics of traditional hierarchies, is the fact that the culture is highly sensitive to feedback.

Say you are in such a group and are having difficulty. You go to your sponsor and say, “I’m not doing so well. Can you give me some help…some corrective feedback?” For starters your sponsor cannot fire you for your incompetence; and to do so, if he could, would be counter-productive because he won’t make any money from your efforts unless you are successful.

So your sponsor, if he understands MLM ethics, and knows what he is doing, goes to work for you (you never work for him/her) and helps you become successful. He teaches you to sell your product. Then he teaches you to sponsor other people and to teach them to sell the product.

Finally he teaches you how to teach the people you have sponsored everything he has taught you. At this point you are independent, and although you may continue to receive your sponsor’s help, you know enough not to need that help.

While many continue to sneer at MLM or network marketing, under the impression that it is exploitative, the fact is that it is not. As a network marketer, if you treat the people you sponsor as if they are your employees you won’t be in business for long. People don’t join such organizations to become someone’s underling. Bureaucratic behavior is simply not tolerated in the formal network culture.


Whenever you contemplate joining a business organization, whether as an employee, a partner, or in any other formal relationship, it will always behoove you to examine the ethics that actually will define your role in that group. If the organization is a formal network, such as an MLM business, consider whether it meets the criteria defined in the "MLM Regulation" section above.

If it passes this test, go on to examine the quality of the product, the value of what the customers are buying, and the kinds of support that the company's owners provide participating "distributors". As a distributor you will be performing the functions of a salesman, a recruiter, and a teacher or mentor of those whom you sponsor. These roles make you more of a partner in the business than an employee.

Remember, above all else, that the process of sequential recruitment does not make the organization a hierarchy – nor does it make it a pyramid. Your sponsor has no hire and fire authority over you. If your sponsor won't give you the help you need to succeed, ask his/her sponsor for help. Unlike most hierarchic organizations, there is no prohibition against going upline as far as you need to in order to find the help you need.

And finally, I want to point out that all organizations, no matter what their purpose, can be converted from unethical hierarchies into ethical formal networks if their leaders wish to do so. To find out what you need to know in order to do this, and how you can employ good MLM ethics in any setting, read

What Is Law? by following this link

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