MLM - Mati Lagi Mati

QUESTION: Would you pay RM8,888 to invest in a multi-level marketing company selling animal placenta pills?

But what if the company selling it to you was based in a swanky office, and it promised that if you invested in said placenta pills, you’d be making hundreds of thousands of ringgit a month, all while being pretty much your own boss?

It’s the oldest trick in the multi-level marketing (MLM) book. But it works, and these days, it seems to be working particularly well with young people. Young people have higher aspirations these days. People want to have a good life. They face peer pressure to keep up. Whether they can afford it or not, gaya mesti mau!

MLM companies traditionally market products/services through a sales force which is not only compensated for the sales they generate, but also for the sales generated by the salespeople they’ve recruited. Many of these companies are now increasingly youth-savvy. They’re using things like social media, fitness club memberships, the promise of luxury holidays and a lot more.

Jessica Chan, 20, for example, is currently part of a vacation club that operates using a multi-level marketing model. It promises luxury vacations at discounted prices. You pay an initial US$299 (RM960) fee to join and a monthly fee – US$66 (RM210) – that can be waived for life once you recruit another four members to your downline. The larger your downline grows, the more cash and points (which can be use to offset the cost of flights purchases, hotel bookings, etc.) you get from the company.

“I’m doing it part-time at the moment because I’m still studying, but I have friends who are already doing this (as a full-time career),” said Chan, who declined to reveal her monthly earnings.

Alan (not his real name), however, had less luck when he was recruited to an MLM company selling aromatherapy products back in college. He coughed up RM2,500 up-front, and was promised big bucks if he could recruit enough people. In the end, the company was shut down. "I didn’t usually trust MLM schemes, but this one looked legit!” he said. “They had a huge, swanky office near Pavilion KL.”

And then there’s Lee, 29, who paid RM8,888 for 14 cans of animal placenta pills. “You can earn up to RM300,000 a month in passive income,” said Lee. “One of the members was already driving a Mercedes SLK at 21!” Plus, the pills are good for health, he said.

Why not?
The problem with MLM companies, said Datuk Paul Selvaraj, CEO of FOMCA, is that many of them operate in the “grey areas” of the law; so what they do may be technically legal, but it’s not necessarily ethical. “When people lose their money through scams, they try and get their money back from the government but that’s not always possible. Gone is gone.”

“These people know the business, they know the laws. They operate schemes that work ‘in between’ the laws, which makes enforcement difficult. They are also experts with marketing language. Whatever claims they make, like when it comes to health supplements, they make sure they’re not legally binding. They might say a product boosts your immune system, but oranges can boost your immune system too!”

And without a legitimate product, an MLM scheme simply becomes a pyramid scheme, which is, of course, illegal. “Sometimes they just sell a product as an excuse (to operate a pyramid scheme). There are, of course, perfectly legit, legal and ethical MLM companies that sell actual products.

Chan, for one, is confident she knows what she got herself into. Yes, there are some multi-level marketing schemes that are unsustainable. You can do a check on Bank Negara’s website. There are some multi-level marketing companies on the consumer alert list. She is eferring to the list of companies not authorised or approved by Bank Negara Malaysia.

MLM schemes are often unsustainable because the math rarely adds up. The membership structure is like a pyramid (each downline will have more members than the level above it), so the lowest level of the structure will always make up the majority of the overall membership. And that means at some point, when the market is saturated, all the members in the lowest level won’t be able to recruit anyone, and will most likely lose money.

YSLM, the MLM company by self-styled “future richest man in the world” Zhang Jian, which made the news recently for being an alleged pyramid scheme, is an example. Domestic Trade, Cooperatives and Consumerism Minister Datuk Seri Ha­­san Malek said the company is being investigated for having contravened the Direct Sales and Anti-Pyramid Schemes Act.

YSLM member Kenny Chan, 44, however, vehemently denies that the company is a scam. “If the boss is really a conman as they say, wouldn’t he be arrested by now? We have members who were close to bankruptcy, their families were starving; and Zhang was able to help them!”

Growing market
Back in 2010, R.AGE ran a story on how direct selling and MLM companies were so aggressively recruiting young people that some colleges put up notices banning recruiters from entering their campuses.

But now, with ads and opportunities pouring in via social media, young people are more exposed than ever to the promises made by MLM companies. “It’s a numbers game,” said Paul. “Bigger reach equals bigger numbers. With social media, even if 1% responds, it’s a success; and there’s no cost involved.

“In that sense, young people are definitely more likely to be targetted now.” In fact, Chan’s company held a conference recently where one of the workshops was on social media marketing tactics.

“They educated us on how to use social media to build our businesses,” she said. “But at the end of the day, it comes down to persistence.

You have to be willing to work hard (to succeed in MLM businesses). It’s not for everyone.”
Direct Selling Association of Malaysia (DSAM) executive director Lawrence Cheah, whose association regulates all legitimate direct selling companies (including MLM businesses), believes the industry will grow in the coming years.

Over the past five years, the sales turnover from direct selling businesses (at least the legit ones) has almost doubled, from RM6.8bil in 2009 to an estimated RM11bil in 2013.

Nevertheless, Cheah said he discourages students from taking part in any form of direct selling – which includes MLM, single-level marketing and mail order marketing – because they should “focus on their studies. Many young people do it because it provides an opportunity for entrepreneurship, to run and own their own businesses."

Having said that, there are of course perfectly legal and ethical direct selling companies you can be involved in. Legitimate direct sales companies focus on products. You recruit downline members, but you earn money through your own sales, as well as get a cut from their sales revenue. Scam companies pay you for each new member you recruit, regardless of whether they actually sell anything or not.

The most worrying ones though, are the companies that are perfectly legal – and licensed – but practise unethical marketing strategies. Paul cites the example of MLM businesses that encourage members to show off their wealth and success on social media, which he said is an increasingly common trend.

“That’s what attracts young people. It’s not illegal, but it’s unethical,” he said. “In the past, most of the victims were older folks. But I was at a gathering for an MLM company recently, and there were so many young people! And many of them now are professionals – lawyers, bankers, accountants and so on. We even had a complaint from a PhD holder!”

So, is there any way at all the government can get to the root of this issue, by making sure these companies don’t get approved in the first place?

According to Paul, it’s pretty much impossible because of how well these companies operate between regulations of the different governing bodies. By the time the authorities finish their investigations and ban these scams, many would have already lost huge amounts of money.