Am I right that it’s cultural to hate network marketing?

I have been wondering lately about what seems to be a bias against network marketing. I am aware that I once had this bias, although I cannot honestly tell why I had it or why I dropped it exactly. There are lots of web sites out there that purport to provide honest and skeptical information about multi-level marketing. One that I’m going to take a look at here is “Operated by Stephen Barrett, MD“. I have to assume that Dr. Barrett or a friend or family member was once burned by some MLM business. Whatever the reason, he has certainly concluded that the angels are lined up against this form of business. Which leads me back to me question, “Why?”

Let’s consider a specific article on Dr. Barrett’s web site: this one on MLM for health products (a topic near and dear to my heart). The article was written in 2003 and has not been updated in roughly 12 years now. It claims that Dr. Barrett has examined the products of over 100 MLM and concluded that they all involve false or misleading claims. I might tend to agree with this claim since the Nutrisearch Comparative Guide to Nutritional Supplements comes to more or less the same conclusion; that is, that out of over 1,300 supplement products available on the market, the vast majority provide very little real nutritional benefit. Most of these sub-standard products are available through retail outlets. Some are available through network marketing businesses. Of the four Gold Medal Five Star products in the Guide, one is available through network marketing, two are available on-line, and one is sold through a chain of participating clinics.

So here is my question: “Why would it be more evil to sell a 1-star nutritional supplement through network marketing than in a pharmacy chain?” A corollary question might be: “Why would it be more evil to sell a 5-star nutritional supplement through network marketing than in a pharmacy?”

I pose this rather rhetorical question since, in this case, Dr. Barrett seems less concerned about sub-standard nutritional products and their impact on consumers than he is with the business model used to sell them. In particular, he doesn’t seem to consider any marginal difference in the quality of the products sold through network marketing business models as opposed to alternatives, say, on-line or bricks-and-mortar. He levels no criticism against; for example, Amazon or Walgreens for carrying low-quality supplements, although both would be making profits from such products. Neither does Dr. Barrett contrast the number of low-quality supplements sold through network marketing businesses versus those on-line or bricks-and-mortar. Back to the Guide, of the top ten brands by market share, only two score four stars or higher (4.5 actually). Most are 2-star products. Three of the ten are sold through network marketing business models; the rest are not. Dr. Barrett’s web site is full of criticism of those two network marketing businesses. The others, which score as poorly and sell on-line or in-store, receive no criticism whatsoever. Similarly, Dr. Barrett has nothing good to say about the one network marketing business that receives the Gold Medal and Five Star rating for its supplements. This particular product is, interestingly enough, the least expensive of the four Gold Medal Five Star brands.

Apparently, the singular evil is the business model; not the product. However, a similar high-quality product sold through network marketing is probably “bad” while it’s companion sold on-line or in-store is “good”.

Back to my question: “Why?” Is this cultural, psychological, sociological, or something else? To a certain extent, people dislike the very wealthy, no matter how fascinating they may be. The idea that someone from lower or middle class ranks could use as simple a means as network marketing sales to become very well-off is, perhaps, offensive. It is much more acceptable to think that a wage-earner would improve their lot through education and experience, thereby increasing the value of their labor. In contrast, the network marketing model promises a formula that, if executed diligently, can bring fortune to your door. There is no question of the value of labor; it is simply a matter of presenting the product properly to a sufficient number of potential buyers.

Dr. Barrett also levels the criticism that “Becoming an MLM distributor is simple and requires no real knowledge of health or nutrition.” Of course, this is quite correct. Again, the network marketing business model does not need deep technical knowledge of the product, although that is not prevented. Yet, does Dr. Barrett expect automotive engineering ability from a used car salesman? Or a deep knowledge of cosmetics chemistry from a salon employee? Or food chemistry from the check-out clerk that sells him a box of cereal? Would Dr. Barrett object if a grocery clerk offered him an opinion on the taste or quality of some product in the store -> even though the clerk was being paid by the store to sell products? Likewise for the used car salesman.

Where is the essential problem if someone who tried a product that was sold through a network marketing business model, and who likes it, and who recommends it to their friends, family, or other contacts? Why would a well-educated man (presumably) like Dr. Barrett find the process of recommending products through network marketing, and obtaining a commission on the result, so offensive?

Consider this imaginary situation. You try a nutritional product that you’ve purchased from a chain drug store. You find that it really helps you. You are aware of a friend or family member who has a problem like yours. You go out of your way to suggest they try what worked for you. You get no pay for doing so. In contrast, you try a nutritional product that you’ve purchased through a network marketing source. You find that it really helps you. You are aware of a friend or family member who has a problem like yours. You go out of your way to suggest they try what worked for you. If you become an associate of the network, you get some pay if your friend buys through you.

Apparently, Dr. Barrett considers you noble in the first case and a fool at best in the second case.

Again, “Why?” It seems that the product could be identically good or bad. Your belief in its value is of no importance to his argument. But in some way, you have been corrupted if you choose to sell products that you believe in through a network marketing business model.

A Big Contrast

As a huge contrast to Dr. Barrett’s approach to the evils of all things network marketing, consider this paper by Cruz and Olaya. While it may be more technical than many of you might care to read, the essence of it is the proposal of a systems dynamic model for the structure and dynamics of the networks that develop in most network marketing organizations. The approach is mathematical and not moral. In particular, many of the structural characteristics of the networks that arise in network marketing organizations are derived in a mathematical way, beginning with certain axiomatic assumptions and proceeding through to conclusions. While it’s perhaps complex jargon, they model these social networks as “scale-free with preferential attachment”. In my humble opinion, their model appears to be reasonably accurate.

This stands in opposition to Dr. Barrett’s approach that criticizes these same structural properties as being implicitly illicit methods to fleece an unsuspecting public.

An notion of risk

Underlying these two approaches, the mathematical and the moral, seem to be two distinct views of risk. Let’s go back, way, way back. Back to the ancient Egyptians. They had a myth about the creation and nature of the universe. The basic idea is pretty simple and it recurs in the history that follows them. At some level “below” our world is an “underworld”. It is the source of chaos and decay, disease and death, lies and untruth. This is because material, physical stuff is unreliable. At some level “above” or “beyond” our world is an “overworld”. It is the source of form and function and idea and truth. It is pure. This world, our world, is a conjunction of the two. It has some of the form and structure and ideal character of the overworld and it has some of the decay and chaos and untruth of the underworld. Just as our level of reality is populated, the ancient Egyptians took the lower and upper worlds to be populated as well, by folks who were representative of their stations in the overall state of things.

With this broad perspective, the ancient Egyptians, and then the Greeks and Romans, assumed that all misfortune in one’s life here on Earth was due to the blind and uncaring actions of these personified forces from above and below. One might be punished from above for some transgression. One might be simply an “innocent bystander” and the random target of some demonic action from below. In fact, the Roman goddess that performed these random drive-bys was Fortuna, from whom we get our word “fortune”. Fortuna was represented as veiled or blind, so that she could not tell who she elevated or degraded. She had a wheel, the “Wheel of Fortune“. It would spin and you’d get lucky. It would spin again and you’d lose everything. [Hence the modern TV game show. Ancient ideas; new incarnations.] This wheel was sometimes thought of as a sphere and associated with the distant stars; that is, the constellations of the zodiac. Hence, we find such statements as “star-crossed lovers” or “it’s not in my stars” and et cetera. If we hit it big, we make a fortune. If we lose big, we lose a fortune.

But here is the basic idea: anything bad that happens is misfortune. It could be a punishment for a transgression, sent from above. It could be a purely random act, sent from below. No one likes the idea that they are being punished; that they’ve done something wrong for which they deserve to suffer. It is, perhaps, better to see oneself as the random target of an evil and demonic force.

Let us move way forward to more modern views of the negative events that might befall us. Nowadays, we call this “risk“. We manage risk using mathematical methods. We work out the probabilities of all sorts of loss: fire, flood, accident, death, etc. We take out insurance policies. Our insurance companies hire actuaries to check data and give statistical predictions of the likelihood that we’ll have a car accident or cancer. They’ll look at risk factors like our driving records and our history of smoking; and they’ll adjust their predictions correspondingly. Nowadays, the mandatory use of insurance to manage risks of car accidents and health is a matter of public policy; not without its own debate.

Handling the risk of various kinds of loss in this way, based on economics and mathematics, as opposed to morality and ethics, is a huge cultural paradigm shift. It began with the first efforts to understand games of chance, which led to a mathematical theory of probability starting a few hundred years ago. However, 6000 years of thought doesn’t just go away. In fact, it seems that if you scratch someone trained in medical science, like Dr. Barrett, those patterns of thought are right there, front and center, even now. More broadly, we like to blame people for their own misfortunes: we blame the poor for their lack of initiative; we blame the diabetics for their over-eating; we blame any victim for their flaws and they deserve their punishment. In our personal cases, our own tragedies are never punishments; we ourselves are “star-crossed”. All too often, we are all hypocritical.

A mathematical model for a scale-free preferential attachment (SF PA) network of the sort that develops in a network marketing organization states categorically that most nodes (associates) will have few connections to other nodes (down-line) while a small number will have many nodes (associates). This property is not a sign of the underworld in action; rather, it is simply a mathematical characteristic of the rules of network development. At any given time, this implies that those people with more associates in their down-line will be making more money. As time goes on, nodes (associates) that once had few connections will gain more; as they do so, their rate of adding more connections (down-line) will accelerate.

There is nothing in this analytical model that remotely suggests ethical blame or wrong-doing; the properties of the network arise strictly from axioms about its dynamics.

Playing the blame game

If one looks at an SF PA social network in the context of a network marketing business model, then it is reasonably clear that the associates with the highest number of connections are the ones that (a) have typically been on the network the longest; and (b) are earning the highest returns. Consider the following model, taken from the Cruz and Olaya paper.

A marketing network

A marketing network

The higher connection nodes are shown in more central positions in this chart. The very outer ring of nodes (associates) are likely to be those that were just added and have had no opportunity for growth. Again, the view here is mathematical and not moral.

A typical bricks-and-mortar retail business might gain 100% of its revenue from product sales and then have costs of goods sold (COGS) of around 40% leaving 60% gross margin. Out of this gross margin would come, say, costs of sales (advertising and marketing) 15%, fixed costs for office and retail space & other depreciation of 15%, employee compensation 15%, taxes 10%, leaving a net of 5%.

A network marketing business might gain 100% of its revenue from product sales and then have a COGS of the same 40% leaving the same 60% gross margin. Out of this gross margin might come costs of sales (associate compensation) of 30%, fixed costs for office and warehouse space & other depreciation of 7.5%, employee compensation of 7.5%, taxes 10%, leaving a net of 5%.

Which of these two profit & loss statements is less ethical? The NM organization has proportionately less in cost for advertising and marketing. These funds are redirected to associates as compensation for their efforts. No retail space is required; there are fewer employees as well, meaning less direct employee compensation and less office space required, by proportion. Of course, any real world cases might depart from what I’ve set down here as basic models, but I think that the essential concepts about the relative proportions of expenses are about right.

Big deal.

One could run the B&M business ethically or fraudulently. Likewise for the NM business. That comes down to the character of the managers in either business, doesn’t it?

To be more specific, it is not that the B&M business does not constitute a social network either. In fact, the B&M business, as far as its internal organization is concerned, is just as much a social network as the “network marketing” business is. Typically, most retail organizations exhibit a hierarchical social network in which the C-Level executives are at the top of the structure and are the most highly compensated. One could copy the jargon of NMOs and say that the C-Levels are the nodes with the greatest down-line connections.

A hierarchical social network

A hierarchical social network

Unlike an NMO, however, the folks in the C-Level positions (those blue dots) did not necessarily get there by selling the greatest amount of product for the business. They may have risen up through the ranks, but there is a great likelihood that they were dropped into their high-level positions through the efforts of a Board of Directors, existing C-Level managers, HR staff, and so on. In other words, some form of central management and committee decision-making based in some measures on reason and emotion and politics. For example, CEOs of major corporations are often recruited from outside.

Similarly, the lowest ranked employees in the hierarchy (those red dots) are also generally much more poorly compensated than the C-Level. Is this an ethical question? Or do we usually accept that the folks at the bottom of these corporate ladders likely deserve to be there? Maybe they’ll advance in rank up the ladder on their merit, maybe not. Maybe the incumbent manager above has to move up or sideways themselves. Maybe their personality doesn’t fit the organizational culture past some mid-level management position. Maybe the economy takes a down-turn and they become part of a down-sizing. And so on. These “risk of loss events” are nothing that an employee can take out insurance for. One could view them as punishment from above or as random “star-crossed” tragedies.

Of course, there are the legendary CEOs like Steve Jobs, who basically recruited his own inner personal network and then communicated his philosophy for Apple over that grand hierarchy that evolved.

So at the end of the day, aren’t all businesses based on social networks? Then what makes the hierarchical planned version so much more holy than self-adaptive scale-free preferential attachment ones?

What?