I talk frequently about how almost everyone loses money in multi-level marketing schemes. Companies like Mary Kay, Herbalife, Amway, and Avon want you to believe that money is being made from retailing the products. They say they are not pyramid schemes because they have legitimate products that can be sold for a profit.

Unfortunately, almost no one profits from MLMs, and certainly not from the sale of MLM products. Why? Because there is only a tiny market for bona fide retail sales. Very little actual retailing of products occurs. The vast majority of the “product sales” are from the MLMs to their distributors, rather than third-party consumers.

But the companies have a vested interest in getting consumers to believe their lies. If consumers didn’t believe the products were being retailed, they’d never sign up as distributors. Oh sure, some retailing goes on. But it is a very small amount, and is usually not at full retail price. Mary Kay says it’s simple: Buy a product for $1 and sell it for $2. You’ve doubled your money! But it’s nearly impossible to sell at full retail pricing, especially when tens of thousands of products are being dumped on eBay at or below wholesale pricing.

But how much do MLM distributors really lose? Some lose hundreds of dollars, while many lose thousands of dollars. Today our beloved Salty Droid posted a document I’ve never seen before. It documents the losses of more than 2,600 victims who participated in a settlement of a class action suit against Herbalife International. The claimed losses total almost $20 million, and this is only the losses related to a “Newest Way to Wealth” promotion scheme (materials, videos, audio tapes, and telephone conferences purchased by the distributors), and doesn’t appear to even include other losses (such as fees paid to Herbalife, products purchased but not able to be sold to customer, other “business” expenses incurred as a distributor).

SaltyDroid sums up the situation nicely:

Only the owner of the MLM makes fat monies. A select group of distributors :: often selected before the launch of the scam {as is happening right now with Rippln} … will be designated to have flashy cash flows so they can shill their massive success to the masses … but they’ll only be netting decent money {think lawyer or doctor type wages} because of the high cost associated with lead production. This mostly closed group of top distributors are then allowed {although usually not formally} to sell “this is how you can succeed at MLM like me” frauducts to the people in their downline.

Selling “how to succeed” frauducts that cost many multiples of the underlying MLM front product :: is how most {if not all} top-level distributors ultimately do succeed at bringing home the fat monies. The lawsuit explained it like this …

[T]he use of Lead Generation Systems was consciously intended by Herbalife and its senior distributors (a) to permit senior distributors to use more aggressive promotional materials and methods than those previously utilized and approved by Herbalife, (b) to provide Herbalife with a plausible defense (i.e., the “over zealous distributor” defense) in the event of regulatory problems with the distributor-generated promotional materials, and (c) to enable senior distributors to supplement their income through the sale of promotional materials to their downlines, and thereby provide an additional incentive for senior distributors to remain with Herbalife.

Scroll through the list of victims, and see how many lost thousands of dollars to the Herbalife promotional scheme. Be aghast at how many lost tens of thousands of dollars. And don’t ever tell me that multi-level marketing is the way to financial freedom.