Derrick Winkel's story has become nearly a legend among the people who gather every Wednesday night at the Riverboat Restaurant. If Winkel himself happens to be in the audience, he'll usually be asked to come to the mike and tell the story once again.
It goes something like this: Winkel was working as a bellman at a Salt Lake hotel four years ago when he carried the briefcase of a well-to-do man who gave him a $50 tip. The man was a distributor for a multilevel marketing company.Pretty soon Winkel decided to become a distributor, too. Now he makes as much as $31,000 a month.
The audience loves this story, and the other stories that follow: how Diane Goodwin expects to be financially independent by the time she is 26; how Debbie Enright, the mother of three small children, is now in the upper 1 percent of wage earners in the state; how Scott Tillotson made $123,000 in July alone.
This is the weekly Wednesday night "opportunity meeting" of NuSkin, a Provo-based skin care company. But it could be a meeting for Matol or NSA or Sunrider or Amway, or any of the hundreds of other companies who sell their wares through a sales approach known as "multilevel marketing."
If you work in an office or go to church or have a neighbor or are related to anyone at all, there's a good chance lately that you've been approached by someone who distributes a multilevel marketing product - and wants you to become a distributor, too.
Signing new people up, who sign more people up, who sign more people up - and who all make profits on the products sold by the people beneath them on the signing-up hierarchy - is the cornerstone of multilevel marketing.
Debra Westlake, a former Xerox sales rep, for the past year has been besieged by calls from friends and acquaintances asking her to sign up to sell everything from water softeners to cookies.
She was contacted by six different NuSkin distributors before she decided to buy a $239 kit this past summer and become a NuSkin distributor, too. Now she spends evenings and Saturdays making phone calls, hoping to sell the product and sign up distributors of her own - hoping, eventually, to make her fortune.
Multilevel marketing is the wave of the future, says Westlake. She quotes a Wall St. Journal article predicting that 60 percent of all goods and services in the United States will be sold by multilevel marketing by the end of the 1990s. She has also read that Harvard Business School teaches multilevel marketing now.
Ken Smith, former publisher of the "MLM News," a newsletter for the industry, says he's heard those statistics a lot - they're part of the multilevel marketing folklore - but that they aren't true.
What is true, says Smith, is that more and more traditional companies are adding a multilevel marketing component. U.S. Sprint and MCI are now selling their services this way, and the Rexall Corp. just opened a MLM division.
"Many large companies are aware of the power of multilevel marketing," says Smith. "They know that word-of-mouth sells, and that with multilevel marketing both advertising and costly middlemen are eliminated."
They can also eliminate the need to recruit salespeople, since the sales force - motivated by the potential of making great sums of money based on the sales volume of the people "downline" from them - are more than willing to recruit on their own.
According to Smith, somewhere between 5 million and 10 million Americans are distributors in multilevel companies. He expects both that number, and the number of multilevel companies, to grow as the economy sours.
"People are going to need additional income," he reasons.
He estimates that there are between 400 and 500 "legitimate" multilevel companies, selling everything from burial plots to 3-D cameras. The current oil crisis, he predicts, will soon spawn multilevel gas additive companies.
Multilevel marketing is also known as network marketing. People in the industry sometimes use that term to avoid the negative image that some people have about multilevel marketing, which they often associate with the pyramid scam.
The problem is that multilevel marketing, when you diagram it on paper, has a geometric shape that looks a lot like a pyramid.
What separates illegal pyramids from legitimate multilevel marketing companies is the existence of a viable product. Money is made not just by signing up new recruits (who sign up new recruits until there aren't any new recruits left to sign up), but by actually selling products.
"It's the most ethical form of business there is," argues Ken Smith.
In most businesses, reasons Smith, "the manager's goal is to keep you from growing, because you're in competition for his job. In multilevel marketing, the opposite is true. . . . Moving up is not limited to whether someone dies."
But it requires hard work, says Smith. It takes persistence, time, usually a mobile phone - and the knowledge, says Diana Steed, that even though you may work hard you may not sign up other people who are willing to work hard, too. Steed, who has tried seven multilevel companies, says a lot of people "just have dreams in their eyes."
According to Smith, the average person who signs up as a distributor sells only $60 a month. "Almost half of the people who get into multilevel marketing just do it to be able to buy the product wholesale."
Those who do get into it seriously "need a tremendous amount of discipline," says Harry Pappasideris, who tried his hand at multilevel marketing briefly this summer. He didn't like making phone calls on his lunch hour and going home to more phone calls in the evening.
Pappasideris's disenchantment with multilevel marketing also stems from the $1,300 loss he took from the multilevel marketing company he chose - FundAmerica, which in August was ordered to stop doing business in Utah.
The California-based company sold memberships for discounts on a variety of services and products, and according to the Utah Department of Commerce that meant that Fund-America should have been registered to sell securities. The
state of Florida has also charged FundAmerica with running a pyramid scheme.
According to "Money" magazine, which conducted a three-month investigation of the multilevel marketing industry, "while some multilevel firms are legitimate, scores of them are not."
"Every day," noted the magazine, "unscrupulous founders of multilevel companies prey on some of the most gullible - and often most financially troubled - people in our society."
For all the pitfalls, however, many Utahns have made, if not exactly their fortunes, at least a respectable second income by signing up with reputable multilevel marketing companies.
Successful Provo photographer Floyd Holdman signed on as a distributor for the Matol company after he drank Km, the company's herbal supplement, and felt better than he had in years.
Holdman now spends 90 percent of his time on his multilevel business and, after six months, has 100 people in his "downline." Because he feels that the product really helps people, he says, "I get more excited selling a $35 product to someone than selling one of my photos for $1,000."
Salt Lake attorney Bud Zoll began selling NuSkin a few months ago. Embarrassed at first at the thought of being in a multilevel business, and skin care at that, Zoll says the endeavor has brought him more than just money.
"Lawyering is a high-risk, high-stress business," he explains. "It's a constant struggle of people trying to get you to compromise your ethics. NuSkin is an upbeat business. And it gives you a sense of freedom.
"You can develop an income stream with potential - and hopefully not work 12 hours a day for the rest of your life."
Tips for spotting a scheme
The term multilevel marketing is loosely used, notes marketing consultant Ken Smith. "The pyramid schemes never call themselves pyramid schemes." So how can you tell one from the other? Here are a few guidelines:
- The company should actually sell a product. Otherwise profits are based only on new recruits.
- Is there actually a consumer market for the product?Comment on this story
- Watch out for substantial start-up investments. While you may have to buy a kit with sample products, you shouldn't have to invest in a big inventory.
- Will the company buy back unsold inventory? You don't want to be stuck with a garage full of cleaning supplies or face creams.
- Resist the temptation to sign up just because you were recruited by a friend. That person may have been misled, too.
- Be willing to work hard. The legitimate companies don't promise easy money.