Many Americans dream of starting and running their own businesses to achieve financial independence and career stability. Multilevel marketing (MLM) companies are an option for people seeking a side hustle or a straightforward way to start their own business.
While some MLMs are legitimate operations, many veer toward the realm of pyramid schemes. We’ll explore how MLMs operate, their pros and cons, and how to tell if you’re dealing with an aboveboard direct-sales operation or a predatory scam.
What is an MLM?
MLMs are legal businesses that focus on direct marketing, home-business franchising, network marketing, affiliate marketing or direct sales operations. Most MLMs recruit independent sales representatives to sell products directly to consumers rather than selling their items in a retail store. These sales reps, or distributors, make money when they sell products; they also receive commissions from products sold by people they recruit to the operation (their “downline”).
What’s the difference between an MLM and a pyramid scheme?
People often equate MLMs with pyramid schemes, but there are key differences. Here are some features of legitimate MLMs:
- MLM companies are legal in the U.S.
- In legitimate MLM companies, salespeople make most of their money selling the company’s products directly to consumers.
- MLM reps may also make a percentage of downline associates’ sales.
- Sales reps don’t have to recruit anyone and are paid based on their sales regardless of distributor recruitment.
- Legitimate MLMs abide by the “70% rule”: Distributors only purchase additional inventory after they’ve sold 70% of their current inventory.
Here are some characteristics of pyramid schemes:
- In a pyramid scheme, the primary way a salesperson makes money is by recruiting more and more downline sales associates, not by selling products.
- The pyramid operation relies on a continuous influx of new recruits and their “dues” payments.
- Reps often must continue buying products even if it’s unlikely that they’ll be able to sell them.
If law enforcement suspects that a would-be MLM is actually a pyramid scheme, they’ll have to prove that the company knowingly incorporates predatory practices, such as requiring sales reps to buy inventory they may not need and that they’re not just a poorly run business that looks a lot like a pyramid scheme.
Cheap business ideas you can get started with quickly include being an online seller, virtual educator, social media marketer or virtual assistant.
Pros of legitimate multilevel marketing companies
Many MLMs, such as Amway and Avon, have stood the test of time and are considered legitimate. These are some of the upsides of joining a legitimate MLM:
- MLMs are an easy way to start a business. If you want to get started quickly, an MLM may be right for you. “Working longer hours can be difficult; however, working on a new business model with complete freedom and chances is an option to easing your way into starting your own business with a small investment,” said Sep Niakan, managing broker at Condo Blackbook. “As a customer, you can purchase products at a low cost, and if you are qualified to become a distributor, you can begin selling the product or invite others to join the network.” Niakan mentioned that the MLM industry has flourished since the start of the COVID-19 pandemic, partly because people were looking for ways to make money from home.
- There is a big demand for direct sales products. MLMs flourish in the makeup, jewelry, lotion, soap, essential oil and clothing industries, to name a few. There are always new releases, keeping demand for the products high. “Many people are looking for innovative, high-quality products that will meet their needs,” said Daniel Foley Carter, director at SEO-Audits.io. “The majority of these folks are fed up with the commercial brands that supermarkets and shopping malls make available to them.”
- MLMs give people a chance to work on their sales techniques. Gaining sales experience can be valuable, helping you learn to win customers over the phone and build a positive sales culture. “In MLMs, you have to learn how to persuade people not only to buy your products but also to join the organization with you as their recruiter,” said Sherry Morgan, founder of Petsolino. “Doing this constantly requires great sales skills when talking to people.”
Cons of multilevel marketing companies
While even the business practices of legitimate MLMs can raise concerns, when companies cross over into pyramid scheme territory, there are even more red flags and worries about predatory behavior.
1. Predatory MLMs prey on vulnerable people.
Direct sales companies sometimes build their sales teams by actively targeting people who have limited employment options or who aren’t savvy about local business practices. People in close-knit communities are also ideal targets because they have broad social networks. The following groups are particularly vulnerable:
- Stay-at-home parents. Shady MLMs often target stay-at-home parents, usually moms, seeking flexible work they can do from home. These individuals often have broad social networks and desire paid work that they can easily do from home or on a flexible timeline. The rise of the gig economy means more stay-at-home parents can make money from home by working part time, and direct sales companies position themselves as a viable option that’s identical to being self-employed, freelancing or otherwise making money on the side of a busy life, when, in reality, some MLMs are predatory.
- Immigrants, minorities and lower-income communities. Predatory companies also target recent-immigrant communities, minority communities, and lower-income communities worldwide. Many of these groups are known for valuing family and community, are upwardly mobile, and have close, trusting connections. A single foothold in a tight-knit community is valuable for recruitment because communities that value cohesion are likely to produce more recruits or, at the very least, more buyers.
Many MLM companies have a foothold in Utah because the state has a high percentage of stay-at-home mothers and is home to many practicing Mormons who value community.
2. Predatory direct sales companies purposely hide sales data.
Shady MLMs tend to obfuscate their sales associates’ financial results. Many MLM reps will say they “can’t tell you” how much money they make but can say how much they or their team have sold.
Their “team” might be their entire upline and downline sales group, which could be hundreds of people. If the team sold “millions” in goods, they could be referring to how much the company says the product is worth, not its list price.
Direct sales consultants are often required to purchase stock before they sell it. So even if a hypothetical representative sells $10,000 in goods, they still must subtract what they paid for the products and the percentage an upline manager receives. You could sell many products and barely break even.
Unfortunately, many people who participate in MLMs don’t make any significant income, and many even lose money.
How can you tell if an MLM is a scam?
If you or someone you know is thinking about joining an MLM company, here are some research tips and red flags to consider:
- Research the company online. Do an online search to get a general idea of what people are saying about the company. Also, search the company name with the word “scam” to see if it’s associated with any controversy. Consult several sources to find consistent praise or criticism, and pay particular attention to mentions of “pyramid scheme” and claims that it bankrupted people. You likely don’t want to be associated with any company with consistent negative impressions.
- Pay attention to a recruiter’s behavior. Be wary if a recruiter is particularly persistent in getting you to sign up with the company. If being a sales rep with the company is such an amazing experience, a hard sell shouldn’t be necessary. If the recruiter is a family member or friend trying to make you feel guilty or accusing you of not trusting them, that’s also a red flag. Other recruiter red flags include social media posts boasting about their happiness, constantly promoting the company and being vague about how much they’re making.
- Consider how the recruiter speaks to you. Be skeptical if the person you’re talking to brags about their lifestyle and money. Legitimate professionals don’t boast about their salaries or lifestyles to recruit people. Look out for claims that the recruiter is making so much money and that it’s so easy.
- Be very wary if you must pay money to start working. Some legitimate business situations require you to invest money to get a slice of the pie, such as owning a franchise or being a venture capitalist. However, most legitimate sales jobs do not require salespeople to buy the goods they’re going to sell. Even legitimate commission sales jobs – such as pharmaceutical sales, auto sales, real estate, retail or telemarketing – don’t require an initial personal investment.
Jennifer Post contributed to the reporting and writing in this article.