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MLMs Are Preying on the Dream of Entrepreneurship

By
Mona Bushnell
,
business.com writer
|
Aug 22, 2019
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> Business Basics
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Multilevel marketing companies target women, immigrants and low-income minorities.

Wherever there's something people desperately want, there are predators looking for a way to take advantage of the situation. It happened with the housing crisis, when lenders offered the American dream of home ownership to people who couldn't afford it, and it's happening now with MLM companies offering the dream of entrepreneurship to people who want to start a business.

Many Americans dream of being their own boss and answering to no one, opening themselves up to brutal manipulation by sharks in pretty Instagram filters. Americans want the dream of entrepreneurship so badly, and believe they can have it so fervently, that they are being manipulated into handing over their hard-earned money and time for the promise of financial independence and career stability that will never come.

The viciousness of multilevel marketing (MLM) companies cannot be overstated, no matter how family-friendly, female-friendly and diverse they might market themselves as being.

Multilevel marketing 101

A lot of people are confused about MLM companies and wonder how pyramid schemes can operate in the public eye for so long without getting shut down. Understanding multilevel marketing is key, and here's the weird fact: MLM companies are not illegal, but pyramid schemes are. Where it gets confusing is that many (some people would say nearly all) MLM companies are pyramid schemes. Here's the legal difference and why it's so hard to get them shut down.

  • Multilevel marketing: Sometimes called direct marketing, home-business franchising, network marketing, affiliate marketing or direct sales, MLM companies are not illegal in the United States. In legitimate MLM companies, salespeople make most of their money by selling products from the company directly to consumers, but they also often make a cut of the downline associate's sales (like in a pyramid scheme, which is why it's all very confusing).
  • Pyramid scheme: In a pyramid scheme, the primary way a salesperson makes money is by recruiting more and more downline sales associates, not by selling products.

So basically, to shut down an MLM company, you must be able to prove in a court of law that the company is knowingly a pyramid scheme, and not accidentally a terribly run business that happens to look a lot like a pyramid scheme. When the defense for your poor business practices is that you aren't predatory, just incompetent, that says quite a lot.

Pyramid schemes prey on women, minorities and immigrants

Direct sales companies aren't vilified the way financial companies are, because they're adept at publicizing glossy images of entrepreneurship and freedom, with the promise of being able to balance it all with a rich personal life. But make no mistake, these companies have one goal: to recruit as many people as they can and get as much of their money as possible. They actively target people they believe to have limited employment options, limited understanding of local business practices, or both, and they sell them every line in the book to get their money.

MLMs continue to grow by targeting people who really want to make money and who also belong to close-knit communities. This allows MLMs to cash in on the rich networks their recruits already have. Women, especially stay-at-home moms, are the primary target of many direct sales companies because they 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 and spouses can make money from home by working on a part-time basis, 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.

There are many MLM companies with a foothold in Utah for exactly this reason. Utah has the highest percentage of stay-at-home moms of any state in the country and is also home to a large population of practicing Mormons. Generally speaking, Mormons highly value community, large families, and proximity to those with similar lifestyles and beliefs. As such, populations like those in Utah offer MLMs the perfect entryway into a vast network of people who are often close in connection and ideology as well as geography. Basically, Mormon stay-at-home moms are valuable to these companies because of their larger community ties.

Predatory companies use the exact same strategy in recent-immigrant communities, minority communities and lower-income international communities worldwide, as 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 (i.e., friends and family purchasing items out of a sense of community or social obligation).

Low-income immigrant neighborhoods offer pyramid-schemers the additional advantage of recruits' higher likelihood of ignorance about local business practices, which can make them easier to sell on wild business plans. When you're new to a country, everything might seem a little off, a little strange and unexpected. Therefore, you may be more likely to push aside that voice that says "this doesn't seem right" or "this seems too good to be true" than if you were in your native country. This is especially true among low-income groups, including non-immigrant minorities who might be more desperate for upward mobility than wealthier groups, which means they are willing to put in work or even invest their own money for a shot at the American dream.

Pyramid schemes use the language of success

Another thing MLMs do very well is using language that echoes the dreams of their targets. They call their recruits "entrepreneurs" and "business owners" and encourage them to talk about themselves that way. The allure of suddenly being able to say "I'm a business owner" or "I'm an independent consultant" for just a small down payment on goods is very strong. People, especially Americans, connect status to independent entrepreneurship and want to be viewed as "bosses" who are out in the world making their own way, running their own lives, and getting their slice of the American dream.

Women are encouraged to use images of themselves and their families on social media to push products and gain recruits. Many MLM Instagrammers use hashtags like #leanin (a la Sheryl Sandberg), #thefutureisfemale, #momboss or #entrepreneur. Using the language of third-wave feminism and borrowing quotes or phrases from real female CEOs helps recruiters and recruits see themselves as legitimate professionals, no different from a founder of a startup company or a C-suite executive.

Many prolific posters also share images of luxury goods and aspirational lifestyle shots. Before and after pictures and "fitspo" ("fitspiration") images are popular with health-related brands, for example. These help sell the idea that it's easy not just to make a modest side income from direct sales, but to fund an upper-middle-class lifestyle – entirely on your own hours, of course.

Direct sales companies purposefully obfuscate sales data

MLMs love to obfuscate the financial results of their sales associates. Many MLM workers will say they "can't tell you" how much money they make, but they can tell you how much they or their team have sold. So, they might tell you their team has sold millions of dollars of goods, but that could mean anything. Their "team" might be their entire upline and downline sales group, which could be hundreds of people. The "millions" in goods sold could be the value the company likes to say the product is worth, not the list price it's actually sold for (like TV marketing ads that say a product package is a $100 value, but it's available for just $65).

Direct sales consultants are often required to purchase the stock before they sell it. So even if a hypothetical representative does sell $10,000 in goods, she still has to subtract from that the cost of those goods that came out of her pocket and the percentage that her upline manager receives, so it's possible to sell a great deal of goods and barely break even. It has been shown ad nauseum that most people who participate in MLMs do not make any significant income and that many of them lose money. A recent report from the AARP Foundation found that only 25% of people who participate in direct sales companies make money, and of that 25%, more than half (53%) make less than $5,000.

How can you tell if an MLM is a scam?

Given the low success rate of people who get involved with all direct sales companies, some people would tell you that it's safest to just avoid them and seek employment elsewhere. However, if you or someone you know is already seriously considering joining an MLM company, there are a few things you should do to research the company before you sign on. After all, that's what all real businesspeople do; it's called due diligence.

Here are some research tips and red flags that you shouldn't ignore.

1. Read the criticism.

Don't seek out information that tells you what you want to hear; search online specifically for negative information to see what's out there. Try Googling the name of the company you're considering followed by the word "scam" and see what comes up. Don't just read one link – read several, and spend a couple of hours on the sites that talk about the company in question.

Of course, not everything on the internet is true, but scale matters in assessing the potential validity of people's claims. When hundreds or thousands of people from all over the country are saying the same thing – that some company was a scam, that they never made money, that it is a pyramid scheme, that it bankrupted them – you should take that very seriously. At the very least, you should ask yourself, "Do I really want to build a career at a company that so many people think is a scam?" The answer is probably no. When you research legitimate employers, like big-box stores, you don't find hundreds of people saying the company stole their money and lied to them, and there's a reason for that.

2. The recruiter is persistent in getting you to sign up.

Think about it: For most desirable jobs, the job seeker must apply, go in for interviews, wait, compete with other people and hope they get the job. If someone is urging you to take a job, being very persistent and reaching out to you repeatedly about taking the job, ask yourself why. Why can't they find someone to do this apparently amazing job? Why are they practically giving this job away? Why aren't more people trying to get such a high-paying, easy, flexible job?

If the recruiter is a family member or friend, and they are trying to get you to sign up by guilting you or accusing you of not trusting them, that's also a really bad sign.

3. The person you're talking to brags about their lifestyle and money.

Legitimate professionals do not brag about their own salaries or lifestyles to recruit other people to work for their companies. If someone is consistently telling you they're making so much money and how it's so easy and you can do it too, run. Real successful people don't do this. If the person is also posting on social media about how happy they are, constantly promoting their company, and is vague about exactly how much they make (only mentioning huge sums like "millions" or "tens of thousands"), they probably aren't as successful as they seem.

4. You must pay money to start working.

There are some legitimate business situations where you need to invest money to get a slice of the pie, like owning a franchise (such as a chain restaurant or store) or being a venture capitalist. However, most legitimate sales jobs do not require salespeople to buy the goods they are going to sell. If you want a job in commission sales, there are lots of avenues you can go down that will not require you to invest any of your own money, like pharmaceutical sales, auto sales, real estate, retail or even telemarketing. [Read about the best sales certifications to better your career on our sister site Business News Daily.]

5. Consult resources about MLM companies.

Pyramid schemes tear families and communities apart, and there is a growing opposition to these harmful businesses. Here are just a few resources you should consult before you choose to sign up as a direct sales associate with any MLM company:

Mona Bushnell
Mona Bushnell
Mona Bushnell is a New York City-based staff writer for Business.com and Business News Daily. She has a Bachelor of Arts in writing, literature, and publishing from Emerson College and previously worked as an IT technician, copywriter, software administrator, scheduling manager, and editorial writer. Mona began freelance writing full time in 2014 and joined Business News Daily in 2017. She covers business technology and reviews CRM systems.
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