We all have that friend.
You know, the one plugging a Beautycounter mascara they’ve fallen for or the one who dropped 30 pounds thanks to Beachbody. These companies seem to sprout out of thin air, filling your feed.
The primary reason for their sudden success? Fans.
Companies like these use a strategy called multi-level marketing (MLM) to fuel their growth. As their customer base expands, so does their workforce. Customers become advocates, who become distributors, who recruit more customers, who also become advocates, and so on and so forth.
The result is an extensive network of dual customers and coworkers, propelling the company forward. However, for many MLMs, their followers grow proportionally with their foes.
Find out how MLMs work and what characteristics indicate a potential scam.
What is multi-level marketing (MLM)?
Multi-level marketing, or MLM, refers to a business that uses its own customer base to promote and sell its products or services. Some other common names include network marketing or direct marketing.
An MLM grows when customers support the business so much that they will not only recommend it to friends and family, but they’ll personally sell its merchandise.
As customers-turned-distributors invite people they know to try the products/services for themselves, they also invite these newfound fans to join the sales team. This creates a domino effect, where everyday shoppers go beyond purchasing goods and even beyond selling them; they become the company’s marketing and sales department.
Some well-known MLMs you may have heard of include the following:
- Mary Kay.
- Young Living.
- Rodan & Fields.
- Stella & Dot.
- Pampered Chef.
- Herbalife Nutrition.
How do MLMs work?
MLMs make their money by capitalizing on a customer’s enthusiasm for their business.
Rather than just purchasing the products they love, customers can share them with friends, family members, coworkers, and so on — and make some extra cash along the way.
However, the reason MLMs can gain traction and grow so fast is that these customers, or distributors, earn additional income when they recruit others to sell the products too.
For example: let’s say you’ve been working for an MLM for a couple of months and recently convinced your friend Sam to join the team. Sam invites a few people over to learn more about the products — to test the makeup, try the jewelry, and sample the essential oils.
At the end of the event, two guests decide to buy some products. Not only will Sam receive a commission for those sales, but you, Sam’s “sponsor,” will earn a percentage of the sales as well. The more people you recruit, referred to as your “downline,” the more commission you make.
MLM sales representatives can gain many additional perks, beyond working for a company they like. They typically all you to:
- Work from home.
- Set their own schedule.
- Organize fun parties and events to sell inventory.
Since these sales representatives aren’t technically considered employees of the MLM, they essentially run their own business.
Not a bad side gig… well, not always.
Are MLMs scams?
If you read through the description above and thought “pyramid scheme,” you’re not alone.
The Federal Trade Commission (FTC) does not have a hard definition for what a “pyramid scheme” is, but do warn customers that pyramid schemes:
“promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public.”
With this said, one of the simplest ways to determine whether or not an MLM is a scam is to find out where the bulk of a distributor’s income (if any) comes from.
Do they make more money from product sales or bringing on new recruits? Which does the MLM prioritize most? According to the FTC:
“if the MLM is not a pyramid scheme, it will pay you based on your sales to retail customers, without having to recruit new distributors.”
Another potential sign of a pyramid scheme is if the MLM requires you to purchase products on a consistent basis and/or pay fees for training and marketing materials.
Some pyramid schemes also use prize incentives such as vacations or vehicles to motivate their distributors to sell more products and recruit more people. As a result, many recruits find they’re unable to sell fast enough and end up losing far more than they make.
Is anything being done about MLM scams?
Every year, the FTC investigates a number of shady MLMs. However, while they’ve sent out warning letters to companies like doTERRA and Rodan & Fields and have even labeled businesses like Neora and AdvoCare as pyramid schemes, they are simply incapable of monitoring every MLM.
With this in mind, be sure to research new and longstanding MLMs thoroughly before you assume they’re legitimate businesses.
At the very least, make sure that you do the following:
- Search for customer and distributor reviews.
- Check with your state attorney general for any filed complaints against the MLM.
- Check to see if the company is a member of the Direct Selling Association. These businesses adhere to a strict code of ethics, so you can feel more confident in their claims.
The FTC also encourages individuals to watch out for the following signs of a pyramid scheme:
- The MLM makes exaggerated claims about the success you’ll have working with them.
- The MLM says you can make the most money by recruiting more distributors.
- The MLM uses urgency and fear of missing out to pressure you into working for them.
- The MLM requires that you purchase more products than you can realistically use or resell, or incentivizes you to buy more than you need to win certain prizes or rewards.
How do you know if an MLM is right for you?
The unfortunate reality is that MLMs are risky. In fact, most people who work for MLMs don’t make much through the business, if anything.
According to an income-disclosure statement in 2018, more than 9 out of 10 distributors with the popular hair-care MLM Monat made just $183 that year.
That same year, 89% of American distributors with essential oil MLM Young Living earned an average of $4. There may be the occasional Mary Kay representative who touts their iconic Pink Pearl Cadillac, but these individuals are often the exception and rarely the norm.
In fact, research from the Consumer Awareness Institute discovered that a startling 99% of people who participate in MLMs lose money.
Not every MLM is out to steal your hard-earned cash, but if you have entertained the idea of working for one, it’s crucial that you do your due diligence.
Since many pyramid schemes offer poor-quality goods, make sure you can personally vouch for their products/services. Study the MLM’s compensation plan and onboarding documents, especially contracts or agreements you’ll need to sign.
Finally, ask for insight from folks who understand the company practices and products well and can give you a sense of the time and money the job requires.
Alternatives to MLMs
Even if the MLM is a legitimate business, statistics show that it’s more likely you’ll lose money than reach the level of wealth and prosperity they promise.
Fortunately, there are plenty of alternatives to MLMs for the folks who want to earn more money on the side.
Here are a few worth considering:
Find a part-time, minimum-wage gig
Do you enjoy books? What about coffee or tea? Maybe there’s a local restaurant or retail shop you like?
If you want to make some money on the side and have the time and energy to work outside the home, find out who’s hiring in your town and consider the opportunities right under your nose.
Become a virtual assistant
Not everyone in need of extra cash can afford to take on additional work outside the home. If that’s you, a remote job like a virtual assistant may be the perfect fit.
This is an especially ideal option for folks with solid computer skills and a knack for organization.
Sell homemade goods on Etsy
For those of you with crafty or creative talents, there may be a market for your designs online. Research the selection available on Etsy to see if your creations could fit well among the existing inventory.
Resell thrifted goods
Selling your unwanted possessions can be a tedious task, which is why many people would rather donate their excess goods than spend time selling them.
Take advantage of affordable secondhand finds and use them to earn some extra cash.
After all, one man’s trash is another man’s treasure.
Popular companies like Pampered Chef and Mary Kay don’t achieve their success by following the traditional business model of brick-and-mortar stores. Instead, they rise to the top by enlisting the help of everyday customers like you.
These companies expand their network of sales representatives as customers-turned-distributors advertise and sell to their network of friends and family members.
If you are considering joining a MLM, make sure that you do your research first, or you risk losing out on more money than you make!