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What is Multilevel Marketing (MLM)?
MLM or multi-level marketing is a sales strategy used by direct sales companies to sell products and services through independent distributors. This approach encourages existing members to sell to their own network of friends, family, and acquaintances and to recruit new members into the business. In this way, distributors can earn a percentage of their recruits’ sales, as well as any additional participants signed up by their recruits, potentially through multiple levels of distributors.
However, not all MLM schemes are created equal. There are legitimate businesses that operate within the law, but there are also illegal pyramid schemes that cast a negative light on the industry as a whole.
Pyramid schemes are unsustainable and work by recruiting members to pay into the scheme with the promise of earning more money by recruiting even more members. The focus is on recruiting rather than selling products or services, which is why these schemes are illegal.
While it is possible to make money in MLM, the odds are often against you. In fact, the vast majority of participants end up losing money, as the earnings are heavily reliant on recruiting new members rather than selling products or services. Therefore, it’s crucial to do your research and understand the potential risks before getting involved in an MLM.
How MLMs Work
MLMs, or multi-level marketing companies, are a type of direct-selling business where salespeople purchase products from the company and try to sell them to customers for a profit. These salespeople can be called distributors, contractors, participants, or other titles depending on the company’s jargon.
What sets MLMs apart from other types of direct-selling companies is the emphasis on recruiting other salespeople. In an MLM, you’re encouraged to recruit other salespeople, who are referred to as your “downline” distributors. You then get to claim part of the commission generated by your downline and pay some of your commissions to those “upline” from you. This is what makes MLMs a “multi-level” marketing strategy.
Upfront and Ongoing Fees
Typically, MLMs require new recruits to pay registration fees and buy inventory or training materials to get started. These costs can range from a few hundred dollars to thousands of dollars a year. Some MLMs also require their distributors to purchase a certain amount of inventory each month or quarter, regardless of whether they’ve sold it all.
Emotionally-Charged Sales and Recruiting Events
MLM events are often emotionally intense gatherings, with a similar atmosphere to religious festivals, designed to encourage distributors to continue with the company even if their sales efforts haven’t yielded a profit. These events can be costly, and distributors are often encouraged to bring their downline with them to help motivate them.
Social Network Sales and Recruiting
Because MLMs don’t operate retail locations, distributors often focus their sales and recruiting pitches on their existing social networks such as friends and family, or members of churches or other organizations they belong to. This can put a strain on these relationships and make it difficult for distributors to separate their personal and professional lives.
In conclusion, MLMs can be a potentially lucrative business opportunity, but they often come with high upfront costs and a heavy emphasis on recruitment. If you’re considering joining an MLM, it’s essential to do your research and fully understand the costs and commitments involved.
Real-World Examples of MLMs
Multilevel marketing (MLM) is a business model that allows individuals to earn money by selling products and recruiting others to do the same. Here are two examples of companies that use MLM:
Amway is a direct sales company that has been around since 1959. It sells a range of products, including health supplements, cosmetics, and cleaning supplies. Amway operates in over 100 countries and reported $8.9 billion in sales in 2021, making it the largest MLM business in the world by revenue.
Herbalife Nutrition is another well-known MLM company that specializes in weight-loss and nutritional products. While the company claims that its revenue comes mostly from product sales rather than recruitment, it has faced several lawsuits over the years accusing it of operating a pyramid scheme. In 2016, Herbalife settled with the Federal Trade Commission (FTC) and agreed to restructure its business.
Activist investor William Ackman also made headlines in 2012 when he publicly accused Herbalife of operating a pyramid scheme and shorted $1 billion of the company’s stock.
However, the stock price rose dramatically in the years that followed, although it has since fallen to recent lows in 2022. Despite this, Herbalife remains a major player in the MLM industry.
Can You Make Money Joining an MLM?
Joining a multi-level marketing (MLM) company might seem like a great way to make some extra cash, but the reality is often far from it. Independent analyses suggest that the chances of actually making money with MLMs are slim at best.
Take Herbalife, for example, a large MLM company that sells nutritional supplements. Public documents reveal that most of its distributors earn very little. In 2015, 95.5% of the one in five distributors who managed to build a downline earned an average of just $627.55 for the entire year. To put that in perspective, they could have made the same amount by working just 1.7 hours per week at a job paying minimum wage. And only a tiny fraction of those who built a downline – 0.65% – reported earning $100,000 or more.
But that’s not all. According to a 2018 survey by personal finance website MagnifyMoney, the average earnings of MLM participants amount to just 67 cents per hour – and that’s before factoring in expenses.
In fact, only one out of every 250 MLM participants actually makes a profit, according to consumer advocate and researcher Jon Taylor, whose work has been published on the Federal Trade Commission website.
So, if you’re considering joining an MLM, be aware that the odds are stacked against you. While it might be possible to make some money, the reality is that most people won’t – and they could end up wasting a lot of time and money in the process.
MLMs vs. Pyramid Schemes
While both involve recruiting members to expand a business, there’s a big difference between the two. MLM is a legitimate business model that focuses on selling actual products or services to customers. On the other hand, pyramid schemes are illegal scams that don’t provide any real products or investments.
In a pyramid scheme, participants are convinced that the company has a valuable product or investment project. However, they only receive “promised payments” by recruiting more people to join the scheme. The more people they recruit, the more they earn, creating a pyramid-like structure. Unfortunately, those who fall for these scams usually end up losing all the money they invested or paid as “membership fees.”
On the other hand, MLM distributors, especially those at lower tiers, typically make small amounts of money from sales commissions. While MLMs also rely on recruitment to expand their businesses, the primary focus is on selling products or services to customers.
To avoid falling victim to a pyramid scheme, it’s important to identify whether the business model is legitimate MLM or a fraudulent pyramid scheme. If a business places more emphasis on recruiting new members than selling products, it’s likely a pyramid scheme.
The Federal Trade Commission (FTC) is responsible for investigating MLM companies and identifying pyramid schemes. However, in some cases, it can be challenging for the agency to determine whether a company is operating legally or not. That’s why it’s essential to do your research and be cautious before joining any business opportunity that sounds too good to be true.
- Learn more about the differences between MLMs and pyramid schemes.
Criticism of MLMs
Inherently predatory business model
One major criticism of MLM is that it’s often compared to a pyramid scheme. Critics argue that MLM is inherently predatory because it can be difficult for the general public to tell the difference between a legitimate MLM company and an illegal pyramid scheme. Both models often make grand claims that rarely materialize, which can lead to disappointment and financial loss for participants.
Purchasing inventory can be risky
Most MLM companies require their consultants to purchase inventory, which they then sell through Facebook groups, distribution parties, or events. This can be a significant financial burden for sellers, who are essentially investing in the product before they’ve made any sales. In order to turn a profit, they must first recoup their investment, which can be a daunting task.
No traditional perks
Working as an MLM consultant is similar to working as a contractor or freelancer. While there is more flexibility and autonomy in the MLM structure, there are usually no traditional perks like health insurance or paid vacations. This can be a downside for people who prefer the stability and benefits of traditional employment.
Lack of guidance
While MLMs often provide training and support to new retailers, ultimately, you’re running your own business. That means you’ll need to be self-motivated and willing to learn on the fly. Without the guidance of an experienced boss, you may need to figure things out as you go along, which can be challenging.
No reliable income
One of the biggest criticisms of MLMs is that they don’t provide a reliable income for most participants. This is because there are typically no territorial restrictions on who can become a representative, which can lead to oversaturation in certain markets. Worse still, the commission structure often favors those in the upper tiers, leaving lower-tier distributors with lower incomes despite working just as hard. This can make it difficult for them to earn a living, as they may be competing with many others for sales.
Alternatives to Joining an MLM
In MLMs, the average monetary return is poor, so almost anything pays better than joining.
1. Remote Jobs
Let’s face it, MLMs have a notoriously low return on investment. So, why not look for a job that pays better and offers more flexibility? Remote jobs are a great option for those who want to work from home and avoid the commute.
These days, more and more companies are offering remote work options. Just be sure to avoid any job postings that are really MLM recruitment pitches in disguise.
Another option is to explore the “gig economy”. Driving for a rideshare or food delivery service can be a great way to set your own hours and make some extra cash.
You can check out our list of the best work from home jobs.
2. Start Another Type of Online Business
For those who are more entrepreneurial-minded and don’t mind taking risks, starting a small business can be a rewarding option. And no, we’re not talking about an MLM.
There are plenty of online businesses that can be established with minimal startup costs. It might take some hard work and dedication, but the rewards can be well worth it in the end.
So, if you’re ready to take the plunge, check out our guide of the best online business ideas.
Is multi-level marketing illegal?
No, multi-level marketing (MLM) is not illegal by itself. However, if the MLM operates as a pyramid scheme, where top-level participants make money by scamming lower-level recruits, then it is illegal. The determining factor is whether the company earns money primarily by recruiting new members or by selling products to the public. If the company makes most of its profits from sales to consumers, then it is a legal MLM. It can be challenging for the average person to tell the difference between a legitimate MLM and a pyramid scheme.
Are all multi-level marketing companies pyramid schemes?
Not necessarily. The Federal Trade Commission (FTC) distinguishes between legitimate MLMs that sell products to consumers and illegal pyramid schemes that mostly earn money by recruiting new salespeople.
While the two can be quite similar, there are important differences. That being said, it’s still tough for the average person to tell whether an MLM is legitimate or a pyramid scheme just by looking at it from the outside. You can check out our article “9 Signs To Spot A Pyramid Scheme” to learn more.