Multi-level Marketing: What it is and why you should be very skeptical
If you are on social media, it’s likely that you’ve been exposed to multi-level marketing (MLM) products. Perhaps you’ve noticed a friend who posts frequently trying to sell skin care products, makeup, or athletic wear. Or perhaps you’ve been approached by an old high school acquaintance that you’ve forgotten about who is looking to recruit “boss babes” to be on their “team”.
Before we move further, I want to make it clear that there are some legitimate businesses that allow people to sell products from home and earn a sales commission. I do not intend to shame anyone for trying to make money. In fact, it’s quite the opposite. My intent is to educate folks on the types of businesses that could potentially be lucrative—and which ones to avoid.
If you’re a part of the financial independence movement, you’re likely on the hunt for ways to earn extra income, and some of these MLM opportunities might look like a tempting way to earn some cash without a huge time commitment. Others MLM companies assert that they are giving you an entrepreneurial opportunity to be your own boss with unlimited earning potential.
Let’s look at the details of multi-level marketing so you can judge for yourself if it’s something you should pursue.
What Is MLM?
Multi-level marketing involves working as an independent contractor, selling products for a company, and recruiting others to work below you. The “multi-level” part comes from the fact that as you recruit others, they will be placed below you. They’ll (ideally) recruit others who will be placed below them, and the structure will resemble a pyramid with many levels.
Most MLM companies refer to these independent sales reps as “distributors” or something similar. As a distributor, you’ll have two parts to your job:
- Sell the products of the company to end-users.
- Recruit other sales reps or distributors to work below them.
Distributors generally make some money from the retail sales they make to end-users, but no one is getting rich off of this income (well, almost no one).
The key to success with MLM involves recruiting and developing a large and active team of distributors. Each company works a little bit differently, but you’ll earn money from the sales made by distributors who are beneath you in the organization, what’s often referred to as your “downline”.
Some popular MLMs include Amway, Herbalife, Avon, Mary Kay, and Tupperware.
MLMs are sometimes referred to as “pyramid schemes” but it’s important to point out that legitimate multi-level marketing companies are legal and technically not a pyramid scheme.
For an MLM business to be legit, there must be a real product being sold, and distributors should have the opportunity to earn a profit simply by selling the product, even if they don’t recruit other distributors.
Illegal pyramid schemes focus almost exclusively on recruiting more distributors. The products are an afterthought. Distributors may be forced into buying more products than they could ever sell.
On the other hand, a rep or distributor with a legit MLM like Avon or Mary Kay can earn a profit by selling the products directly to customers. Recruiting other distributors is necessary to reach the maximum income potential, but it is possible to make some money without recruiting.
The FTC provides more information about the differences between MLM and pyramid schemes to help provent people from falling victim to scams.
Are MLMs a Scam?
There’s a fine line between a legit multi-level marketing business and an illegal pyramid scheme. The legit companies are not a scam in the sense that it is possible for someone to run a completely legal and profitable business.
However, most MLM companies have a bad reputation because of the lies or partial truths that are often told during the recruitment process, and because the success rate is extremely low. MLMs may be viewed as a scam because you’re more likely to lose money than to make money, but the legit companies are not illegal.
The Problems with MLM
Let’s look at some of the most common issues related to multi-level marketing businesses.
Extremely Low Success Rate
If you’re being recruited by someone in an MLM, they’re probably telling you about the opportunities you’ll have to earn a six-figure income and live life on your own terms. They may show you examples of people who have had success with MLM, and there certainly are plenty of success stories.
However, the success stories are the exception, not the rule. Most people who try MLM don’t succeed, although the exact statistics vary from one report to the next. A study conducted by the FTC found that 99% of MLM participants actually lose money, and 95% quit within three years (source). A separate study conducted by AARP found that 25% of MLM participants turned a profit (source).
Many other studies have been conducted over the years, and the general consensus is that the success rate with MLM is very low. In fact, the report from AARP with a 25% success rate feels surprisingly high.
While this isn’t always the case, it’s very common for distributors or reps to use a lot of pressure to convince people to sign up. You might be discouraged from taking your time to research the company and decide if it’s right for you. In some cases, you may even be made to feel foolish if you don’t recognize the opportunity or have an interest in joining immediately.
Selling to Family and Friends
As a direct sales rep or distributor, you’ll need to sell products to run a legit business. Who do you sell those products to? You’ll probably have to sell, or attempt to sell, to your friends and family.
Now, selling products to your friends and family isn’t always bad. Your products may be able to genuinely help someone. However, trying to sell to friends and family will often become uncomfortable, and it may even cost you some relationships.
And selling products isn’t the only way friends and family are often involved. If you need to build a downline, your prospecting will almost certainly start with the people you know. This can lead to a lot of uncomfortable conversations and awkward situations. And with the success rate being so low, it may lead to strained relationships from people who decide to join your downline.
Smriti from Yogic-Experience had one of these uncomfortable experiences with a friend who was a co-worker. After an impactful motivational speech, Smriti invested $1,200 into a business opportunity that resulted in nothing gained and would have forced agressive recruitment of other friends and family with no clear business plan. Smriti says, “I chose not to strip friends and family of their hard-earned money like my friend did.”
Everyone Is a Prospect
Those who beat the odds and have success with network marketing typically are very good at recruiting new distributors. In order to do this, you need to be constantly looking for new prospects.
Former Amway distributor Ryan Healy found this to be difficult to accept. He says, “Quite honestly, it was a stressful way to live. When everybody is a prospect, then nobody is ever just a friend or just a waitress or just a [fill in the blank]. Everybody you meet, anytime and anywhere, is a prospect who might be looking for a business opportunity like Amway. This mindset creates pressure to always be thinking about selling people on the idea of an Amway business.“
Too Much Emphasis on Recruitment, Not Much Emphasis on Products
Unfortunately, the products of an MLM business are usually overshadowed by the emphasis on recruitment. Selling a product might make you a few dollars, but the real money is made in recruiting others and building a downline. As a result, many MLMs focus 90% of their time and emphasis on recruiting and only 10% on the products.
Does anyone even care what the products are? Could you switch out the products for something different an no one would think twice? If so, that’s not a good sign. A legit business should have more interest in the products it sells than in recruiting more people to sell those products.
Upfront Costs and Registration Fees
Many multi-level marketing businesses require an upfront payment to get started. You may need to pay some sort of registration fee or be forced to buy a certain amount of products. The sponsoring rep who signs you up may receive a bonus from that amount. If the upfront payment involves buying products, everyone in the upline stands to benefit.
Unfortunately, many people who join an MLM never earn enough money to even cover the upfront cost.
Ongoing Purchase Requirements
In order for a network marketing business to remain legit, products must be bought and sold. If no products are being sold and the only activity is new distributors signing up and paying an initial fee, the entity becomes an illegal pyramid scheme.
As a result, many MLMs have requirements that force distributors to purchase a certain dollar amount of products each month or each quarter. Typically, the products can be used for yourself or sold to your customers. Distributors who aren’t having success at finding customers often spend a lot of money buying products they don’t need just to meet the requirements.
While it’s not always the case, you’ll find that many MLMs sell products that are priced significantly higher than the competition. The higher prices allow money money to be made by everyone in the upline, so it makes sense why cheap products aren’t being sold. However, if there’s anything worse than trying to sell products to friends and family, it’s trying to sell significantly overpriced products to friends and family.
Is MLM Right for You?
In general, it’s advisable to avoid multi-level marketing. Sure, some people will have success and build a profitable business, but the odds are stacked against you. Even if you do have success, it’s likely that you’ll lose some friends and family along the way because of the aggressive nature of recruiting.
If you do opt to join an MLM company, it’s best to choose a company that sells quality products and places as much emphasis on the products as the recruiting aspect.
Is There a Better Option?
If financial independence appeals to you, and it probably does if you’re reading this, there are plenty of other options aside from multi-level marketing. Here at Think Save Retire, we’re big fans of side hustles and online business. Working to increase your income, living below your means, and investing as much as possible will make it possible to achieve your goals without resorting to MLM. Be sure to read The Roadmap for How to Retire Early for more information.