What Are Multi-Level Marketing Scams, and How Do You Avoid Them?
Multi-level marketing, or MLM for short, is a business model which profits from participants selling the company's products and services or recruiting investors. Sales people aren't paid on salary, and instead make money through distributors lower down in the system, workers or investors they've recruited themselves in compliance with the company's marketing strategy. Learn more below about what MLM scams are (a.k.a pyramid schemes), how to identify them, “red flags” to look out for as well as other warning signs.
If you were to outline the shape of this model, with levels of distributors and a revenue that flows upwards to the top boss, it would make the shape of a pyramid. Chances are you've heard of pyramid schemes, but what exactly makes them so bad?
There is an even increasing number of people or companies advertising on social media for people to take part in multi-level marketing opportunities. In fact, according to studies (including from the AARP) it is estimated that as many as 20 million Americans either currently or have been part of a MLM scheme. Many of them are single moms, desperate for money, or immigrants. These MLM schemes are often touted as a way to run your own business and make big money, and they often target the vulnerable.
However, many of these schemes are predatory and involve large outlays of personal cash with little or no long-term reward. One study from the AARP showed the following.
- The AARP study/survey shows that about 50% of participants actually lose money.
- Another 25% or so “break even” - they do not lose money but they make zero dollars.
- About 15% earn a profit of under $5,000 after working countless (often many hundreds) of hours.
If you're looking to quit the nine-to-five grind, then great! Setting up a genuine business can be highly rewarding, as can creating a side hustle for extra income. However, don't allow yourself to get hooked into a pyramid scheme that benefits only those running it.
Problems with a Multi-level marketing (MLM) business model
The main problem with pyramid schemes and related MLM scams is that such models always fail and most people make zero dollars or they lose money. They're a short-term strategy to accrue as much money for those sitting at the top until the whole business ultimately falls apart.
Why do multi-level market schemes fail? Because at each level the number of investors has to increase exponentially. Eventually, you run out of people, and without new recruits to invest, the money stops flowing.
Are all multi-level marketing businesses scams? Not automatically. While pyramid schemes and other scams fall under the MLM models, there are legitimate companies that sell real products and services with the goal of long-term sustainability and growth. So, how do you tell the difference between legitimate multi-level marketing and scams?
What is an MLM Scam?
The key difference between a multi-level marketing scam and genuine business is that a legitimate company makes money from selling tangible goods, while a scheme makes money from investors and distributors at the lowest level. An MLM scam may mask their true intentions behind a front of selling products, but there are a few ways to tell the difference.
If a business charges new recruits for selling rights or investment requirements, they are absolutely nefarious. A genuine company will never demand payment for their recruits to work. In addition, a thorough examination of the products and services being sold may shed light on a company's legitimacy.
A scam won't care about the quality of their goods, as selling products comes second to the money accrued through new investors. Therefore, they won't offer guarantees or warranties, as customer satisfaction and repeat buyers aren't a concern. The products and services offered are most likely poor quality, intended for quick and dirty sales.
Multi-level marketing organizations usually reject the term "pyramid scheme" to describe the way they operate, but the similarities are startling. Pyramid schemes operate on the basis of recruits becoming recruiters themselves and receiving a commission for recruiting a certain amount of people to the organization.
This commission is taken from those paying a fee to join the organization, with the money trickling upwards. Those at the top receive the largest share, while those at lower levels get a proportionately lower share of the money depending on their "level" in the pyramid.
These schemes are illegal in the US under trading standards legislation, but MLMs circumvent this by selling a product. While the exact breakouts may vary, some representatives spend only about 70% or so of their time selling the product, and 30% of their activity looking to recruit others.
This means that legally they are sales representatives for a firm. However, the only way to make money in the organization is through recruiting others and moving up through the organization, so really it's a pyramid scheme with a veneer of respectability.
This is where it starts to go runny: MLMs often advertise as an opportunity to "own your own business", so starting up involves a considerable cash outlay, often in the thousands. Many of the “advertisements” are directed at low income individuals, the undereducated as well as single moms. In addition to this, sales "representatives" will need to purchase the product for resale from the organization.
If you're foolish enough to wind up working for an MLM, you will find yourself with an "upline" manager who puts pressure on you to hit sales and recruitment targets -- so much for being your own boss! Inevitably the cash from product sales flows upwards, and those on the "downline" can only move up by creating their own downline and recruiting more reps.
This makes for a fundamentally flawed business model. For a start, by having to recruit your own downlines, you're creating competition for your own sales! Of course, the idea is that as you head on up the line, you spend less time selling and more time managing your downline. However, as the base of the pyramid widens, it creates a saturated market. For this reason, many MLM products are tainted by the pushy reputations of the reps and have a poor brand image.
Inevitably, those who are at the bottom of the organization find it very difficult to move up beyond a certain level, and the initial cash outlay and cost of buying the product means that those joining an MLM are unlikely to make a profit. Quite often, people who take part in MLMs become indebted, which is hardly surprising, as there is only so much room at the top of the pyramid. In MLMs, it is estimated the around 80-90 percent of participants make a loss.
Some MLMs even "gift" their reps a vehicle, with the rep then required to pay finance installments and servicing costs!
Warning Signs You're Being Recruited Into a Marketing Scam
Congratulations, someone has a job offer for you. Maybe it's even someone you know, be they a friend of a friend or a family acquaintance. But, during the interview, they reveal this exciting new marketing job doesn't have a salary--and is in fact based on you recruiting investors or new distributors.
How can you tell for sure if this new job offer is legitimate and for real or just an insidious multi-level marketing scheme?
Start by asking the interviewer detailed questions about the job--specifically what your task will be. If they give you vague answers or want you to wait for later meetings or seminars, chances are they're hiding something or don't know what they're involved in. If the interviewer avoids going into detail about the job, there's a reasons for it.
Did the recruiter show you a video? Worse, did that video specifically underline that they're not a pyramid scheme, and here's why? Pyramid schemes are generally well-known, and someone potentially trying to recruit you into one will first attempt to dissuade your fears. If anyone tells you not to worry because they aren't a pyramid scheme, run for the hills.
Avoid any business that demands investment money from you or promises income numbers that are too good to be true. Check the consumer demand and quality of products the business is selling. If the business is distributing for well-known brands, make a few phone calls to these companies and determine the connection is legitimate.
Furthermore, the organization will encourage them to aggressively sell their products to friends, family and acquaintances and look to recruit them. MLM victims are often encouraged to ignore and unfriend those who express misgivings, causing them to become alienated from their support network.
This makes MLMs very cult-like in their approach, which is why it's important to be aware of them and how to spot some of the following red flags - but there are many other warning signs.
- Overfamiliarity - MLM recruiters are often lampooned as "huns" due to their overuse of this term of endearment when trying to sell or recruit. If a stranger or somebody you seldom hear from suddenly acts like your best friend while recommending a product, it's a warning sign.
- Pushiness - If they just won't take no for an answer, it's because they're under pressure to sell or recruit. If it was that wonderful an opportunity, they'd have to be turning people away.
- "I need ten women who want to look FABULOUS this summer"
Why not nine or eleven, or just "some"? This is the clarion call of the predatory "hun". Any variation on this old chestnut shows that the rep needs to recruit a certain amount of people to create a downline and improve their prospects. Don't join the madness.
Be thorough in your search and suspicious of vagueness or anything that doesn't add up. A legitimate company will be transparent with their practices as well as the goods they're selling. In actual fact, those involved in MLMs are very disempowered. They have no choice or say, and those who question the organization will often find themselves frozen out of the MLM with massive debts.
Low quality products
Quite often, the product itself is of questionable quality or even potentially dangerous. As an example or two. Many MLMs sell makeup products that are far inferior to common high street brands; another might sell a shampoo that has a reputation for causing hair loss. Other MLMs sell health or diet supplements that have never been tested for their safety or effectiveness.
All of this adds up to a fairly shady business practice, but those at the top most often benefit. As the initial investments flow up and the reps far down the line buy products to mass-sell at tight margins, those few far up the line do well from the initial and continued investment of those below.
Since the pandemic and the enduring lack of employment security, many vulnerable as well as low income people are finding themselves targeted by MLMs, and the overwhelming majority are women. Many targets of pyramid schemes are immigrants as well as people of color. Or they are desperate for money for their bills.
Many MLMs sell products aimed at women, and their recruitment techniques are designed to seem empowering. Women are bombarded with terms like "boss babe" and offered the chance to be a business owner. MLM imagery is awash with luxurious cars and holidays and the chance to enjoy a lavish lifestyle.
Avoiding MLM Scams and Pyramid Schemes
Recognize the difference between businesses that employ a multi-level marketing strategy and pyramid schemes. Legitimate businesses have a real product to sell and customers to satisfy, while a scam only cares about making money from new investors on the bottom rung--all to feed the top levels.
Sometimes recruiters for multi-level marketing scams are members of your community or religious group. They might use that to ease you into their scheme, as recruiters are often instructed to target people they personally know. Many MLM schemes try to target single mothers. Just because the recruiter is someone you know or involved in your community, you have every right to say no.
We know many people are looking for new opportunities or a side hustle to make ends meet, but MLMs are not the answer. Think about what they're offering: if you've got what it takes to be an entrepreneur, why would you need to sign up to an MLM?
MLMs (also known as pyramid schemes) are disempowering and exploitative, and prey on women especially. There are plenty of successful women in genuine businesses, and they certainly don't call themselves "boss babes"!
MLM scams are everywhere, but you can take precautions and arm yourself with the knowledge of how to recognize them from legitimate business practices.