Investment Scams

Multilevel Marketing Scams

What is Multilevel Marketing (MLM)?

According to Wikipedia Multi-level marketing (MLM), also called pyramid selling, network marketing, and referral marketing, is a marketing strategy for the sale of products or services where the revenue of the MLM company is derived from a non-salaried workforce selling the company's products/services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system.

Participants in a MLM program or company usually make money in two ways:

  • By receiving a commission on selling a product or service
  • By getting others to join the program and receiving a commission on the sales these participants make

The video below explains the concept in more detail.

Most Multi-level Marketing programs are Scams

According to a report that studied the business models of 350 MLMs, published on the Federal Trade Commission's website, at least 99% of people who join MLM companies lose money.

The reason is that people at the bottom of the pyramid have to invest time and money but cannot get any other people to join. There are also so many people already trying to sell the product or service that there is simply too much demand and not enough supply. 

This is the reason why in most countries pyramid programs like these are illegal.

There are of course also legit Direct Selling companies like Tupperware, Herbalife, and Avon who work with sellers who are only rewarded for the actual sales they make. Their focus is however on selling a physical product and not only on getting more members in. 

How to recognize a Multilevel Marketing Scheme?

MLM scams use many different ways to distinguish what they really are. They can be product related but on the internet investment clubs, gifting groups and HYIP scams are more common. A few tips on how you can recognize them:

  • Large sums are offered: The program offers you a way to alter your life. Become part of the rich. Or simply make a lot of money. Especially elaborate schemes use famous people to promote their multi-level marketing programs. Others show videos of fancy events being held. In essence, the potential revenues are always exaggerated. 
  • It's easy money: If guaranteed revenues are promised with very little effort, you can be sure it is a scam. Making money is never easy. Possible costs are not listed clearly and the amount of time needed remains undisclosed. Working from home especially is low paid if legit. If it was easy, everybody would join. 
  • The products, services or investments are unclear: The company does not reveal which product or service it actually sells. Or, in case of an investment club, they are vague about which assets they actually invest in. 
  • You have to pay in advance or fixed fees: They require you to pay for a membership and commit to (large) sums of money on a weekly/monthly basis. The costs may be for training or a license. Legit direct sales companies offer you a lot of information and only require you to invest in physical goods. In case of an actual product, be sure that the multilevel marketing company has the obligation to take (part of) the inventory you buy back at the price you bought it for.
  • Focus is put on getting others to join: This is a clear sign that a pyramid scheme is offered. A normal company cannot live from getting more people to sell their service. It's sales what counts, not sales representatives. 
  • Pressure to join: Scammers use time pressure to not allow you to think. They often state that you have to take the opportunity now before it goes away. Legit companies understand that you need time to make a good decision and will not pressure you into signing a contract. If the product is good, you can also sell it next week. 

In general, we recommend not doing business with any Member-Gets-Member company which sells a service or positions itself as an investment company. Product Multilevel Marketing Companies may be legit. But do a thorough reference check, for example by verifying that they are a member of the Direct Selling Association

We also recommend you check our general tips on "How to recognize a scam". 

Below another video example of why you should not participate in Marketing Networks.

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