Multi-level Marketing (MLM) Scams

What is Multi-level 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 an 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.

Multi-level marketing is often considered synonymous with pyramid schemes. However, there is a clear distinction between MLMs and pyramid schemes, which is that MLM companies offer a tangible product or service. On the other hand, pyramid schemes do not offer anything tangible and simply promise unbelievable returns on investments. This distinction is what makes pyramid schemes illegal while MLMs enjoy legality. 

While MLMs pitch themselves as a way for people to achieve financial freedom, research has shown that this is far from the truth. 

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. Another problem is that when you recruit everyone in your circle to become salespeople, there is simply too much supply and not enough demand. Basically, there are too many people selling the products and not enough people to buy them.

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 on selling a physical product and not only on getting more members in. 

A major issue with MLMs is that their products or services often cannot stand on their own legs. The offerings of MLMs are often priced higher than similar counterparts available in the market, as the commissions to be paid on various levels of the organization are factored into the cost of the product. As a result, these often carry a higher price without any benefits to justify it. Due to most consumers being price-sensitive, people who are selling these products may find it difficult to make sales. 

MLMs can also negatively affect the mental health of participants. Participants may be led to believe that it is their fault for not working hard enough to make a profit. In reality, the system is designed in such a way that it is extremely difficult to break even from sales alone. It is an unsaid requisite to build a large team and pressure them to make sales in order to earn a decent income. Income disclosure documents of MLMs often reveal that most of the participants earn less than a liveable wage annually.

How to Recognize a Multi-level 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 dramatically alter your life. Become part of the rich or simply make a lot of money. Elaborate schemes use celebrities to promote their multi-level marketing programs. Others show videos of fancy events being held and gifts being given to ‘top performers’. In essence, the potential average 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 to join or stay: 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 buy back (part of) the inventory at the price you bought it for.
  
  
• Focus is put on getting others to join: This is a clear sign that the business model is that of a pyramid scheme. A normal company cannot survive by getting more and more people to sell their product or service. It's sales that count, not sales representatives. 
  
  
• Pressure to join: Scammers use the pressure of time 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 that sells a service or positions itself as an investment company. Product-based Multi-level Marketing Companies may be legit. However, 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.

Sources:

• https://en.wikipedia.org/wiki/Multi-level_marketing 
• https://www.artofmanliness.com/articles/should-i-join-multi-level-marketing-company/
• https://www.dsa.org/