Although legitimate multi-level marketing companies (MLMs) exist, most MLM distributors actually lose money — worse yet, some unknowingly get involved in scams.
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Millions of people have chosen to start a new business by participating in multi-level marketing (MLM) opportunities. In fact, AARP reported that more than 20 million Americans have been involved with an MLM at some point in their lives, generating over $36 billion in retail sales.
Although there are legitimate MLM businesses, many companies have been compared to pyramid schemes, and some have even run into issues with regulators. Worse, millions of people who have become MLM sellers with the dream of generating extra cash or launching a new career have ended up losing money instead. In a 2018 AARP study, only one quarter of survey respondents reported making any profit at all during their involvement with an MLM, while 47% of MLM participants reported losing money from their venture.
That’s a sobering statistic. So how are you supposed to know whether the company you’re looking at is legitimate or a scam? Should an MLM even be on your list of ideas when you’re considering how to make extra cash?
If you are thinking of becoming part of an MLM business, here’s what you need to know about MLM vs. pyramid scheme business models.
In this articleWith most businesses, you buy a product directly from a company or at a store. But MLMs function differently. If you want a product that an MLM sells, you have to buy it from an authorized MLM seller or distributor; you can't just go to a store or website to buy the product. The MLM industry on the whole offers a wide range of merchandise, such as supplements, makeup, candles, cookware, and cleaning products. If you’ve been to a party at a friend’s house that revolved around buying from a line of products, then you’ve probably been exposed to an MLM.
To become an MLM seller or distributor with a particular company, you usually need to pay a fee and buy a set amount of inventory to get started. For example, as of February 2020, to become a LuLaRoe independent fashion retailer, you need to spend $499 on an initial inventory order. That order gives you 65 different pieces to sell and gives you access to LuLaRoe’s educational, marketing, and sales tools. But, although the company may provide you with tips and advice on how to run and market your business, you run it independently and are solely responsible for its success.
There are two ways you can make money with an MLM:
Many companies promote earning commissions from your “downline” — also known as the sellers you recruit to sell under you — as a way to make more money. When you recruit new sellers, you get a percentage of any sales that they make. For example, if you are a SeneGence distributor and recruit other distributors, you’ll earn a 10% commission on all of their sales in addition to what you earn on your own sales.
There are some MLM companies that are reputable and have operated for a long time. For example, Tupperware Brands has been around for decades and has more than 3 million salespeople. Who hasn’t heard of a Tupperware party, right? Or the Avon lady? Yes, she’s part of an MLM too.
Unfortunately, there are other MLMs that border on pyramid schemes or are outright illegal. How can you spot the difference? The Federal Trade Commission (FTC) lists the following as the biggest red flags:
If the companies display some or all of the above red flags, even if regulators haven’t yet identified them as a pyramid scheme, they should be avoided.
Some people use the terms MLM and pyramid scheme interchangeably, but they’re very different. So what are pyramid schemes, exactly?
With pyramid schemes, the primary source of revenue is through recruiting new members rather than product sales. The company promises high returns in short periods of time, and they often promote themselves through social media, group presentations, and conference calls.
Because the companies’ revenues are based on new recruits, they’re constantly trying to bring on new members. However, that business plan is unsustainable and the pyramid scheme eventually collapses, which leaves the people at the bottom of the pyramid unable to recoup their money.
Pyramid schemes are illegal and are investigated by the Securities and Exchange Commission and the FTC. The first investigations and subsequent legal cases began in the 1970s, and both agencies have continued to pursue illegal pyramid schemes ever since.
Despite these efforts, pyramid schemes continue to operate, and have affected millions of people. Three major cases that have occured in the past few years involved AdvoCare International, Herbalife, and Vemma.
One of the most well-known and recent cases of a pyramid scheme is AdvoCare International, a health company that sold energy drinks, protein shakes, and supplements. It was a popular and well-known company that had Drew Brees, the quarterback of the New Orleans Saints, acting as a spokesperson.
In October 2019, AdvoCare paid $150 million to settle charges that it operated an illegal pyramid scheme. According to the FTC, 72% of AdvoCare’s distributors lost money or made no money, and an additional 18% earned less than $250 per year. After subtracting the distributors’ expenses, nearly all of them lost money.
Another major case involved Herbalife, a seller of shakes and supplements. The FTC said Herbalife misled customers, convincing them they could earn a substantial amount of money selling products. In actuality, the FTC claimed that distributors were rewarded for recruiting other sellers rather than selling products.
Herbalife agreed to restructure its business operations and paid $200 million to compensate customers and settle the FTC’s charges.
Vemma stood out as an MLM because it targeted college students and young adults as distributors. In its marketing materials, it showed its distributors surrounded by signs of extreme wealth, such as yachts and luxury cars, to encourage others to become sellers.
In 2015, the FTC brought federal court action against the company. In its complaint, the FTC said Vemma encouraged sellers to buy more products to qualify for bonuses and told other recruits to do the same. As a result, people were primarily compensated for recruiting other sellers rather than selling products.
In December 2016, Vemma ended its business practices and agreed to pay a $238 million judgment.
Yes, there are some legitimate MLM opportunities out there. And if you’re a customer of a particular company and personally enjoy their products, becoming a MLM distributor can help you score a discount on those products and earn extra money on the side.
However, it’s important to do your due diligence before committing your time and money. Choosing the right company could lead to success; choosing one that’s a scam could be a serious side hustle mistake.
Even with a legitimate MLM opportunity, direct sales aren’t for everyone. Before spending your hard-earned money becoming a distributor, ask yourself the following questions:
If joining an MLM sounds too scary or intimidating, we have some other tips for how to make money that aren’t so risky:
When it comes to whether a company is an MLM vs. pyramid scheme, the line can be blurry. Before becoming involved in a company, make sure you do your homework and thoroughly research it so you don’t waste your time or hard-earned money. If you do decide to become a MLM seller, pick a product you love, come up with a marketing plan, and be prepared to hustle to make your new business a success.
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