MLMs: Predatory Scams or Entrepreneurial Opportunities?

What is an MLM?

MLMs are legal businesses that focus on direct marketing, home-business franchising, network marketing, affiliate marketing or direct sales operations. Most MLMs recruit independent sales representatives to sell products directly to consumers rather than selling their items in a retail store. These sales reps, or distributors, make money when they sell products; they also receive commissions from products sold by people they recruit to the operation (their “downline”).  

What’s the difference between an MLM and a pyramid scheme?

People often equate MLMs with pyramid schemes, but there are key differences. Here are some features of legitimate MLMs: 

• MLM companies are legal in the U.S. 
• In legitimate MLM companies, salespeople make most of their money selling the company’s products directly to consumers. 
• MLM reps may also make a percentage of downline associates’ sales. 
• Sales reps don’t have to recruit anyone and are paid based on their sales regardless of distributor recruitment. 
• Legitimate MLMs abide by the “70% rule”: Distributors only purchase additional inventory after they’ve sold 70% of their current inventory.

Here are some characteristics of pyramid schemes:

• In a pyramid scheme, the primary way a salesperson makes money is by recruiting more and more downline sales associates, not by selling products. 
• The pyramid operation relies on a continuous influx of new recruits and their “dues” payments. 
• Reps often must continue buying products even if it’s unlikely that they’ll be able to sell them. 

If law enforcement suspects that a would-be MLM is actually a pyramid scheme, they’ll have to prove that the company knowingly incorporates predatory practices, such as requiring sales reps to buy inventory they may not need and that they’re not just a poorly run business that looks a lot like a pyramid scheme.

Pros of legitimate multilevel marketing companies

Many MLMs, such as Amway and Avon, have stood the test of time and are considered legitimate. These are some of the upsides of joining a legitimate MLM:

• MLMs are an easy way to start a business. If you want to get started quickly, an MLM may be right for you. “Working longer hours can be difficult; however, working on a new business model with complete freedom and chances is an option to easing your way into starting your own business with a small investment,” said Sep Niakan, managing broker at Condo Blackbook. “As a customer, you can purchase products at a low cost, and if you are qualified to become a distributor, you can begin selling the product or invite others to join the network.” Niakan mentioned that the MLM industry has flourished since the start of the COVID-19 pandemic, partly because people were looking for ways to make money from home.
• There is a big demand for direct sales products. MLMs flourish in the makeup, jewelry, lotion, soap, essential oil and clothing industries, to name a few. There are always new releases, keeping demand for the products high. “Many people are looking for innovative, high-quality products that will meet their needs,” said Daniel Foley Carter, director at SEO-Audits.io. “The majority of these folks are fed up with the commercial brands that supermarkets and shopping malls make available to them.”
• MLMs give people a chance to work on their sales techniques. Gaining sales experience can be valuable, helping you learn to win customers over the phone and build a positive sales culture. “In MLMs, you have to learn how to persuade people not only to buy your products but also to join the organization with you as their recruiter,” said Sherry Morgan, founder of Petsolino. “Doing this constantly requires great sales skills when talking to people.”

Cons of multilevel marketing companies

While even the business practices of legitimate MLMs can raise concerns, when companies cross over into pyramid scheme territory, there are even more red flags and worries about predatory behavior. 

1. Predatory MLMs prey on vulnerable people.

Direct sales companies sometimes build their sales teams by actively targeting people who have limited employment options or who aren’t savvy about local business practices. People in close-knit communities are also ideal targets because they have broad social networks. The following groups are particularly vulnerable:

• Stay-at-home parents. Shady MLMs often target stay-at-home parents, usually moms, seeking flexible work they can do from home. These individuals often have broad social networks and desire paid work that they can easily do from home or on a flexible timeline. The rise of the gig economy means more stay-at-home parents can make money from home by working part time, and direct sales companies position themselves as a viable option that’s identical to being self-employed, freelancing or otherwise making money on the side of a busy life, when, in reality, some MLMs are predatory.
• Immigrants, minorities and lower-income communities. Predatory companies also target recent-immigrant communities, minority communities, and lower-income communities worldwide. Many of these groups are known for valuing family and community, are upwardly mobile, and have close, trusting connections. A single foothold in a tight-knit community is valuable for recruitment because communities that value cohesion are likely to produce more recruits or, at the very least, more buyers.

2. Predatory direct sales companies purposely hide sales data.

Shady MLMs tend to obfuscate their sales associates’ financial results. Many MLM reps will say they “can’t tell you” how much money they make but can say how much they or their team have sold. 

Their “team” might be their entire upline and downline sales group, which could be hundreds of people. If the team sold “millions” in goods, they could be referring to how much the company says the product is worth, not its list price.

Direct sales consultants are often required to purchase stock before they sell it. So even if a hypothetical representative sells $10,000 in goods, they still must subtract what they paid for the products and the percentage an upline manager receives. You could sell many products and barely break even.

Unfortunately, many people who participate in MLMs don’t make any significant income, and many even lose money.

How MLMs use social media in their operations

MLMs, both legitimate and predatory, often use social media to grow sales and recruit others. Social media digital marketing tactics include using success language and envy-inducing images to recruit participants, and using social media to sell inventory.

• MLMs use the language of success to recruit on social media. To recruit new sales reps, MLMs use language that echoes their targets’ dreams. They call recruits “entrepreneurs” and “business owners” and encourage them to talk about themselves that way. The allure of suddenly being able to say “I’m a business owner” or “I’m an independent consultant” for just a small down payment on goods is powerful. 
• MLMs encourage personal images on social media. Sales reps are encouraged to use images of themselves and their families on social media to boost sales and attract recruits. For example, if the MLM products are health-related, reps use before-and-after photos to show the products’ results on a personal level.
• MLMs use social media to showcase wealth and luxury. Many prolific posters also share images of luxury goods and aspirational lifestyle shots to sell the idea that it’s easy to make a modest side income, or even fund an upper-middle-class lifestyle, via direct sales. “Sometimes, they also use social media to post statuses that tell a story of how their money grew many times over with very little work,” Morgan said. “Naturally, people will get curious, and once they bite the bait, recruiters will start telling them how MLMs can help them achieve the same material wealth.” The main issue with this kind of social media use is that members posting about expensive material items are usually at the top of a pipeline and are part of the very small percentage of sellers with that amount of success. Unfortunately, very few people reach that level.
• MLM members use social media to sell their inventory. Many MLM members resort to selling on Instagram Live or to using Facebook Live to showcase excess inventory and sell it in real time. This was a selling strategy for the women’s clothing line LuLaRoe, especially when sellers received a new shipment of leggings, dresses or tunics. The sellers would advertise their upcoming live event for weeks, building anticipation among buyers. Offering a sneak peek of new designs or styles would also draw in more people and new customers. This strategy is successful if you have a large, engaged following, but if not, it doesn’t always work out. Getting repeat customers is also difficult this way. How many printed leggings or scented candles can someone have? While it depends on the person, most customers aren’t buying something from every live sales event.

How can you tell if an MLM is a scam?

If you or someone you know is thinking about joining an MLM company, here are some research tips and red flags to consider:

1. Research the company online. Do an online search to get a general idea of what people are saying about the company. Also, search the company name with the word “scam” to see if it’s associated with any controversy. Consult several sources to find consistent praise or criticism, and pay particular attention to mentions of “pyramid scheme” and claims that it bankrupted people. You likely don’t want to be associated with any company with consistent negative impressions.
2. Pay attention to a recruiter’s behavior. Be wary if a recruiter is particularly persistent in getting you to sign up with the company. If being a sales rep with the company is such an amazing experience, a hard sell shouldn’t be necessary. If the recruiter is a family member or friend trying to make you feel guilty or accusing you of not trusting them, that’s also a red flag. Other recruiter red flags include social media posts boasting about their happiness, constantly promoting the company and being vague about how much they’re making.
3. Consider how the recruiter speaks to you. Be skeptical if the person you’re talking to brags about their lifestyle and money. Legitimate professionals don’t boast about their salaries or lifestyles to recruit people. Look out for claims that the recruiter is making so much money and that it’s so easy.
4. Be very wary if you must pay money to start working. Some legitimate business situations require you to invest money to get a slice of the pie, such as owning a franchise or being a venture capitalist. However, most legitimate sales jobs do not require salespeople to buy the goods they’re going to sell. Even legitimate commission sales jobs – such as pharmaceutical sales, auto sales, real estate, retail or telemarketing – don’t require an initial personal investment.

Jennifer Post contributed to the reporting and writing in this article.