I have always been an entrepreneur at heart. It started when I was young with something I call the playground economy. The playground was where I discovered I could sell baseball cards, gum, candy, or other little things for a small profit. When I was younger, a few quarters represented a nice return on my investment of time and energy. To this day I run a small business and I enjoy finding ways to make money.
The dream of small business ownership
Many people dream of owning their own business. Who wouldn’t like to be his own boss and set his own hours, meet with other small business owners over a nice lunch that can be expensed, and deduct home office and other expenses? Add in flexible hours, the ability to work from home, and a low barrier to entry and you have the perfect business, right?
Selling the dream. The dream of owning a business or working from home is a dream that is sold everywhere. You see it on TV, hear it on the radio, and you can read about it in the newspaper and online. A Google search for the phrase “work from home” returns 330 million articles. Many of these “opportunities” come in the form of multi-level marketing companies.
What is a multi-level marketing?
Multi-level marketing, or MLM, is a business model that relies on independent representatives to sell products for a company. Instead of the company paying for advertising and promotion, multi-level marketing companies rely on individuals to spread the word about their company. In return, the individuals receive a commission on their sales (more on this later, as commission plans can be extremely convoluted).
Multi-level marketing goes by many names, including network marketing, direct marketing, referral marketing, matrix marketing, direct selling, pyramid selling, and more. You may also hear it referred to as a pyramid scheme, but pyramid schemes typically don’t involve a product and are illegal in the US.
How multi-level marketing works
Multi-level marketing relies on peer to peer advertising and sales. MLM companies believe the best way to create sales is through a trusted source. Word of mouth advertising is much more persuasive than a 30 second TV spot or a full page color ad. Multi-level marketing representatives try generate sales through personal contacts, sometimes through events such as parties, product demonstrations, etc.
Multi-level marketing compensation
Many MLM companies are incorrectly labeled as pyramid schemes, which are illegal. The reason many MLM companies are referred to as pyramid schemes is because the compensation “trickles up” and often results in higher commissions for those near the top of the chain. Many MLM companies offer additional incentives for recruiting new members to your “downline.” In some plans you can receive a commission based on the sales made by people you recruited, and some companies even require you to bring in a certain number of new members before you can receive compensation, regardless of how much you sell. This brings up an important point – many multi-level marketing companies have complicated compensation systems.
Types of multi-level marketing compensation plans
The first red flag I see with many MLM companies is the compensation plan. You can easily determine how much you get paid for most jobs. Your compensation is usually based on a salary, an hourly wage, a commission, a bonus, or a combination of these. But many multi-level marketing companies have confusing compensation plans such as:
- stairstep earnings
- binary compensation plan
- uni-level matrix plan
- forced-level matrix plan
- hybrid compensation plan
- breakaway compensation plan
- compressed compensation plan
To top it off, the compensation plan may also include special bonuses or trademarked terms like Extra Super Duper Star Seller Level Silver to denote your compensation level. If you understand what those words mean or you can decipher the graphics and multi-paragraph explanations of the compensation plan, then you are one step ahead of me – and the majority of MLM participants.
*Note: Many MLM companies require independent distributors to purchase a minimum amount of products, reach a certain sales quota, or recruit a certain number of new distributors to be eligible to receive compensation.
Common multi-level marketing products
Most multi-level marketing companies offer products that fill a need or a void in people’s lives. The three biggies in everyone’s lives are Health, Wealth, and Love. These three categories make up a large percentage of the products offered by MLM companies. The most common products are health foods and nutrition items such as vitamins, juices, and extracts; skin care products; financial products; exercise equipment; household items; clothing and accessories.
One common factor among some (not all) MLM products is the relative high price compared to comparable items you can purchase from a retail store. Most companies or MLM associates will claim the difference is in the quality or proprietary nature of the product. But it makes one wonder if the price difference is from the quality of the product or the fact that several people get a cut of the sale?
Money Merge Accounts. A common financial product sold through MLM companies are money merge accounts, which work to more quickly eliminate your mortgage. Some of these companies are legitimate, while others are not. I recommend reading about the Pros and Cons of Money Merge Accounts for more information.
How MLM companies recruit new members
The products MLM companies sell work on the emotions of the potential customer. The same often goes for recruiting new distributors. The biggest selling point is owning your own business, setting your own hours, freedom from a boss or a schedule, etc. Many companies have large conventions that are more like pep rallies than seminars. It is not uncommon to see some of the top distributors flanked by high priced cars or pictured in front of their multi-million dollar mansions. The truth is that multi-level marketing is a lot of work and the vast majority of distributors earn less in commissions than they spend on membership fees, training products, and minimum purchase requirements. In many cases, MLM companies are selling the dream of becoming wealthy.
Question to ask before joining a multi-level marketing company
As with any business, it is important to understand the company, business model, products, threats, opportunities, and other requirements before joining. At the minimum you should be able to easily answer the following questions:
- The company. What’s the company’s track record and reputation? Is the company public? Has it been involved in any major lawsuits regarding its operations?
- The product. Which products does the company sell? Does it have the evidence to back up product claims? Is the product competitively priced? Does the product appeal to a large customer base?
- The business model and compensation plan. Do you understand the compensation model? Is there a cost to join the plan (many companies charge outrageous prices for administration fees and training materials)? Is there a minimum monthly sales commitment to earn a commission? Will you be required to recruit new distributors to earn your commission?
Examples of multi-level marketing companies
Wikipedia has a list of multi-level marketing companies which can be found here. The list includes many prominent and well-known companies that you may have heard of, including Amway Global (also known as Quixtar), Avon Products, Discovery Toys, Mary Kay, MonaVie, Pre-Paid Legal Services, Primerica, and The Pampered Chef.
Are multi-level marketing companies scams?
Some multi-level marketing companies have bad reputations for many reasons, including the proliferation of scams. Some people who join MLM companies also turn into salesmen 100% of the time. So you end up dreading your weekly dinner party because it turns into one long infomercial. Running a business is great, but alienating friends to try and make a buck is never cool.
But that doesn’t mean that all MLM companies are scams. A few years a friend of mine started his own company, which I later learned was a multi-level marketing company. He ended up doing very well with it, and continues to do well to this day. He gave me some information about it, but in the end, I decided it wasn’t for me.
Is Monavie a scam?
MonaVie is a multi-level marketing company that has been in the media often lately, with many people asking if MonaVie is a scam, including this article, is MonaViea scam?, and this article.
I encourage you to read these articles for more information, then visit the Monavie website if you are still curious about this business opportunity.
What does the FTC have to say about MLM?
The FTC recognizes there are legitimate and shady MLM companies and has strong warnings against pyramid schemes, which are illegal, and several other warnings regarding multi-level marketing companies. You can read their words in these two articles:
- The Bottom Line About Multilevel Marketing Plans.
- Lotions and Potions: The Bottom Line About Multilevel Marketing Plans.
Multi-Level Marketing Companies – Good or bad?
The truth regarding MLMs is this: Some multi-level marketing are legitimate and represent a unique opportunity to run your own business. But it is hard work. On the flip side, there are many MLM companies that are scams. Do your research before you sign up for any business venture.
My experience. I know several people who have been involved in multi-level marketing programs. Some of them run their independent distributorship as a full-time job, and I know people who do nothing but write a check to the parent corporation each month and wish for a better life. Much of the result depends on the legitimacy of the MLM company and the amount of work you are willing to put in.
{ 24 comments… read them below or add one }
Here in Utah it’s all about rounding up the college kids to go sell alarm systems, satellite programing or pest control over the summer. Some people do really well (working 14-16 hour days), and others just end up doing barely enough to cover their lodging (that the company provides and docks from your pay). My brother tried it for about three days. He quit because he didn’t feel good about trying to sell products people didn’t need, to people who really couldn’t afford them.
I heard of things like this before and actually even interviewed to sell books for a company like this. Whether scam or not it is not something that you should look into. It reminds me of online affiliate sales except that is legit and can be done the right way.
Having worked with one old, large MLM (that actually advertises on TV) and having seen several sets of friends work for as many as 8 other MLM’s, I skip right passed it and call them all scams. But that’s just me.
Kinda funny that your post previous to this one was How NOT to Become a Millionaire. Poetic justice in my experience! But again, that’s just my opinion based on my experiences.
“Much of the result depends on the legitimacy of the MLM company and the amount of work you are willing to put in.” Amen to that
Many people use the term “product-based pyramid scheme” as a way of saying, “We know that it’s really a pyramid scheme, but it’s technically legal because it’s based on a product.” I don’t know if that makes it any better for consumers, especially if that product is shown to have little benefit to the consumer.
@Lazy I think thats one of the major problems with the idea of MLM. The products usually provide nothing of any importance to the people selling or being sold to. I always say, “I can’t sell anything I don’t believe in 100%” and I havent found an MLM than sells anything I can believe in. They are all products that can be found elsewhere, cheaper, and with less of a cultish feel to buying them.
Hey Patrick, this is a well conceived and well organized resource for folks looking at MLM as a possible business opportunity. I think a lot of folks unfairly dismiss Network Marketing as a pipe dream or scam. Part of the reason for that is the hype driven or cult-like environment that so many of them put out there.
You ask if MLM’s are scams?
The obvious answer is no, but there are bad companies in the industry JUST LIKE THERE ARE IN ANY INDUSTRY.
Having been in networking for over 14 years, I understand that many people aren’t so clear on this question, thus your question is a good one to help open the conversation.
If anyone is interested in learning more about the industry, I suggest a book by Robert Kiyosaki called “The Business School”. He’s famous for his huge best seller, Rich Dad, Poor Dad and Cash Flow Quadrant as well.
I hope that helps, and if you’re one of the under-educated ones who is still asking the question, my suggestion is to slow down, ask questions about who you’re looking at partnering with.
The good ones won’t chase you or make you feel uncomfortable, and they’re much harder to find than the normal networker.
If they’re getting slobber and drool all over you, you might want to keep looking, but if it’s a good friend, perhaps you just tell them to cool their jets a bit and you’ll partner with them. It can be fun working with a friend on an MLM project, and who knows, maybe you’ll both become financially free one day together!
Kurt in Tennessee
Before you join a mlm business:
* Critical: Brand YOURSELF. Yes, promote YOURSELF, not some company – get the best long-term value for your ad dollars!
* Learn to spot the companies that will steal your paycheck – and there are PLENTY of those rascals!
* Find and bond with income partners who will become lifelong friends, who stay with you forever.
* Generate your own leads, so you’ll know they’re good. Would you buy a blood transfusion online? Think of your leads the same way.
Soren Egstrup
Great tips, Søren. Thanks for sharing!
Patrick,
Nice discussion and complete. This could be the basis of an ebook. Really well researched friend.
I have made about $30,000 in the past few years in network marketing. That might not seem like a lot to most networkers, but most of that income is passive. Show me a mutual fund that can grow from 200 bucks to 30k in a few years. Just as important as finding a good company is finding the right team of leaders to work with.
Congrats, Rodney. That’s not chump change! I would argue that it is probably not completely passive, at least at first. A lot of hard work had to go into creating your networks, understanding the product and business model, etc. But once you get it going, then it becomes all about maintaining a good thing.
Glad to see you have been successful!
You are so right about it being hard work at first. So many people want something for nothing. Network marketing is not just an investment, it is a business.
I love this site man. Keep up the good work.
Legitimate or not, MLMs are not right for most people, unlike what they try to tell (sell) to everyone. There are plenty of articles and discussions for and against them. To me, it is pretty simple and comes down to the well known saying, slightly adjusted, “If you can’t tell who the sucker is at MLM ‘presentation’, it is you!”
Dima, You may be right about it not being for most people. That is because most people are not business minded and are pulled into mlm in the first place. I made that same mistake and turned many people off. The thing most networkers fail to do is find the people already looking for something. (people looking to better their lives are not suckers) Sales and marketing is not for everyone mlm or not. I read on a census website that on average only 2 out of 10 people that start a 4 year degree program finish (80 percent failure rate.) Would you call college kids a bunch of suckers knowing that 8 out of ten are going to quit or fail?
I agree with you that M.L.M. is hardwork and for an individual to be successful in this he/she has to set goals and try to achieve them. M.L.M. is like a small business and with every business one has to think of ways to optimize it and be ahead of the competitors. You also has to manage your Team very well so that none will become frustrated. I enjoyed reading your article and the insights that you bring across.
It’s funny I wrote a post a while back about my experience with Primerica and the one thing I realized after writing it is that is seems that most people are passionate one way or another. Many love MLMs and many hate them… they are an interesting creature…
I believe you have to be passionate to be successful as a MLM business owner.
MLM stands for Most Lose Money.
Unfortunately like with anyother business there are good ones and there are bad ones. I am currently with a company that is not considered a MLM but is a network marketing business. I did have to make a small (less than $1000) upfront cost. And I was told from the begining I was going to have to work hard to get it where I wanted it and then I would be able to slow down and It is true. I have gotten it where I want it and I am able to walk away and watch it. BUT it does take alot of work to get it to that point. And DO NOT get me wrong there are definate scams out there which is unfortunate because they are the ones that give my business a bad wrap when i want to start making my business grow again.
I do think there are MLS s out there that are scams especially when the purpose is recruiting people to have financial plans set up for them and selling mutual funds, insurance plans and annuities. I know one mlm in particular in the Financial field which is involved with this type of personal recruitment. They claim “it is all about education in financial matters” but it is all about belittling the client and ripping them off. At least with Monavie the client gets a quality product but with the financial group it is all about scamming the client by having them buy financial products with high fees.
I’ve been with this skin care company and with little effort I can make $800 a month. Not bad. I know if I work harder I can make more. I put passion in my business since that’s your best presentation. I love MLM’s only if I believe in the product. I had a “real” job 6 months ago but they had to let me go because of the budget cuts.
Now I’m doing my homework because I want to join another MLM. I think any MLM is like any other sales job, you have to work your B off! People sometimes join MLM’s because they think or believe they can have the mansion or the luxury car after 3 months! Don’t believe that! You gotta work, work, work!!!
MLM’s are not scams or illegal pyramids. If you think about it every job has a pyramid shape. You have the owner or the CEO, then managers, then employees… Every one gets paid according to the time or position. Then why complain about the levels of MLM’s??? The more you work the higher level you will get!
Looking for help…
Hi Patrick,
Really enjoyed your article. I’m working, writing the marketing collateral for an MLM startup. I’ve been looking for ‘compensation plan’ examples as resource material. I’ve looked a lot but have only been able to find the one PDF from Mona Vie. Do you have other examples? Two to three more PDFs from other companies should do it. The startup is calling their plan…a “trinary.” Yet another spin:-) Hey, thanks so much, if you can help! Best! – Dave B.