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Multi-Level Marketing – Business Opportunity or a Scam?

by Ryan Guina

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 over 6 billion articles. Many of these “opportunities” come in the form of multi-level marketing companies.

What is a multi-level marketing?

Multi-level marketing companies - business opportunity or scam?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!

*Requirements to earn compensation from MLM companies: Most 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 before they are eligible to earn 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 there are several credible counter-arguments to those claims. If the product were so revolutionary or such high quality, companies would want to put it in as many hands as possible, which generally means distribution through retails outlets such as Wal-Mart, Target, grocery stores, etc. Another counter-argument is the fact that in network marketing, several people generally 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 publicly traded? Has it been involved in any major lawsuits regarding its operations?
  • The product. Which products does the company sell? Does it have independent research to back up product claims? Is the product competitively priced? Does the product appeal to a large customer base? If the product is a “wonder product,” why isn’t it available through traditional retail outlets?
  • The business model and compensation plan. Do you understand the compensation model? Is there a cost to join the plan (many companies charge steep 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? Can you explain the business and compensation model to your grandmother in less than 30 seconds?

If any of these three issues aren’t clear, then it may be a good idea to avoid the situation altogether.

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.

Some of the companies on the Wikipedia page are well-known and respected, while others have poor track records, or are at best, scams.

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.

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.

But some MLM companies have a lot of questions around them. A prime example is MonaVie, which is a multi-level marketing company that has been in the media often lately, with many people asking if MonaVie is a scam, and this article, which discusses the product and business at length.

Protandim is another questionable MLM product, with dozens of well-researched articles pointing out inconsistencies in their product and research, and even a website devoted to exposing lies to members, the FTC, and other governing agencies.

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:

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.

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.

My recommendation. Do your research before you sign up for any business venture. The above articles from the FTC are excellent resources for researching network marketing opportunities. They recommend learning about the product and company, interviewing independent distributors, asking questions, understanding the restrictions, and speaking with a trusted friend or family member as a sounding board.

The internet is a wonderful resource for researching products and companies. There is also a lot of misinformation. In general, it is best to look at both sides of every situation and go with your gut. If something smells bad, it probably is.

The final recommendation I have is to avoid giving in to pressure. These business opportunities will be around next week or next year. You should never have to make a decision on the spot. These companies want new members, and they will be just as happy if you come later.


Published or updated July 25, 2012.
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{ 27 comments… read them below or add one }

1 Miranda

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.

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2 Ron

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.

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3 Lazy Man and Money

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.

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4 Craig

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.

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5 Jesse

“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

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6 Jesse

@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.

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7 Ellie Gant

Hey Ryan, 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.

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8 Kurt Gross

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

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9 Søren Egstrup

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

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10 Ryan

Great tips, Søren. Thanks for sharing!

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11 Neal@wealthpilgrim.com

Ryan,

Nice discussion and complete. This could be the basis of an ebook. Really well researched friend.

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12 Rodney

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.

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13 Ryan

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!

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14 Rodney

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.

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15 dima

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!”

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16 Rodney

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?

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17 FinanciallySmart

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.

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18 ChristianPF

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…

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19 Ryan

I believe you have to be passionate to be successful as a MLM business owner.

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20 Mike

MLM stands for Most Lose Money.

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21 Laura

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.

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22 Mcrandles

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.

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23 spadiva

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!

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24 Dave Bunnell

Looking for help…
Hi Ryan,
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.

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25 Gail

I saw a flier and contacted the mlm’er. I was very interested in the product. She knew only what they taught her. I suggested she do some more research. I know she is a born again christain and feels God wants her to do this. Its a definite health booster. well I did my research and read reviews. The only real problem was the item cost the company$2300 and they were selling it for $4000. So that like $1,700 in commissions but the person that does all the work and gets $285.Now sure if you can recruit and move up you’ll get a piece of the pie but that takes hard work and getting in early. In this case comparable systems could be ordered online for a lot less…thousands less. The independant reviews said it was a good product but over priced by being an mlm and the amount that went into commissions. Why does the worker who sells it get so little. the rest rises above. Also the training cd sounded cult like. I worry that my friend will be heart broken when she sees the whole picture or she might get rich but they lead her to believe this was the only such product.Anybody can google it and find a distributer who has about 15 models and can sell it so much cheaper. I found on the net a well reviewed portable model and a youtube video comparing it to a in place model. The portable came out with good numbers. So I won’t be buying the $4000 model(wouldn’t spend that kind of money in a recession) but can buy the portable one with an extra filter for under $100. So the real answer is learn all you can about the mlm and do your own research on it and read reviews. Just google : your item,reviews. Thats my advice:researchif you are going into it or deciding to buy,you can probably find it on line for cheaper!!!

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26 Kris

MLM is a very interesting business model. In theory, it sounds great – make money from people buying products every month. But it requires a unique kind of person. I tried it years ago because of the appeal, but could never get past asking friends to buy overpriced products. Ad could never understand why I had to be my own first customer to make it work. There’s nothing wrong with buying the products you sell – but when you MUST buy the products for the business to work, that always seemed strange to me. Credit to those who make it work, but it’s definitely not for everyone!

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27 Joel Libava

Scams.

For the most part, Ryan, the folks that started these schemes are the ONLY ones who make money.

The others….the folks that paid $100 or so to join their, “System” come and go.

MLM blows, Ryan.

And, here’ s the kicker-for me:

Some MLM companies are starting to insert the word, “Franchise” into their offerings.

Online franchises…blah..blah…blah. What an insult to my industry. (Sorry-THE franchise industry)

People: Legitimate franchise opportunities start in the $60,000 range-total investment.

Some of them run into the millions.

If your investment is only a hundred bucks or so, it ain’t a franchise.

And, it’s illegal to call it one. (For the companies)

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