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, 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:
- The Bottom Line About Multi-Level 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.
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.