Thinking of joining a multi-level marketing program or building one for yourself?
While it has existed for decades, this scheme has attracted a number of controversies due to its questionable business practices and instances of exploitation within the industry.
In this article, we’ll break down what the MLM business model means, including its pros and cons. We’ll also explore the key differences between a legitimate MLM business and an illegal pyramid scheme, and how to spot them.
The information provided in this text is for informational purposes only and does not constitute legal, financial, or professional advice. The content is primarily directed toward U.S. citizens, who are advised to consult with relevant authorities or legal professionals before taking any action. Non-U.S. citizens should check with local authorities to ensure compliance with local laws.
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What is Multi-Level Marketing and How Does It Work
Multi-level marketing is a business model where a sole distributor sells products or services to consumers, while recruiting other people to sell the products or services in the same network.
Up to a point, MLM is pretty much like an affiliate program. Members earn a commission on products sold and sales of affiliates they recruit.
It’s also known as direct sales or network marketing and works with independent, non-salaried participants. These participants bring new participants, who bring more members to grow the network.
Multi-level marketing companies aim to promote distributors for their products and services to boost sales.
The distributors earn money in two ways:
Direct Sales
Direct sales involve selling the company’s products or services to consumers. MLM companies don’t create retail stores; they use MLM participants to sell their products.
Participants sell products by talking with people, using online platforms, and using social media. These distributors are independent business owners because the company doesn’t pay them salaries. They generate income through the sales they make.
Thus, as an MLM distributor, you need to try to sell so you don’t lose money. You may need to apply direct marketing strategies to reach your target audience. Your earning is the amount you get by subtracting the price you sell to customers from the price you buy the products.
Recruitment
Another means of generating income in the MLM model is through recruitment. This process involves bringing new members into the program. Once you bring in someone, they become part of your “downline.” When this person brings others who bring more participants, they’re called “downline participants.”
It means you make money from your product sales and those of your downline distributors. This business model creates a pyramid structure that keeps growing as people join.
While direct sales companies often encourage recruitment, it’s not compulsory. However, recruiting doesn’t only increase the company’s sales; it also helps you earn more.
Compensation Plans
MLM companies’ compensation structures vary. The general payment plan involves product sales by participants and recruits. However, different companies may take a slightly different approach.
Here are some common types:
- Unilevel: You earn an agreed commission percentage within each downline level. Thus, income varies depending on the number of sales within the downline.
- Binary: Comprises two primary “legs” in your downline. You earn commissions based on the sales of the weaker part. This plan aims to balance growth within your network.
- Matrix: In this plan, the number of downline participants is limited. Commissions depend on sales from each matrix position.
Before joining any MLM company, it’s important to understand its payment structure. Selling products and recruiting might seem easy, but in the end, your earnings might not match your sales effort. Thus, research the company to ensure their payment plan suits your needs and risk tolerance.
The “Downline”
The “downline” is central to multilevel marketing plans. It creates a pyramid structure and refers to the chain of distributors. This network comprises participants who bring in more members and their recruits, and so on, creating more branches. The idea is to grow the company’s sales personnel to increase sales.
The larger and more active your downline is, the greater your earning potential. What this means is that a large downline may not increase your earnings. If the participants are not making sales, you won’t earn much.
Also, creating a successful downline is not always easy. You’ll spend time convincing people to join and teaching them sales strategy.
The Legality of MLM
Multi-level marketing is a legal business structure. However, illegal pyramid schemes use the same business structure to trick people into joining them. Thus, some MLM companies are illegal pyramid schemes.
Pyramid Schemes
Pyramid schemes are deceptive business practices. This business model operates like legitimate MLM businesses, where members recruit more members. However, they focus on recruitment rather than sales of actual products.
Legitimate MLM companies encourage the sale of real products. Participants can earn with or without recruitment.
On the other hand, pyramid schemes force members to recruit more people. They might sell actual products, but sometimes, most participants struggle.
When participants can’t sell products, they convince others to join them to earn money. Then, new distributors also recruit other distributors, and the chain continues.
Multi-level Marketing vs. Pyramid Scheme
| Features | Multi-level Marketing | Pyramid Schemes |
| Primary Focus | Selling real products or services to consumers | Recruiting new members. Product sales are often a secondary focus, if even available. |
| Earning Structure | Incomes are derived mainly from product sales. | Earnings are based on recruited members. |
| Downline Framework | Earnings depend on your team’s success. A long downline does not guarantee success. | Earnings are based on the number of recruits, rather than actual sales performance. |
| Legality | Legal when focused on product sales and ethical value. | Illegal due to its deceptive business structure. |
| Product Details | Products are competitively priced within the market value. | Products are heavily priced or of poor quality. |
| Initial Costs | Requires low to no startup fees. | Requires high initial fees for ‘inventory tools’. |
FTC Guidelines
The Federal Trade Commission (FTC) has set up business guidelines concerning MLM practices.
These key factors will help individuals differentiate between pyramid schemes and legitimate operations:
- Emphasis on product sales: Legitimate MLM companies focus on retail sales. Although they encourage recruitment, they don’t pressure their members. They also sell to customers outside their network.
On the other hand, pyramid schemes focus on recruitment. They convince participants to recruit more participants to earn a significant income.
- Inventory loading: Pyramid schemes load products on new members. However, legitimate MLM businesses don’t force members to buy large inventory quantities.
- Buy-back guarantees: Legitimate companies will buy back unsold products, while pyramid schemes may not.
- Compensation structure: Compensation is mainly on product sales for legitimate MLM businesses, while pyramid schemes rely mainly on recruitment.
The FCT fines companies that operate pyramid schemes for customer protection and to maintain best market practices.
Is MLM Right for You?
Although there are legitimate companies that operate an MLM model, it may not be good for you. This revelation may make you wonder what is bad about multilevel marketing. MLM itself is legal, but not all businesses are for everyone.
Below are factors to consider:
Entrepreneurial Spirit
Do you have an entrepreneurial spirit? Find out below:
- Self-motivation: Are you disciplined enough to work on your own time?
- Sales skills: Can you convince people to buy? Can you communicate clearly? Your sales skills can determine how much you make.
- Networking abilities: You must bring in new distributors to increase your earnings. Recruiting and training require strong networking skills.
- Resilience: Can you withstand the challenges of MLM? You’ll need resilience to handle low sales and the difficulty of building a successful downline.
Income Potential
Many people rush into MLM with the idea of getting rich quickly. However, once they join the company, they find the opposite true. Many spend money on purchasing products, promotional materials, and training, but don’t make enough sales, which may lead to a loss of money and frustration.
While some people do well with MLM, you may not be as lucky as they are. Notwithstanding, you can achieve success by creating a strong downline. A strong downline consists of a large number of active participants. A vast majority of them make sales, which increases your commission.
Time Commitment
You’ll need to commit enough time to run a successful MLM business. An MLM business might not fare well as a side hustle you do in your spare time. Except you’re comfortable earning small, you’ll need time managing the business. Nevertheless, with effective time management, you can achieve success.
You’ll need time for:
- Learning about the products or services: Understanding what you’ll be selling makes selling easier. Training and reading the company’s product information will help you learn about the products. Also, testing the product yourself will make things easier.
- Selling and marketing: This step involves strategies to convince customers to buy. You must identify your customers, speak with them, follow up, and build relationships. It involves using both digital marketing and traditional marketing to widen your reach.
- Recruiting and training: This step involves strategies for building a successful downline. You’ll need to find new people, recruit them, and train them to succeed.
- Managing your business: This step involves tracking inventory, orders, commissions, and other administrative tasks.
How to Spot Pyramid Schemes
It’s important to pay attention to the activities of MLM companies to identify any illegal schemes.
Here are red flags that tell an MLM business is a pyramid scheme:
High Upfront Costs or Mandatory Inventory Purchases
Illegal MLM companies often ask prospective participants to pay an unreasonable fee to gain access. They might also ask them to buy large quantities of products before joining. As a result, they make money through this scheme rather than actual sales of goods.
Emphasis on Recruitment Over Product Sales
It might be a scam if the MLM program focuses on recruitment rather than sales. Pyramid schemes pressure members to recruit others so they can earn more. This phenomenon creates an unbalanced structure, where those at the bottom suffer the loss.
Unrealistic Promises of High Earnings
If promoters make unrealistic earning claims, that is a warning sign. Pyramid schemes often convince people by promising them quick financial freedom. These companies never explain the process well, making people believe it’s easy.
High-Pressure Sales Tactics or Emotional Appeals
An Illegal MLM company operates by using emotional appeals to lure people in. These companies make people believe they lose out if they don’t join immediately. They might even bring testimonials or claim that there are few spots left. This scenario creates a sense of urgency that makes people join without asking enough questions.
Complex or Confusing Compensation Plans
Illegal MLM businesses lack clear compensation plans. They don’t clarify that referral is the main source of income, which convinces people to join. You should be wary of such companies.
Lack of Retail Sales to Customers Outside the Network
Another warning sign of a scam is when members buy and sell to one another. If most product sales happen within the network, it’s likely a pyramid scheme. These illegal companies create this front to make it look real to people. However, a legitimate business structure will sell more to others outside the network.
Research and Due Diligence: 3 Easy Ways to Avoid MLM Scams
Asking enough questions about any MLM business opportunity can help you avoid scams. Here are the steps to take:
- Check for online reviews and complaints. Websites like Better Business Bureau (BBB) help people find trustworthy businesses. It contains reviews and complaints that can influence your decision. You can also find reviews on consumer forums.
- Contact the Attorney General’s office for information on the company. You can learn about the company’s history to guide your decision.
- Speak to former and current suppliers about their experiences. Find out how much they put in, their income, and how they recruit people.
Examples of MLM Companies
Many companies have run legitimate MLM programs. However, some companies have faced controversies and accusations.
Legitimate MLM Companies
Legitimate MLM companies focus on selling real products for consumer satisfaction.
1. Amway has been in business for over six decades. It’s a well-known MLM company and health and beauty brand. This global brand operates in over 100 countries and peaked at 8.9 billion in 2021.
2. Mary Kay Cosmetics is another popular brand that practices direct sales. It sells high-quality skincare products, enhances beauty, and empowers women through its MLM program.
3. Avon is another global brand that practices MLM through direct sales, founded in 1986. They’ve empowered entrepreneurs, especially women, through their business model. They’re into beauty, home care, and fashion products.
4. Tupperware is a popular kitchen product company. It caters to consumers through direct sales. Members sell online and organize home parties to advertise their goods.
5. Natura & Co. is a Brazilian cosmetic company known for using natural products and selling through direct sales.
These companies have built a solid MLM structure that offers quality products to consumers. They also train and support participants.
Companies Accused of Pyramid Scheme Practices
Below are companies that have faced accusations due to their focus on recruitment over product sales.
1. Herbalife Nutrition is a wellness brand that sells dietary supplements. It has been operating since 1980 and has received attention for its MLM practices. People have accused the brand of focusing on recruitment over retail sales, which has led to several regulatory investigations. In 2016, the FTC sued Herbalife, and the company agreed to pay a $200 million refund and promise to restructure its business.
2. LuLaRoe is a women’s clothing brand established in 2012 that operates an MLM model. It calls its participants “Fashion Consultants.” LuLaRoe has also faced accusations of operating as a pyramid scheme. Independent vendors have complained of high start-up costs, heavy sales quotas, and difficulty selling. In 2021, the court asked LuLaRoe to pay AG Ferguson $4.75 million to settle victims.
3. Young Living deals in essential oils. This brand sells its products online and through MLM distributors. In 2022, the FDA issued a warning letter to the company for marketing its products as drugs. Distributors have also accused the company of operating a pyramid scheme.
These claims don’t mean the company operates an illegal MLM business. They emphasize the importance of researching before registering for an MLM program.
Tips for Success in MLM (If You Choose to Participate)
If you choose to join an MLM program, here are tips that can help you succeed:
1. Product Knowledge
Ensure you know your products well. Think about it like a teacher passing their knowledge to their students. When you know everything about your products, it builds confidence. It becomes easier to convince people to buy from you.
Read the company brochure, ask questions, attend training sessions, and use the products to gain experience.
2. Sales and Marketing Skills
You can attract the right customers for your products with strong sales and marketing skills that highlight your unique selling propositions. The first thing to do is:
- Identify your target audience.
- Build relationships with customers. Practice generational marketing to personalize your messages to different age groups. This strategy is useful, especially if your products are for a certain age group.
- Use both online and offline strategies to reach more people.
3. Training and Support
Attend the company’s training programs to learn more about the MLM process. Ask old members questions and learn from their experience.
4. Goal Setting and Time Management
Since MLM companies don’t employ distributors as salaried staff, it’s easy to become lazy. Set realistic goals, create a business plan, and work toward them. Managing your time well will help you meet your financial goals.
5. Build Relationships
Don’t fail to build good relationships with customers. Once you earn customers’ trust, they’ll like to keep buying from you. Also, maintain a good relationship with participants in your downline. These people can offer advice to help you.
6. Online Presence
Build a strong online presence to reach more people and increase sales. Create a professional website to strengthen the effect of your digital marketing efforts.
Use social media to expand your reach. Create a social media profile and optimize it to engage potential customers. Use a variety of digital marketing tools to generate, nurture, and convert leads.
7. Persistence and Resilience
No business achieves success overnight. You need to put in the work. To succeed in MLM, you must work hard to achieve your goals. Don’t be discouraged by setbacks; keep improving on your skills.
8. Ethical Practices
Always observe good business practices. Be sincere and transparent when convincing prospective participants. Stay honest about the products with customers. Don’t tell lies to convince them to buy. Honesty will help you build a good brand reputation.
Why Do You Need a Website for Multi-Level Marketing?
In multi-level marketing (MLM), a website is your digital storefront and a powerful tool to grow your business. Creating a website it’s not just about having an online presence—it’s about building a hub to showcase products, explain the MLM opportunity, and attract recruits.
It also streamlines operations, helping you manage orders, track sales, and automate recruitment. But performance is key: slow loading speeds or downtime can turn people away. Consider learning how to set up a GA4 to track your website performance.
In this digital age, you can even do more for less. Check out some of the best ways to promote a website for free and gain more visitors without breaking the bank.
Investing in the best web hosting ensures your site is fast, secure, and always accessible, which is essential for building trust and expanding your MLM network.
Hostinger
Conclusion
Multi-level marketing isn’t a scam, but sometimes, people make it one. While it’s a great means to build a customer base and a budding community, there are also a ton of guidelines and legal scrutiny to follow.
If you plan to build or join a multi-marketing program, this blog explores everything you need to know, from the best practices to societal perception. You’ll also discover digital marketing tools to help you boost sales, track growth, and build a solid online presence.
Next Steps: What Now?
Ready to join an MLM program? Here are the next steps to take:
- Research to ensure the scheme is legal.
- Learn more about the products you’re selling.
- Apply both online and offline marketing strategies to sell your products.
- Make an effort to recruit new members to increase your earnings.
- Keep improving on your skills.
Further Reading & Useful Resources
- Learn more about an affiliate program network.
- Learn more about seasonal marketing.
- Types of affiliate marketing.
