Multi-level Marketing (MLM) – What it Is and What it Isn’t.
If you’ve come to this site, you’ve probably either seen a video presentation for a multi-level marketing business opportunity or you’ve been to a home meeting that offered you something a friend says is an MLM, or maybe even called it a “pyramid scheme“.
Oftentimes it’s difficult to get a straight answer when it comes to Multi-Level Marketing. In today’s crowds it is usually referred to with the casual term “Network Marketing” (mostly due to the negative connotations attached to MLM). Over the years it has had many names. We’ll cover those another time.
I’ve been reluctant to do this, but I will do my BEST in this series of articles, to be as in-depth as possible. You may spot some level of bias from time to time. That’s only because over the past few years, I’ve dedicated a significant amount of time educating myself about MLM to a level most don’t ever care to do. Reading some of my previous posts would prove that. There is a ton of bogus information available that can steer you in the wrong direction if you’re not careful. I’m going to do everything in my power to keep this completely on the level and not include anything that I can’t support with facts or some form of evidence to back my claims.
There is a vary diverse set of opinions on the topic, and most are just that, opinions. On one hand, about 16 million people participate in some form of MLM, in the U.S. alone, and most believe that it’s the greatest thing since sliced bread and want to tell the whole world about it. To tens of millions of others, its nothing more than burnt toast. I, on the other hand, feel it’s on par to a living virus and has become a worldwide epidemic. By the time we’re done here, you’ll see why I take that stance. It claims to be a $30 billion a year industry, so somebody’s getting rich, question everyone out there seems to have is… Who?
What is MLM and are they Legal?
In most cases with MLM an individual sells products or services to the public using “direct sales” methods which could involve door-to-door, home meetings, word of mouth, general advertising (though not common) or the internet and it’s myriad of electronic avenues and social applications. Since the advent of the internet, the killing fields for MLM and it’s player base has grown exponentially. We’ll cover the internet’s impact on MLM and it’s ability to spread unchecked around the world, in another article in this series.
MLM as defined by Wiki:
Multi-Level Marketing (MLM) is a marketing strategy in which the sales force is compensated not only for sales they generate, but also for the sales of the other salespeople that they recruit. This recruited sales force is referred to as the participant’s “downline”, and can provide multiple levels of compensation. (For more on the definition, history and evolution of MLM, read the full Wiki Page)
So it’s basically a commission-based earnings structure where a seller is considered a “distributor” for a larger company. Earnings are based on sales made by the distributor and the sales made by other “distributors” that have been recruited into a “downline”. The payout structure typically resembles that of a pyramid. Those on the bottom, pay up to the distributors above them, so forth and so on. This is where the term “pyramid scheme” originates and it tends to get thrown around loosely as a derogatory form of name-calling by many “anti-MLM” advocates. And sometimes for good reasons.
Let’s be perfectly blunt here, not all MLM’s are legitimate. In fact, very few MLM’s are legit by legal definition, even if they attempt to persuade you to believe otherwise.
The truth is this, if the money you make is based primarily on your sales to the public, it may be a legitimate multi-level marketing plan, but not always. However, if the majority of the money you make is based on the number of people you recruit and your sales to those in your down line, then it is not legitimate and it’s a pyramid scheme. The FTC has confirmed this in a recent blog post:
“If the money you make is mainly based on the number of people you recruit and your sales to them, it’s a pyramid scheme” (The Telltale Signs of a Pyramid Scheme – 5/13/2014 by Aditi Jhaveri -Consumer Education Specialist, FTC)
The MLM community and its avid proponents detest hearing those 4 little words. They’ll even go as far as telling newcomers that any business “is a pyramid thing”. They tend to use the graphic of the pyramid shown here to convince people, which is contrary to the truth.
The major fault with their claim is simple. In the corporate world, an individual at the bottom of the pyramid is an employee and gets paid to perform a task, or paid to work toward making a sale. Either way they are compensated just for arriving on the job to perform their duties. They may also be given additional benefits such as sick pay, vacation time and health insurance, maybe even 401k contribution matches. They are part and parcel of the company as a whole and considered an asset.
The complete opposite is the case within any MLM structure. The company creating the product does NOT pay their distributors as employees. They are contracted labor with no tie to the company structure, no regular pay, no benefits, no nothing. The distributor is actually paying the company to be a part of the compensation plan, not the other way around. You are only paid if you make product sales or recruit other people into the business opportunity. When you have to pay to earn an income, there’s something amiss.
By default (legal oversight), many borderline pyramid schemes are falling under the radar and operate in the U.S., but many are later discovered to be operating illegally. Not only that, but the majority (upwards of 99.9%) of participants in MLM businesses are nearly guaranteed not to earn a dime, regardless of how much effort they put into the business from the start.
If you’re considering buying into one of these business models, (which is what you do in MLM, you give them money with the hopes of making more money than you put in) it is best advised that you do a healthy amount of research before you proceed with any purchase or buy in to any plan or program. Be certain to get all of the details before you commit to anything.
First Educate Yourself on How MLM’s Operate
There are many organizations that offer their products through distributors, some of the more well-known are companies like Tupperware, Mary-Kay, Avon, Pampered Chef and Scentsy, even Kirby and Filter Queen vacuum cleaners. You’ll find that these products are usually priced competitive to standard market pricing (while the vacuums are over $1000.00) and the products being sold are of a relatively high quality. On the flip side, many products offered through a distributorship or MLM program can be highly overpriced, have questionable health or healing claims and can also be untested and unsafe for public use or consumption.
Older, long-standing MLM-based companies like Avon (argued to be the first MLM), Amway and Herbalife are basically borderline pyramid schemes that have held out from legal action by utilizing powerful lobbying strategies and high-priced attorneys to keep them out of court. Once an MLM company reaches a certain size (as in behemoth) it’s difficult for the limited resources of the FTC to prosecute them without ending up settling out of court for millions of dollars, a drop in the bucket for some of these corporate giants.
As part of this series I will perform a follow-up to the ruling on Vemma Nutrition Company, an MLM health foods company that the FTC shut down recently by freezing most of the MLM arm of operations by way of injunction back in Sept. 2015.
How Do You Know if an MLM is Legit?
Some of the first questions you should ask yourself and the person that is selling you on the “business opportunity” can be straight-forward, simple and direct.
- What is it you will be selling? A product or a service?
- Are similar products or services on the open market?
- Is the product priced competitively to retail competitors?
- Is the product tested and safe for use by legal standards?
- Can your sponsor (the distributor who is recruiting you) support the claims about the product’s performance?
You’ll find that the most common products sold in multi-level marketing programs are usually associated with the health, fitness and beauty niches. This is why they are often referred to by the MLM watchdogs as pushing “Pills, Potions and Lotions”. Nearly every product or service sold in MLM can be found at a much lower price in a store shelf, on the internet, or in a catalog.
That’s why it’s such good practice to apply a bit of skepticism when you hear a distributor attempt to advertise their product as having some type of “miracle” ingredient or “guaranteed result”. Most of these products that claim to be “quick cures” are unproven and using that as a sales method is very frowned upon by most distributors. Claims like these are usually made by fast-talking distributors trying to make a fast buck.
If you intend on selling products or services, you would be well advised to be sure that the product you are selling is safe and has the scientific research readily available to back it up. Would you really want to discover that you were peddling some kind of “snake oil” miracle cure or pushing some type of placebo health remedy to unwary, under-educated seniors that believe what you have to tell them? Common ethics should play a huge part in what your business practices entail here.
So you think you’ve found the perfect company to work for? Great. Have you done an internet search on the company’s name along with words like “review” or “scam” or “complaint”? Now would be a good time to do so. You may find that depending on the company you choose, there are very few or very many pages of results to siphon through.
You may also want to look for articles about the company in local newspapers, magazines, or other online consumer advocate sites. YouTube videos are another good place to start your research. Call your local news networks to see if they’ve ever covered a story on the company in question, if it’s nearby.
Sometimes competing companies have distributors placed in online roles that produce reviews identified as “scam reviews” as a means to trash talk the competition. Others use hired “trolls” (people pretending to be other than who or what they are) to post praise-filled comments on review sites that are calling out deceptive practices. Companies will also threaten the little guys like me and you with gag orders or cease and desist letters as a means to bully authors to take down any posts that may rub potential recruits the wrong way and away from their companies.
Don’t be fooled by these reviews or the threats. MLM is a very intense and electrified environment, therefore passion swings loudly both for and against it. There will always be three opinions on the matter. The good, the bad and the indifferent.
During your discovery period, keep notes on the following:
- How long has the company been in operation? Has it ever changed names or owners in the past?
- Is there easy to locate contact information with addresses and phone numbers?
- Do they operate their headquarters within the country you reside in?
- What is the ratio of positive reviews to negative reviews?
- Does all of the news about a company or its products come strictly from its distributors?
- Has the company or any of it’s owners or representatives ever faced legal actions?
Just because there is no “bad news” about a company online, does not make them legit. New MLM’s are created every day. It is said there are at least 1000 operating in the U.S. currently, therefore it is impossible to believe that every company will have a back story to check out in order to know if it’s clear to proceed. Check with your state Attorney General for complaints, too.
It’s my opinion that the BBB is not a reliable resource when it comes to investigating these types of company structures. Hypothetically speaking, fraudulent MLM companies could pay big bucks to the BBB and hire expensive attorneys to cover their tracks when they are not operating on the up and up. From what I’ve seen, the BBB ratings can be influenced by several factors.
Check Out the Company “Comp Plan” (Compensation Program)
NEVER, EVER pay or sign any kind of contract with a company to become a distributor at one of those organized “sit ins”, “events”, “home parties” or “opportunity meetings”. Any kind of scarcity ploy they throw at you that leads you to believe that you need to get in NOW in order to get this or that is just hype and manipulation. Don’t be fooled by this garbage. I know its difficult to pass on some of the sweet talk that the recruiters are using in their pitch to sell you the opportunity. It’s what they are trained and expected to do. You’ll find many “strong-arm” strategies used in the selling techniques that are employed by network marketers. Take your time to think it over. Any investment requires real money and only fools rush in uneducated.
Be sure to drill your sponsor (politely of course) about the terms and conditions of the plan. What is the exact compensation structure? What could some of my expenses as a distributor amount to (including any auto-ship or required fulfillment).
Ask for proof of any income claims that your sponsor makes during his/her presentation. More often than not, there is a disclaimer involved that states “Results shown are not typical”, or something similar. This is often a sign that very few of the company reps ever achieve the level of income that is purported to be available to everyone who signs up. In fact, it is often less than 1% of distributors that ever earn the amounts quoted as the bait to lure folks into MLM programs in the first place!
Below is an actual example of a currently operating MLM’s income disclosure:
Keep in mind, when selling a program similar to this to other individuals, it is usually hyped up that anyone can earn $5,000 or more a month as a distributor “it just takes hard work and dedication” they’ll tell you. When in reality, it just takes signing up a bunch of other folks who won’t make a dime because they won’t perform the “hard work and dedication” necessary to become successful. As you can plainly see from the chart above, only a few people (perhaps less than 100 out of every 10,000) will ever make enough money to squeak out a any kind of living. Most (91% in the case above) make less than $100 a YEAR!
Get information like what I’ve shown you above in writing. Steer clear of any programs that have rewards based on recruitment vs. selling products to the public. Buying products yourself to “front load” your inventory or selling to those you intend on “building a team” of distributors with does NOT constitute sales to outside customers. The law states that you (and your company) must sell more product to customers OUTSIDE of your organization and make more money in sales to those customers than from recruiting other distributors, in order to be deemed legitimate. Sometimes, in layman’s terms, this is referred to as the “50/50 Rule”, when in reality it’s more of a majority requirement (51/49 or more).
As far as the FTC is concerned (the Federal Trade Commission is the entity that brings forth charges of fraud in the direct-sales industry), this is the time-tested and traditional tip-off to a pyramid scheme.
Do Unto Others…
Regardless of whether you attempt to recruit your brother, your sister, your cousin or your mother (egads!), you should be aware that when you attempt to create a team of new recruits, you are held responsible for any claims you make about the products or the income potential by becoming part of the organization (which in reality they are not). If you can’t keep any promises that you make to your recruits, you could be liable, even if you’re just repeating what’s printed on the company leaflet or if you’re parroting another distributor that you work under or associate with. If you cannot be honest and forthright about these two key items up front, you may have just given yourself the evidence you need to judge your own moral character.
As with any business venture, if you have more questions or are unclear of anything, ASK MORE QUESTIONS! If at any time you feel pressured to join an MLM, it’s is a good time to step back and consider doing some deeper self-evaluations. A legitimate company doesn’t need to “hard sell” you into their sales team. In fact, if a company isn’t controlling the size of its sales force by limiting the distributors by establishing specific sales territories, there is the likelihood that market saturation (overselling) will take place very quickly. This will significantly reduce the potential for any profits to be made in the area you’re selling in.
Now… Do the Math
If you recruit 10 people in your area to cover costs and create a return on investment, that means those 10 will have to do the same and so on. The sales force grows exponentially within the first year: 1 ->10->100->1000->10000->100,000->1.000,000
A sales force larger than the size of the entire City of Detroit (Pop. 688,701 – 2013) would be out selling your product by 2016.*
* We’ll touch on this again when we talk about the effect of the internet and the spreading of MLM across the globe.
Many MLM’s force you to maintain a sort of “quid pro quo” (Latin for “something for something”) in order to receive bonuses on product sales. What this means is you will likely be expected to purchase a certain amount of product every month to maintain your distributor level. Ultimately, you will want to sell all of this product to customers outside of the program, but it doesn’t always work that way. Fact is it will either sit in a closet or you’ll consume it yourself.
You’ll want to know in advance, does the company have a written return policy for returning any unused products? Are there any restrictions and restocking penalties applied? Policies vary on whether you’ll even get a full refund.
MLM programs may require, or least entice you, to buy training or marketing materials, or pay for seminars or live events if you want to “go big or go home”. It’s basically a “rah-rah” push to create a herd mentality and keep people inside the fold. Find out how much time and money other distributors have had to spend on training, marketing materials, and seminars when they joined the MLM. Find out whether you’ll be required to participate in periodic training or what happens to your status if you “opt out” of these usually expensive endeavors. The usual marketing hoopla is “Make it to LIVE events! It will take you to the next level…Network with the Big Dogs, the REAL Marketers!”, yeah, yeah…rah, rah…
If you’re sponsor seems uncomfortable answering any of these questions, ask them to deliver someone who can, otherwise move on, you’re not in good company and you’re likely to end up “drinking the kool-aid”. I know it sounds cynical, but it’s true.
Secure the Talents of a Smart Friend
Don’t be afraid to consult with your accountant, attorney or a business associate you can trust that is not affiliated with the program you’re looking into. Allow them to review all of the materials you’ve received and ask them for their honest opinion or to give you sound legal advice. Ask them how they personally feel about the whole thing. Sometimes just getting a second opinion can clear up a lot of concerns you may have. Don’t be surprised if some of your smarter friends scream “Don’t get into that pyramid scheme crap!” You may be surprised to discover that oftentimes they are usually correct!
Think about whether this kind of work suits your talents and goals.
After digging into all of the above, ask yourself if this is really for you. How many hours a week can you dedicate to this plan? Do people in your area have an interest in the product or service? Do a field test. Remember, no matter how good something sounds or looks on the outside, there will be a ton of work involved on the inside to make a profit. There is no free money out there. If this was what you were told before signing up, then you’ve been fooled already, for sure and for certain.
If the product being sold is reasonably priced and has a demand in the marketplace, you may find success with dedication to the cause. But just like any other business, MLM can take a lot out of a person. Most MLM-types have certain personality traits. They are usually hyper-motivated, excellent salespeople and are success driven with no problem being told “NO” when prospecting others to join a progam. Thick skin is required because you will be rejected and at times even shunned. It takes a certain kind of individual to even think of working inside of an MLM business structure. If that’s you, good luck, you’ll still need it.
Today’s Closing Remarks
This has just been a small introduction into what MLM (Multi-Level Marketing) is from both the perspective that it could be a tangible, lucrative, and legitimate business model and that perhaps it isn’t, well to some extent anyway. It wasn’t really my intent to show that it was all that tangible to begin with.
So, I’m sorry to burst anyone’s MLM bubbles, but here comes the BOOM! Now that you have a basic understanding of what an MLM is (for the most part), and what to watch for to avoid being scammed by one that isn’t legit. Let’s get serious about this grandiose idea that it’s could actually be a viable business model and see if it meets all of the challenges of today’s marketplace.
I fully intend to show “What MLM is, and What MLM is not”. I’ll have evidence, proofs, and professional opinions mixed in with a little of my own. I will use some specific criteria to help you determine which side of the long-standing debate over this highly contested business model you’re on. This could get heated, it might not. Let’s all try to keep our heads on straight as we proceed to see what’s really out there in the world of Multi-Level Marketing.
When you’re ready to “take it to the next level”, look for my next article in this series, (as of yet untitled) which is due out sometime around the first week in November 2015. It may not be complete at the time you’re now reading this, so please do come back or sign-up for my newsletter and get a summary of all my latest postings on a monthly basis.
Remember to leave any questions or comments below and share this with any friends or family that may be considering getting involved in an MLM themselves… you might just save them a big hassle in the long run. This article will be ever-evolving and may receive minor or major edits as I move forward to complete this task. I’ll see you in the next post.
Thanks for stopping by,