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Multi-Level Marketing Scams: How a MLM "Job" Could End Up Costing You Thousands
If you're on social media in any capacity, chances are you've had an experience like this—an old friend, one you haven't spoken to in years, randomly messages you, asking if you want to catch up.
"Heyyyyyy," they type. "How ARE YOU? Seems like your life is going super well! We should grab a cup of coffee sometime and talk!"
You reply that it is so great to hear from them, that you're happy to chat. And usually, that's when they pounce. They ask you whether you're still working in retail or the dreaded corporate world.
"Aren't you tired of slaving away all day for pennies? Have you ever thought about being your own boss? Owning your own business?" They say they were JUST LIKE you last year, barely making ends meet.
But then they came across a "unique business opportunity" that changed their ENTIRE LIFE. They can't wait to tell you all about it ...
If you make the mistake of meeting up with them for that coffee, you're not gonna be spending that time reminiscing about the old days. Instead, you'll likely get sucked into a pyramid scheme that could cost you thousands of dollars and a whole lot of stress.
What is a pyramid scheme?
Most businesses make money by selling things directly to the customer, but pyramid schemes work a little differently. Instead of marketing their products to consumers, pyramid schemes require their sales agents—who work as independent contractors—to buy large quantities of the product themselves, and then resell at a markup.
This often proves difficult for the sales agents, who buy hundreds—or even thousands—of dollars worth of product to start, then realize too late that they can't possibly sell it all. In order to avoid losing the cash they spent buying their worthless inventory, people who get sucked into pyramid schemes have basically one option: become a recruiter for new sales agents.
A telltale sign of a pyramid scheme? Your income is based primarily on the cut of the money you get from the people you recruit paying to buy product, not on the amount of product you actually sell.
This is why it's called a pyramid scheme. The people at the very top rake in the dough while everyone underneath them scrambles to get more and more people to buy in, thus expanding the bottom of the pyramid exponentially.
At the end of the day, pyramid schemes sell very little product to actual customers, and instead make most of their profit off the backs of their "employees."
Is it different from a Multi-Level Marketing (MLM) program?
This is a tricky question. Ask any of the people trying to recruit you into becoming a "small business owner" like they are, and they'll bend over backward to assure you it's NOT a pyramid scheme. It's a multi-level marketing program, they'll insist. It's completely different and totally legitimate! But is it?
Maybe? According to the FTC:
"If the money you make is based on your sales to the public, it may be a legitimate multi-level marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s probably not. It could be a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money."
The thing is, it's hard to know whether or not even a "legit" MLM fits this profile. Most MLMs are notoriously secretive about their contractor's sales, and some don't track them at all. When you look at what they're selling, the reason why sales agents find it so difficult to unload product becomes clear.
Most MLMs sell things that you can get cheaper at a normal store. Why buy $18 mascara or lipstick when you can get the same thing at your local drug store for $8?
According to Pink Truth, a blog dedicated to educating would-be consultants on the dangers of MLM business models, there are six main reasons why MLM sales agents often find it tough to make a profit on selling their products:
The prices of the products are high when compared to products of similar quality available through traditional or online retail outlets.
The products are undifferentiated. Similar products are widely available in stores and online.
In the person-to-person selling model, choice is restricted and there is the pressure of a personal relationship. In stores or online, the choices are unlimited and the sale most often comes with no pressure.
There is too much competition selling the product to make profitable retail sales. There are an unlimited number of sales representatives with no territories. Distributors are encouraged to recruit more distributors, who are naturally their competitors. They enroll their friends, family, and neighbors. When they do so, they not only lose potential customers, they also create new competitors.
There isn’t a big enough margin in order to turn a profit. Distributors find that they can’t sell products at “suggested retail” pricing, and must discount, often heavily. Then factor in the cost of supplies, free samples, advertising, shipping, and all the other costs related to selling the products, and any hope of a reasonable profit vanishes.
MLMs promote and reward recruiting far more heavily than selling. New recruits are pushed toward recruiting and away from retailing, even before the new recruits realize how impossible it is to turn a profit retailing. The only way to be profitable (with a minuscule number of exceptions) is to get to the upper levels of the hierarchy, and recruiting is the only way to move up the hierarchy.
Whether what your friend is trying to sign you up for is a legitimate MLM or a full-blown pyramid scheme, they're likely making some quick cash off your new "business opportunity." Consider whether you want to start a job that requires you to spend money before you make any.
Sadly, most MLM contractors end up losing money, and lots of it.
Speaking of "making money," should you take your friend up on her lucrative offer, you're unlikely to get rich quickly—no matter how many stories she tells you about her mentor's Mercedes Benz.
In fact, the vast majority of people who start working for MLM companies actually end up losing money, not earning it. According to two separate studies recently conducted on MLM profitability, more than 99% of MLM distributors lose money on their business ventures, and many MLMs actively misrepresent contractor earning numbers in an attempt to recruit new members.
In the study The Case (for and) Against Multi-Level Marketing, Jon M. Taylor of the Consumer Awareness Institute writes:
"I have analyzed the compensation plans of over 350 MLMs, using the five causative and defining characteristics of recruitment-driven MLMs, or product-based pyramid schemes. For every MLM examined so far (100% of them), I have found them to be recruitment-driven and top-weighted. This means that income is derived primarily from building a large downline, not from retailing products to consumers. Also, most of the commissions and bonuses paid by the company to participants go to a relatively small number at the top of the hierarchy (pyramid) of participants. As such, they are extremely unfair and deceptive.
"Also, in all (100%) of the MLMs for which I was able to obtain average earnings data, the loss rate was abysmal, with an average of 99.6% of all participants losing money (using liberal assumptions in their favor), after subtracting “pay-to-play” purchases and minimum operating expenses."
It should be noted that, yes, it is POSSIBLE to make money in an MLM. But more than 99% of people who try, fail. That's a pretty high bar to cross. In short, your friend probably isn't doing as well as she claims to be doing. If she was, why would she be so desperate to recruit you?
Watch for signs that the person you're talking to is trying to recruit you.
MLM scam and pyramid scheme recruiters can come out of nowhere, and often seem like they're peddling a real possibility of success. Some recruiters approach strangers at the mall or on the street and start a friendly conversation that eventually turns into a conscription pitch. One of our bloggers was almost sucked into an MLM while she was leaving a job interview in downtown Chicago just after she graduated from college:
I was leaving a job interview in the loop and was feeling kind of downtrodden. It was my third interview of the week and so far I'd gotten no bites. I was beginning to think I'd never find a job, when a very pretty older woman dressed in a chic, close-fitting designer suit stopped to compliment my shoes. I thanked her, and she asked me what I was doing downtown. I told her I'd just left a job interview for a marketing position, and her eyes lit up.
"I am actually looking to hire people JUST LIKE you for marketing roles," she exclaimed, excited. She then went on to compliment everything from my personality (she'd known me for less than a minute), to my hair and even my eyes. She said I seemed like the perfect fit for the job she was hiring for, and asked for my number so she could call me later and explain what the opportunity was.
It goes without saying I was very drawn in. She looked like a fancy, successful business woman, she spoke very articulately and professionally, and best of all, she seemed to be willing to give me, a desperate 22-year-old college grad, a shot at a job.
When she called later, my hopes were dashed. She sent me the link to a talk she'd given that she said would explain everything. Turns out, the "job opportunity" was actually an opportunity to spend $100 I didn't have on a starter product kit and try and hawk makeup to my equally poor friends. I found a bunch of message board posts from women who'd had the EXACT same experience as I had. Apparently her shoe compliment approach is actually something they're taught as a recruiting tactic.
These days, you're probably more likely to be recruited on social media than on the street, but no matter where the pitch is coming from. Keep an eye out for these warning signs:
- MLM scam and pyramid scheme recruiters typically spend a lot of time putting down the "typical" 9-5 corporate lifestyle. They'll claim their opportunity will give you a chance to own your own business, make your own schedule, and make way more money without lifting a finger. They won't mention the fact that this new job will come with zero benefits like healthcare and vacation time, and unlike most small business owners, you'll have no chance to sell your business in the future if you hit gold.
- They'll use the phrases "residual income" or "passive income" a lot. They might mention friends who have retired at 35 and just living off their "residual income," which is what they claim they make just from getting up high enough in the pyramid. They won't mention that, in order to make money in a pyramid scheme, the people under you have to continue working. Most MLMs have high turnover and dropout rates, and when someone under you drops out, you can kiss your cut of their cash goodbye. Anyone making "residual income" is actually working constantly recruiting new members to replace the ones who've ditched.
- If you meet them in person, they will be dressed to the nines. Think designer clothes, new shoes, perfectly-done hair. They will look out of place at the coffee shop where they're meeting you, and that's by design. They want to indicate how successful they are through their outward appearance. Don't be fooled.
- They will likely be cagey about describing exactly how they make money, and they rarely will say the name of the company they're working for until you're already sold. They'll call themselves "mentors," or "network marketers."
- They'll tell you their entire life story, starting with the bad, the struggle, the strife, and ending with their current MASSIVE success, which is all due to this AMAZING opportunity that they just LOVE to share with others.
- They'll use a lot of motivational quote cliches, both in person and on social media. Watch out for people who are constantly sharing memes and quote photos about how success is a product of hard work, and boasting about how hard they're killing it. They're probably not killing it. MLMs and pyramid schemes use motivational quotes and self-help books to motivate people into buying more product.
What resources are available to victims of MLM scams?
If you or someone you know has fallen victim to an MLM or pyramid scheme scam, here are your options:
- Report them to the U.S. Securities and Exchange Commission.
- File a complaint with the Federal Trade Commission.
- Check to see if any class-action lawsuits have been filed on behalf of former distributors at your company.
Remember, MLMs are rarely the path to quick money. They're not going to make you rich overnight, or probably at all. They may actually drain your savings and leave you worse off than you are now. The next time a friend reaches out with a "business opportunity," tell him you're set, and ignore them if they try again.