the hidden dangers of MLM schemes.
Hey babe, want to hear about a great business opportunity?
You would be great at what I do - want to learn more?
Ever thought about being your own boss?
Any of these sound familiar?
A few years ago a local lady would drop off a catalogue every now and again, my mum would buy a nail polish, nanny would purchase some talc, then I’d rub and sniff all the scented pages. And that was that. Nowadays, these companies, known as Multi-level Marketing companies (MLMs), are flying at us from all directions, encouraging us to sign up, join in and invest. MLM schemes pose as feminist, empowering companies that allow women financial freedom and the chance for success. But they are not necessarily the heaven-sent, money-making opportunity they appear to be, and you need to watch out for them.
The basic structure of an MLM company derives revenue from a non-salaried workforce. In other words, recruiters of the business are not paid a regular wage, but make money when they sell products via commission. The MLM will probably frame this as “owning your own business”, to justify the idea that you’re not receiving a wage for your work.
More importantly than selling the company's products, participants of MLM schemes can earn by recruiting others for their “downline”. Sellers make a percentage of commission from their own recruits, effectively funnelling money upwards as sales are made. This is where those pesky online recruiters come in, pandering for your participation in their “exciting business opportunity”.
Recruiters might pitch their scheme under a number of guises, including network marketing, referral marketing, affiliate marketing or dual-level marketing – but they’re all the same thing.
what makes these schemes so problematic?
As opposed to income being generated from products that each participant sells, the majority of revenue comes from the recruitment of new members and making commission from their sales. The people you recruit are called your downlines, and the people they recruit are their downlines, and so on. This is why people involved in MLM schemes are so keen to recruit new members, and why your inbox is constantly flooded with messages trying to sign you up.
More often than not, in order to start “your own business” under an MLM, you’re required to buy the products yourself. This is often framed as a “starter pack” or something similar, but essentially has you funnelling money into the business before you’ve made a penny.
Some companies require participants to make a minimum number of sales in a given time frame. Often the most lucrative way to meet this target is by recruiting new members and making commission off their starter packs and their sales. This is also the reason you might see a friend so fired up about their “new business” selling their skincare range or get-thin-quick shakes one day, and silent on the matter a few weeks later when they’ve failed to meet sales targets. Even if there is no pressure to meet targets (some companies use this as a persuasive selling point), the fact remains that in order to make money, you must sell products.
but hang on – aren’t you describing a pyramid scheme?
You’d be forgiven for thinking an MLM sounds shockingly similar to a pyramid scheme, but there is a crucial difference. If you tell a recruiter that you don’t wish to be part of their pyramid scheme, you’ll often receive a quick and defensive reply, telling you that pyramid schemes are illegal - and that’s not what “their company” is.
And they’d be right to tell you this, too; pyramid schemes are illegal in all 50 states in America and the UK too. The reason they’re illegal is because they promise extraordinary returns based on flimsy structures that are impossibly unsustainable and likely to collapse. They rely on a never-ending stream of new recruits, filling the pockets of those at the top, leaving the majority at the bottom worse off than they were before.
It can be difficult to tell the difference between a pyramid scheme and an MLM. The main distinction is that MLM representatives do have the opportunity to make money through selling products and services, and they are legal. Pyramid schemes don’t actually sell a product or service, and they are illegal.
So although MLMs do often make money and funnel it upwards in a pyramid style structure, they are different from illegal pyramid schemes.
This doesn’t mean that those involved avoid facing the same issues that make pyramid schemes illegal. Just as in a pyramid scheme, very little money is made selling to those outside the company, and the only real profits are made via an endless stream of new recruits. All a company has to do to stay on the right side of the tracks between an MLM and a pyramid scheme is show that their primary purpose is to sell a product, rather than recruit new sellers.
One of the most crucial flaws of MLM schemes is this issue of saturation. If you’re a mum selling your MLM product at the school gates, and you recruit a handful of those other mums, not only will they no longer be buying your product but also that entire social circle is saturated with sellers. They have to find other circles to distribute in, which can be difficult.
This means that the best way to make money is recruitment, and suddenly the main purpose of your position as an ambassador is to recruit others into the company. Others who will inevitably funnel money upwards in order to get their “business” started. And suddenly, you start to notice a ‘pyramid’ structure form.
but I know someone who has made thousands from an MLM?
It’s true that there are a lucky few, who find success via an MLM. Whether it’s someone we know personally, a friend of a friend or an example rolled out by the company themselves, we’ve all known them and felt the envy.
But in reality, these people are probably one of the first sellers in their area, and those who attempt to imitate their success usually fail. It’s in the company’s best interest to greatly reward a handful of ambassadors to motivate and inspire their downlines to sell, sell, sell. After all, if it were so easy why would anyone bother with a nine to five? We’d all be pushing shakes and skincare via our Instagram while swanning off on lavish holidays to the South of France.
So while it’s true that a small percentage of people make money from multi-level marketing schemes, it’s often at the expense of those in their downline. Sadly for the majority of people, they simply end up being a costly lesson. Dare to dream, but accept the fact that MLM selling is always accompanied by a high risk of failure.