We’ve all gotten that text, an out-of-the-blue Facebook message from a long-lost high school acquaintance. The person you were never really close with, but who has chosen you for a “fantastic business opportunity!”
More often than not, this fantastic business opportunity is an offer to join that acquaintance’s multilevel marketing company or MLM. But what exactly is an MLM? Is it really a pyramid scheme?
What is an MLM?
An MLM is a business strategy many direct sales companies use. Some common MLMs are It Works!, Amway, Arbonne, LuLaRoe, Scentsy, Monat, Younique and Color Street.
MLMs don’t provide their salespeople (or distributors as they’re often called) a typical salary. As an MLM salesperson, you rely on two streams of income: revenue from selling products and commissions when you recruit other distributors who buy products to sell themselves. The distributors you recruit are called your downline.
The line between MLM and pyramid scheme is often very thin, if not invisible. In fact, in 2017, Arbonne was faced with a lawsuit alleging it was a pyramid scheme. The same thing happened to LuLaRoe in 2019.
The biggest difference, aside from the fact pyramid schemes are illegal and MLMs are technically not, is while pyramid schemes rely solely on recruitment for money, MLMs claim to generate income based on the sale of products and services.
How exactly does an MLM work? Imagine you take your high school acquaintance up on their offer and join their MLM that sells makeup. To start, you will have to purchase all of your own inventory out of pocket. Often these companies have starter kits, which cost roughly between $50 and $200. Bear in mind whenever you buy inventory, the person who recruited you gets a small amount of the money you spent.
It’s then up to you to sell the makeup you bought and recruit people into your own downline so you can make money whenever they purchase inventory. When those downlines recruit people, you get a commission on their sales too. This is where most people lose money because often what you sell does not exceed what you initially purchased. The pressure to always keep fresh inventory in stock leads many people to lose money very quickly.
The problem with MLMs
Most MLMs push the narrative of being your own boss, and promise perks such as working from home and bringing in thousands of dollars in additional income. Sadly this promise is not the reality.
Due to the structure of MLMs, many people end up making less than minimum wage. In fact, most people end up losing money in these schemes. According to a 2019 income disclosure statement from the MLM It Works!, entry-level distributors, who made up about 84 per cent of all active distributors in the company, made on average $48 a month. The highest-level sellers, who made up only 0.07 per cent of active distributors, made on average $24,466 a month. Put simply, only those at the top of the ladder made money. uses for its top-level sellers,
– who made up 0.06 per cent of active distributors and made on average $24,798 a month. Put simply, only those at the top of the pyramid made money.
Moreover, the recruitment strategies employed by MLMs are extremely predatory. For example, a number of MLMs push the narrative of female empowerment in order to recruit members. In fact, according to the Direct Selling Association, about 74 per cent of people involved in MLMs are women. However many of the products sold by MLMs, like skin and hair creams, body wraps and nutritional shakes, are designed to prey on people’s insecurities—quite the opposite of female empowerment. To make matters worse, MLMs may use false or misleading information to advertise.
MLMs often promise extra income (six figures or more) obtained effortlessly from the comfort of your own home. Think about the groups of people for whom this would be most appealing: students, people with low incomes, the recently unemployed, struggling parents, etc.
Being involved in an MLM can endanger a person’s already precarious financial situation. Imagine a student pouring money into a business that claims to be lucrative while trying to pay off student loans at the same time.
Multi-level marketing is now almost completely online. People use platforms like Facebook to sell to friends and families, and one large grievance against MLMs is how relentless some distributors can be. While being annoying online isn’t as harmful as preying on insecurities and false promises, it is disappointing to have a friend or acquaintance start seeing you as nothing more than a potential customer or downline.
What to keep in mind
Some people do join MLMs without the serious goal of making money. My parents have friends who host product parties as a social activity rather than a way to make money. Going back to the It Works! disclosure statements, we can see some people do end up making good money through MLMs. Though again, I can’t stress enough how incredibly small a percentage this actually ends up being.
My advice to anybody involved in or thinking of joining an MLM is this: do whatever you want, but if your goal is to make a lot of money then an MLM is statistically not an effective way to do it. Create a spreadsheet, and keep track of every single dollar you put in and take out. Even if you don’t intend to make money, or you want to join simply to enjoy the products, keep in mind you are still supporting and contributing to a predatory business model.