Multi-Level Marketing (MLM) companies use a variety of tricks designed to lure unsuspecting people into “get rich quick” schemes. Want to know which ones are the most common?
Unfortunately, not all businesses are set up to help and serve customers. I’ve discussed 3 business models that take advantage of people who are vulnerable, lonely, insecure, and financially desperate. Check out Which Business Models are Predatory [Podcast]
Multi-Level Marketing companies are especially good at doing this. They tend to target people who:
- who want to stay home with their children,
- who are scraping by paycheck to paycheck,
- who are dealing with health issues,
- who have recently lost their job,
- who feel lonely and want to find friends, and/or
- who to be useful and apply their talents.
Even if a new recruit sells products, they are under incredible pressure to keep performing despite a lack of qualified buyers, family setbacks, or discomfort with using high-pressure sales methods. When a sales rep decides to quit, she is often shamed or intimidated into staying — which is one of the many cult-like tactics used by MLMs.
Promises that Aren’t Quite True
I recently saw an article called “12 Reasons MLM Companies are Fantastic” (actual title has been changed). In it, the author is an MLM promoter and speaks very highly about direct sales opportunities.
To be honest, I believe this author was very well-intentioned and really does want to help people find legitimate home-based job opportunities — which is, I’ll admit, very difficult to do. However, the author strongly promotes “opportunities” in companies that use fraud, deceit, and outright lies in a flawed business model.
Here are the 12 reasons which were shared by the author (again, altered a bit to protect their identity), as well as my opinions on the potential risks of each statement and why this type of thinking can be harmful.
1. False Promise: “You can work from anywhere!”
While the thought of working from your kitchen table or a sunny beach is tantalizing, working as a promotional agent for a multi-million-dollar corporation is far from relaxing. MLMs do not offer a “job”; instead, they entice financially vulnerable people with a promise of control, financial security, and a community that pressures them to keep moving up the ladder. (Read more: 7 Reasons MLMs are So Attractive to Established Business Owners)
Owners of MLM corporations are really smart. They recruit thousands of reps as their sales team — on whom is placed the difficult task of influencing others to buy products. This means that the MLM owners pass on the responsibility for salary, benefits, and sales costs on a contractor workforce. Each Independent Contractor signs and agreement to follow the MLM company’s rules about how to promote and sell the products, while taking on all the risk if they aren’t able to sell.
Successful MLM reps typically spend hours connecting with friends, purchasing and testing the products, cataloging their inventory, setting up appointments, hosting parties, influencing people to buy, and following up to increase follow-up sales. None of this time or financial investment is reimbursed by the MLM company.
Most Independent MLM Contractors don’t take the time to track their spending, or how many hours they work every week. As long as they continue to buy products and recruit others to buy as well, their status remains active and they can move up the ladder. The vast majority of Independent Contractors (ICs) who join a network marketing company don’t generate a profit; most actually lose money (Source: MLM Statistics).
2. False Promise: “You decide how much effort you put in.”
A traditional employee-employer relationship provides very clear boundaries and delineation of responsibilities. Employees of legitimate companies will never be pressured to:
- pay for the opportunity to be an employee,
- work evenings and weekends with no set schedule,
- pester their friends and family to buy products,
- view every conversation as a potential sale, or
- get paid based on the number of “recruits” added to their team.
Regular jobs allow you to leave work and enjoy other hobbies. But since there is no “guaranteed income” with MLM sales, contractors feel a constant pressure to share social media posts, host parties, and contact everyone in their circle of influence… with no break. There is no clocking in or clocking out. Daily life becomes an endless loop of trying to recruit more people to join the opportunity.
Worst of all, MLM companies do not limit the territory where their sales reps can sell and recruit. This means that everyone who joins your team will actually become a direct competitor. A legitimate company would never design a situation where their sales team are punished for doing their job well. Yet that is exactly how Multi-Level Marketing companies operate: with an unsustainable model of growth that only rewards the few at the top of the pyramid-shaped structure.
3. False Promise: “It rewards those who work hard.”
Successful MLM reps have 2 things going for them:
- They are great at influencing people to buy, and
- They got in before others joined the market.
Basically, successful MLM reps are really good at talking people into joining their team, and they are also just plain lucky because of the timing of when they joined the MLM. Once the market is flooded, new reps who join will find it nearly impossible to earn any money.
Read more: How MLMs Use the Psychology of Influence
With a combination an assertive personality and luck, some MLM representatives generate significant money. But only a tiny fraction of those who sign up for a multi-level marketing venture are able to create a sustainable income — because success in an MLM company means that they convince other people to sign up under them — paying into a system that only benefits the few at the top.
The average MLM rep earns around $400 per year in sales, not counting expenses. One study reveals that 80% of representatives earned no income at all (Best Company). Another shows that the average seller actually spends more than they generate (MLM Statistics).
And these figures don’t take into consideration the expenses incurred from independent contracting work. Reps are strongly encouraged to pay for sample products, promotional materials, inventory, and other resources that will increase their chance of success. Yet the vast majority of MLM reps don’t calculate their earnings and expenses on a Profit and Loss statement, which would reveal that they may actually be losing money each month.
MLM reps often use positive phrases to encourage others to join their team, such as:
- “selling is easy,”
- “the products will sell themselves,” and
- “everyone will want to buy from you.”
But this is a ploy that minimizes the role of legitimate sales professionals.
Not everybody is a gifted salesperson. Of the millions of people who sign up with MLM companies, not everyone can succeed… yet that “promise of success” is the message that draws people into joining.
When they inevitably fail to make more than a few hundred dollars a month, MLM reps are blamed for their “lack of effort.” This is a tactic that is common in cults (which you can read more about in 11 Ways Multi-Level Marketing is Like a Cult).
4. False Promise: “You get to be your own boss!”
One of the fallacies that MLMs like to promote is the idea that their Direct Sales Representatives / Promoters / Independent Contractors are legitimate “business owners.”
Although an Independent Contractor (IC) is considered a sole proprietorship and must pay their own annual taxes, they have no equity or control in the company for which they are contracted to work.
ICs who resell and recruit Multi-Level Marketing products often misrepresent and inflate their status by calling themselves “Owner,” “Boss,” “CEO,” or “Entrepreneur.” However, ICs are not a true “entrepreneur,” a “boss,” or a “business owner.” Their role is to simply market and sell the company’s product exactly the way they want.
To be considered a true business owner, one must have 3 things:
- control of the product,
- control of the distribution, and
- control of the pricing. (Source: Lazy Man and Money)
MLM reps are not in charge of any of these.
The MLM corporation — which hires representatives — has ultimate say over:
- the type and quality of products they offer,
- the speed of customer service,
- thee job role of an IC,
- marketing materials,
- return and exchange policy,
- payment structure,
- any policies and procedures,
- the company’s operations,
- the strategic direction, and
- any other decisions made by the company.
An IC is simply a recruiter and/or salesperson. They cannot impact the decisions of their MLM’s corporate leaders and have no power to change or influence those decisions.
5. False Promise: “The hours are flexible.”
Many people say they want a flexible schedule; but if they actually achieve freedom, they are often miserable. Running a business requires discipline, organization, and the persistence to get things done even if they’re unpleasant.
Although legitimate home-based business owners often enjoy a greater degree of flexibility (a welcome relief from typically inflexible restrictions of a traditional job), it can also result in failure when a month of 12-hour days only results in a handful of sales. ICs are expected to bring in monthly or quarterly sales earnings—which means they need to talk about the “opportunity” with everyone they meet.
“Work from anywhere” is not actually true when you consider that successful reps work well over 40 hours a week and rarely earn a profit. There is no such thing as a vacation in the MLM world, because that would mean missing out on a potential recruit to add to their downline. There are no paid days off, no reimbursement for expenses, and no opportunity to relax… because of the constant pressure to sell items (which are typically sub-par and over-priced, as we’ll discuss below).
6. False Promise: “Startup costs are lower than for other businesses”
Starting an actual company from scratch is not easy, and it can involve a significant cost for equipment, training, licensing, legal fees, advertising, and other overhead costs. Self-employed owners decide how they want to structure their company. They aren’t required to buy a “starter kit” or to purchase pre-set inventory and products.
Business ownership requires creativity, intelligence, and innovation to think outside the box. Many companies require a legitimate business owner to secure a bank loan, which involves drafting a Business Plan and analysis of financials, market conditions, and the likelihood of a Return on Investment (ROI).
In contrast, MLMs require an upfront purchase to “buy in” to the opportunity to resell their products. They do not guarantee any Return On Investment (ROI) despite an over-saturated market, excessively high retail cost of products compared to the regular market, restrictions on marketing techniques and recruitment, and other strict policies that make it very difficult to actually make any money.
Working as an Independent Contractor for an MLM provides no security at all. It’s true that a brick and mortar store or a franchise requires upfront costs to operate, but joining an MLM carries even more risks. (Read more: What’s the Difference Between Brick-and-Mortar, Franchise, Direct Sales, and MLM?)
Here are a few examples of the costs associated with being an Independent MLM Contractor:
- The IC’s income is 100% commission, which means there is no guarantee of a biweekly or monthly paycheck.
- They are obligated to follow the MLM’s strict rules and sign a contract.
- Upon joining, they are offered several startup options — with the least expensive only providing the basics, and the most expensive also being the most likely to provide a Return On Investment. Most ICs sign up for the higher-priced packages.
- They are required to purchase a minimum amount of products every month.
- They are often expected to pay for a website, marketing materials, and samples in order to be more successful.
- They have no control over inventory, including the selection and quality of products or services they can offer.
- They typically cannot set their own price points (the prices that customers pay).
- They are encouraged to buy as many of the MLM’s products as possible, even if it means reinvesting their profits and borrowing money to do it.
- They are encouraged to pester family and friends to buy and sign up as loyal customers in their “downline.”
- They are at the mercy of the MLM company for commission payments based on arbitrary rules.
MLM Contractors sell products for another company. Thus, she or he does not run their own business — they are a sales representative. They pay for the privilege of buying products at a discount and are incentivized to amass inventory that they may or many not be able to resell to outside customers. If they sell more than they spend, this reinforces the cycle. If they don’t, it pushes them further in debt.
In contrast, legitimate business owners have partial or full financial control of business decisions, and must also receives a financial benefits from its success.
7. False Promise: “It provides you with extra income.”
MLM reps are encouraged to highlight their sales success but downplay the expenses — which may look appealing to those on the outside but isn’t good business practice.
The most important metric in any company is its Profit Margins — the difference between income and expenses. But often, MLM companies only reveal the income and sales figures, not expenses.
What is “extra income” if profit margins are nearly zero (or even in the negatives)?
Nearly all MLM reps (95%) make no profit, or lose money from their “business.” Take a look at these income disclosure statements to see the numbers for yourself. While “earning money from home” or “supplementing your income” is a great goal, the promise that it can guarantee extra income is dangerous and predatory.
8. False Promise: “You will save money on childcare expenses.”
Less than 5% of MLM Contractors earn enough enough money to quit a full-time job. Many MLM recruits are Stay-At-Home Mothers (SAHM) who are lured into joining based on a promise of easy money by an MLM Sponsor.
Any sales job requires intense focus, determination, and a high level of energy. Most parents are not able to run a business at home without some type of childcare assistance. So the idea that a parent could run a successful sales job while also raising children, and save the expense of childcare, is unrealistic… and it adds to the faulty perception that MLMs provide the perfect opportunity. In reality, this does not end up being a sustainable option for the vast majority of those who sign up.
9. False Promise: “It gives you goals to work toward.”
MLMs provide no possible way for the majority of reps to achieve the top level of their pyramid structure. Individuals at the top may earn a significant income, but it’s because they had the good fortune of entering the company early on. They have also influenced thousands of other people to join their “downline.”
Although MLMs encourage recruits to “dream big” and earn “unlimited income,” the reality is that most of these companies provide no true opportunity to make it happen.
10. False Promise: “You’ll feel supported and make lifelong friends.”
For people who are extroverted and crave being around people, or those who feel lonely and want to be part of a group that will accept and encourage them, an MLM can sound very appealing.
Unfortunately, while the “team” atmosphere in an MLM may give some degree of camaraderie, it comes at a steep cost: the constant sales revenue and recruitment of new team members (jokingly labeled “Hunbots” due to their frequent and patronizing use of the word “hun”).
Most of the people you’ll be “connecting” with in the MLM world come from a very small circle. As long as a rep behaves as they are supposed to, they are rewarded. But as soon as they begin to question or pull away, they start to be excluded from the group.
An MLM rep who doesn’t fulfill their monthly quota is told to try harder or that their failure is their own fault. If a rep cannot keep up with the pace of generating more sales and recruits, their “lifelong friends” will start using high-pressure tactics to keep them hooked… including intimidation, shaming, embarrassing, bullying, and peer pressure (all of which are cult-like behaviors).
Read more: 11 Ways Multi-Level Marketing is Like a Cult
11. False Promise: “You can buy high-quality products at a discount.”
Actually, the reverse is true. The vast majority of people involved in MLMs actually lose money (see evidence of this here). The “work-at-home gig” is presented as a great way to earn extra income… yet it ends up being an expense (often with ever-increasing credit card debt).
Products offered by MLMs are also sold at a tremendous markup. For example, a bottle of $25 skincare lotion might be offered at a “special rate of 4 for $60 for reps,” making it $15 per item.
From that sales price, the MLM company must deduct:
- the commission payment for the sales rep,
- commissions for multiple people in their “upline,”
- the company’s overhead cost (advertising, sales, operations, salaries), and
- a suitable profit margin to end with a profit margin.
Once all these expenses are deducted, the actual “wholesale cost” of the product is actually $2 to $3—not enough to guarantee that the product actually has a high amount of quality. Legal action has been taken against several MLM companies for inappropriate and deceptive marketing, unfounded health claims, and false earnings claims (Sources: Truth in Advertising and Federal Trade Commission).
12. False Promise: “MLMs are fun!”
Most Independent Contractors for MLMs aggressively promote the company’s products… before they finally realize they have unwittingly been part of a pervasive scam similar to a cult.
MLM victims realize:
- It’s not fun to constantly pester friends and family to buy your products and sign up as a “recruit.”
- It’s not fun to lose money every month by constantly investing in more inventory, buying samples, trying new product lines, and hosting parties and events.
- It’s not fun to cut off relationships with anyone who questions your loyalty and dedication to the MLM brand (a tactic that is used by nefarious organizations)
- It’s not fun to realize that the “business” relies on its sales team as the main source of revenue (not outside buyers, but the Contractors themselves).
In conclusion, although Multi-Level Marketing companies offer an enticing opportunity to make money, work from home, be self-reliant, and make lots of friends, the unfortunate reality is that it uses a flawed business model that fails for the vast majority of those who sign up. (Hear more in a podcast episode, Which Business Models are Predatory)
Yes, a handful of people will generate significant income; but thousands of others are left with debt and broken relationships, as well as a sense of deep failure and shame for having joined in the first place.
Grace LaConte is a business strategist, writer, and workplace equity advocate whose risk management graphics are used around the globe. She specializes in finding hidden threats and opportunities in organizations that employ working parents. Grace is the host of the What’s Wrong with Your Business? Podcast, which provides tools to adapt in a rapidly changing market.