Multi Level Marketing Scam – Or Is It a Real Business?

Do you know the difference between a multi level marketing scheme and the legitimate, top multi level marketing companies?

First of all, we need to be clear with the terminology. Multi level marketing (MLM) is the same as network marketing and direct sales. When I use the term multi level marketing, I am also referring to direct sales or network marketing. I see no need to split hairs.

Multi level marketing participants are referred to as Independent Business Owners, distributors, independent distributors, sales associates among others.

Federal Trade Commission logoAlso, the Federal Trade Commission in their guidance regarding multi level marketing make no distinction between network marketing and MLM. To them it is all direct sales. The FTC does make a big distinction between legitimate multi level marketing plans and pyramid schemes!

 

Multi Level Marketing Introduction

Wikipedia defines MLM as a “strategy in which the sales force is compensated not only for sales they generate, but also for the sales of the other sales people that they recruit.”

Multi level marketing diagram

Multi level marketing diagram

MLM involves direct selling to consumers with the opportunity to recruit and create a sales organization. The sales force or “downline” members make commissions on multiple levels (thus the reference to multi level marketing). These recruited “downlines” provide for multiple levels of compensation for the recruiter.

There has been lots of discussion over the years as to whether MLM is a legitimate business model.  Forbes, a major business magazine, provides an argument for it being a legitimate business model. They reference Mary Kay, Tupperware, Advocare and Avon.

MLM companies are often criticized because they place more emphasis on recruiting new distributors than selling products. The opportunity to earn commissions from downline distributors can exceed the amount of commissions earned by selling products.

Because of the shape of a sales organization, network marketing companies are often misidentified as illegal pyramid schemes. The Federal Trade Commission provides information on pyramid schemes.

Recently, a group of U.S. lawmakers (28 co-sponsors) came together to write and sponsor a bill (H.R. 5230 – Anti-Pyramid Promotional Scheme Act of 2016.) that would finally define what a pyramid scheme is at the federal level.  The most important part of this legislation is that it defines internal consumption… meaning customers who are also distributors or members would be considered “consumers.”

The new law, should it pass, will finally clarify and legitimize the many multi level marketing companies where many consumers have also chosen to become associates.

MLM companies publically owned

The list below shows some of the top multi level marketing companies, which are publicly-owned companies, using the MLM business model.  I do not think the Securities Exchange Commission would authorize an illegal pyramid scheme to be listed on the New York Stock Exchange!

  • Avon – beauty, household, and personal care
  • Nature’s Sunshine – Aromatherapy, Cookware, Health/Fitness/Wellness, Homeopathics, Nutritional Supplements, Oral Hygiene, Personal Care, Skincare, Water Treatment Systems, Weight Management
  • Herbalife – Health/Fitness/Wellness, Nutritional Supplements, Personal Care, Skincare, Weight Management
  • Primerica – Financial Services
  • Nu Skin – Cosmetics, Fragrances, Haircare/Hair Accessories, Health/Fitness/Wellness, Internet Services, Nutritional Supplements, Oral Hygiene, Personal Care, Photography/Photo Processing, Skincare, Telecommunications Services, Weight Management
  • USANA Health Sciences Inc – Haircare/Hair Accessories, Health/Fitness/Wellness, Nutritional Supplements, Oral Hygiene, Personal Care, Skincare, Weight Management
  • Pampered Chef (owned by Berkshire Hathaway Inc) – Cookware, House and Kitchenwares

How many people knew Warren Buffet was involved in a multi level marketing business?

Advantages/Disadvantages of Multi Level Marketing

When it comes to analyzing the advantages and/or disadvantages of multi level marketing, it may depend on your perspective. One person’s advantage may be another’s disadvantage. For example, it is an advantage that an MLM business has a low cost of entry as compared to starting a franchise like McDonald’s fast food restaurant. On the other hand, it could be said that low cost of entry is a disadvantage because anyone could join. Just because someone can join does not mean they should.

Pros

  • Risk – There is typically low cost of entry to start an MLM business. There may be an application fee, distributor kit cost, marketing material costs, training material costs and other costs associated with starting a business. Then there are product related costs such as cost for samples and inventory (if there is a requirement to carry an inventory). It still costs less than opening a McDonald’s franchise where you have major costs before selling the first hamburger. Costs such as employee salaries, rent/lease of of building site, food costs, equipment costs among others.
  • Quality of Products – The quality of products vary widely as they do with any business (non-MLM). Quality of product is subjective as each consumer makes the personal decision to buy and use a product.
    • Why buy a Smashbox (brand owned by Estee Lauder) Smashbox Studio Skin 15 Hour Foundation costmetic, 1 ounce, for $42.00 when the Maybelline Super Stay Better Skin Foundation is available for $8.98 at Walmart?
    • The question regarding consumption is would I still buy the MLM product if there were no opportunity associated with it.
    • Also,  are there other benefits to using the product besides making money.
  • Income Potential – Having an MLM business does offer the potential to create a successful business and make life-changing income. Very few people actually will make any money. A typical income disclosure statement provided by an MLM company will show percentages of distributors making money. But the MLM business gives a distributor a chance of making more money than the person that sponsored him/her into the business. Fact is a Walmart door greeter will never make more money than the Walmart CEO.
  • Residual Income – The potential for earning residual income after you have stopped being an active distributor (retired) is an advantage. The amount of residual income is dependent upon the sales volume of the distributor’s recruited sales force.
  • Low Overhead – Typically, a home based business has low overhead unlike a brick-and-mortar business. There are tax advantages associated with a home business as well.

Cons

  • Mistaken for Pyramid Schemes – Because of bad business practices and bad actors, MLM is usually associated with the word “scheme” as in mlm scheme. Too many unscrupulous companies and distributors promote the idea that multi level marketing is a way to get rich quick. They also promote “the dream” of life-changing income appealing to the baser instincts of potential recruits. When the focus becomes recruiting new members and not the sale of products, the businesses quickly cross over into the realm of pyramid schemes.
  • Recruiting – Companies that have decided to distribute their products via the MLM business model have essentially told their distributors they are responsible for hiring their own sales force. The time, effort and cost of recruiting belongs to the distributor. It is fair to say that most people becoming an MLM distributor does not have the training or experience to recruit new members. “Old school” sponsors tell new members to make a list and contact all your family and friends.
  • Marketing – MLM companies have gotten into serious legal trouble because of how distributors have marketed the products and business opportunities. The U.S. Government sued and fined Herbalife millions of dollars for fraudulent claims made by distributors. Because of the risk to companies, they usually mandate that distributors follow a corporate “system” to promote the products and opportunity. So much for distributor independence!
  • Lack of Sales Training – Business is about selling.  Plain and simple.  People exchange cash for a solution to a problem they have or a unfulfilled want. Yet, people do not want to be associated with sales. Unscrupulous distributors disguise the sales process as “sharing” or some other disingenuous words.
  • Confusing Compensation Plans – Compensation plans are the bane of MLM companies. Companies use all kinds of formulas to structure payments as a result of downline member sales performance. Consequently, the multi level marketing compensation plans have some unique names like binary or 2-up or unilevel. Companies try to build incentives into the compensation plans as a means to compensate the achievers. The Mary Kay “pink cadillac” is a prime example. Here is an example of a compensation plan.

Compensation Plan

The next section discusses MLM product pricing. It could have been listed as either a Pro or Con, but I decided to have a separate discussion.

Multi Level Marketing Product Pricing

An assumption parading as a fact. MLM products are high-priced because the company has to pay sponsoring distributors commissions on downline member sales. In a courtroom, a lawyer would state an objection based on assumption of facts not in evidence.

Corporate business models define how a company is going to do business. Part of their marketing strategy is to define how they will distribute their products. For more discussion on business models, please click here.

A company would choose the MLM business model for several reasons. First of all, it reduces cost risks by transferring some selling, general and administrative (SGA) costs to the independent distributors. As stated above, independent distributors are responsible for recruiting their own sales forces. Because the distributor is responsible for recruiting a sales forces, the distributor assumes training costs as well.

Product PricingPart of a business model is the revenue model, which defines the pricing model and customer acquisition and retention model. The pricing model consists of price details and structure. Theoretically, the SGA and training costs are not part of this model since they have been passed to the distributors. Consequently, the assumption is the pricing is less than it would be otherwise.

This difference should theoretically cover compensation paid for downline sales performance.

I say this is all theoretical because pricing models are generally company proprietary data not available to the public.

Evaluating a Multi Level Marketing Business Opportunity

Should you decide to consider joining a multi level marketing business, here are some factors to help you decide.

Since we all have personal preferences, the following criteria are not listed in any particular order. Before starting, I suggest you define your goals for having a business. The goals should be both financial and non-financial. This will give you a basis as to whether the business being considered would meet those goals.

Having goals will lessen the affect marketing pitches and hype will have.

Evaluation criteria:

  • Products and services – The products and services must have a demand. Does the product or service fill a need in the marketplace? Or does it solve a problem?
  • Profitable – Can everyone make a profit in a reasonable amount of time? Does the company provide an income disclosure statement?
  • Training – You will want to see the quality of training and support. Training should include videos as well as text lessons. Live webinars are even better.
  • Company reputation – Is the company leadership and management experienced and have a successful track record? Does the company have a good public image and known for quality?
  • Support – You will want to evaluate any support provided by the company and upline distributors. They should have a responsive support system in place.  Distributors should be able to interact and receive guidance requested via live chat, tutorials, blogs and private mail. The company should provide sufficient “back office”administration and information.
  • Established System – The company and upline distributors should have a proven process in place that can be duplicated by anyone.
  • Tools and resources – There should be tools available to help create a successful business. If the tools must be purchased, the prices should be reasonable and not profit centers for the company or leaders.

Use these criteria to evaluate potential business opportunities. Do your homework and due diligence. Make a chart and list multi level marketing companies  you find. Focus on the MLM products and services you would be happy to use and proud to sell.

Conclusion

Hopefully,  you will be able to separate out the legitimate companies from the MLM schemes with the information and links above.

If you decide that a multi level marketing company is not for you, then consider my #1 affiliate program.

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If you have any questions or comments about multi level marketing or have experiences with MLM that you would like to share, please fill in and submit the form below. I love feedback!