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Are MLMs Scams?

“An extraordinary claim requires extraordinary proof.” – Marcello Truzzi

Everyone who is involved in Multi-level Marketing (MLM) will espouse the wealth and wonders it can bring to your life…but somehow those results are not readily visible to the rest of the world as far as the person who is pitching the idea to you. These people usually still have to have other jobs to support themselves – so the prosperity they promise doesn’t seem to quite jibe with reality. That disconnect might be part of the reason MLM has an almost universally negative connotation. No one (aside from those involved) really seems to like it.

And yet more people get involved each and every day – presumably under the promise of quick money and easy earnings. And since I am actively in contact with people in the small business community, or those who wish to start a business, I see this all the time.

So as a small business advisor and advocate, I felt like it would be beneficial to write this article to talk about the reality of MLM. The good (there is a little), the bad (there is a lot), and some other caveats. We’ll cover these basic questions:

  1. Are MLMs outright scams?
  2. Can you make money will MLM?
  3. How much money?
  4. Will you be able to make MLM your primary means of living?
  5. How difficult is it to get people to buy your products?
  6. How interested are people in joining your network/team?
  7. How much competition is out there?
  8. Would my time be better spent elsewhere?
  9. Why are reps so dedicated to their companies?
  10. If I want to get involved in an MLM, what factors should I consider?

The short answers are:

  1. Rarely
  2. Possibly
  3. A very small amount (in the vast majority of cases)
  4. Almost definitely not
  5. Very difficult
  6. Not at all interested
  7. A ton
  8. Usually
  9. See below
  10. See below

If that is sufficient for you, then stop reading here. Note: I am not out to bash MLMs, because I think they are acceptable so long as the expectation is realistic. Some people clearly have success in them and somebody has to be doing quite well for them to continue to pop up and grow. But in my experience, most of the people who get involved with them do not have a view that is in line with reality. And unfortunately, the ones who are most likely to be swayed by these inflated claims are the ones who can least afford the sign-up fees.

Are MLMs Scams?

Most MLMs stay on the right side of the law (and avoid being deemed pyramid schemes) by ostensibly focusing on product sales rather than recruitment. Once recruitment (getting people under you in your network) becomes the primary focus then the lawsuits will follow – as recently happened with an FTC suit against Vemma.

However, the only way to be truly successful with MLM is by recruitment. That is where the “easy” money flows in and where the biggest growth potential lies. The third section in this discussion will outline why that is problematic.

Strictly speaking they are typically not scams – because there is some economic activity behind them. Pyramid schemes are designed to purely get more people to put in money with no underlying revenue stream/product/service. In an actual pyramid scheme there is no actual business to sustain them for the long term.

MLMs do have a product they are selling – so they are not inherently rip-offs. Unfortunately however, although there is technically and truly a real product or service involved, in informal settings (translation: not in writing) the real focus does tend to be on “building your network,” “expanding your team,” and so forth. (“If you sign up 10 people and each of them sign up 10 people and each of them sign up 10 people…”) They tend not to focus on selling the product itself nearly as much as they do on the supposed wealth-generating concept of having lots of people underneath you doing the selling.  But if everybody is recruiting and very few are selling product…well, it doesn’t take a Harvard MBA to figure out how that is going to end. So it is fair to say that the high expectations that their pitches typically give do not match reality.

How Interested Are People in Buying the Product?

The cold hard truth is that most people are not interested in buying products from an MLM. The main reasons for this seem to be:

  • They are usually more expensive compared to non-MLM competition. Every MLM company will argue that for the quality they are a great value. That’s inherently subjective so we won’t discuss it here. Maybe they are better than competitors and maybe they are not. But you will often pay more than you would for a typical retail equivalent.
  • There are a million MLM reps out there already trying to sell their own products – which will often by the same as or competing with your product. So a large portion of the market that was/is interested in buying is already tapped. How many of “that crazy wrap thing” do people really need?
  • Given the barriers, most MLM reps have to be very aggressive to succeed. They will be almost constantly talking about the product and the “opportunity” to be a rep for the company. Most people have already bought the products from someone else or are completely tired of hearing about them.

How Interested Are They in Joining My Team?

Are most people interested? Usually? Not even the tiniest bit. This is because:

  • Every MLM has an initial investment/sign-up fee to join and some have ongoing fees. Any “job” that promises you unlimited earnings if you just shell out some cash first has an intrinsically bad vibe to it.
  • They have heard all of the negative parts about MLM.
  • They have had reps bombard them with products or harass them into joining their team and are sick of it.
  • Again, with so many existing reps the majority of the population who would be interested is already signed up.

Some people will and do join – otherwise these companies would be going under. But it is a grind. I have a client who is doing very well with her MLM and was looking to pay for the sign-up costs of people joining her team. She was also willing to reimburse for event costs and offer other incentives. As MLM goes, this was absolute gold.

To call the response tepid would be generous. People thought it was nice she was paying the sign-up fee but didn’t really care. They were sick of MLM and didn’t want to get involved regardless of the circumstances.

And even if you do succeed in getting people to join, that is only helpful so long as they continue actively working on the business themselves. If they burn out, your residual/passive income from them goes away.

How Much Money Will I Make?

There will always be people who do very well with MLMs. They are great salespeople, great recruiters, and can sell shamelessly without it coming across as obnoxious. Someone will always make great money with these systems.

But most people will not. Take for example this disclosure from World Ventures: “27.7% of all Independent Representatives (“IRs”) earned a commission or override, while 72.3% did not. The average annual commission or override earnings of all IRs, including those who did not earn a commission or override, was $344.28.” They also note that “these figures do not represent Representatives’ profits; they do not consider expenses incurred by Representatives in the promotion of their business.”

So 72% of reps didn’t earn any commission and the average payout was $344…before expenses. And those expenses should not be discounted:

  • In addition to the sign-up fees, many companies have monthly maintenance fees just to maintain an active rep account.
  • Some companies require you be an active customer to keep your affiliate account open.
  • You are responsible for buying your own samples, promotional tools, and everything else associated with the business.
  • Many companies push you to buy their training and go to their seminars in order to have a “successful” business. One Amway rep spent $10,000 on their training and seminars to teach him how to be a great rep. How much did he make with all that training/”invaluable” knowledge? $500.

A study posted on the FTC’s website found that 99% of all MLM reps lost money. That’s quite a contrast from the promotions featuring financial independence and easy money. And while I specifically mentioned Amway and World Ventures, I want to be clear that I am not singling out these particular companies. Other companies have very similar stats.

Would My Time Be Better Spent Elsewhere?

Given the realities above, making an MLM business successful takes a lot of dedication and work to be successful. Most successful reps will tell you just that: it is a job. It’s a far cry from the life of leisure promised in the promotions. You can be successful, but it will take a lot of time and a lot of energy for that to happen. And since it does require so much effort, it does warrant looking at the opportunity cost. Would your time be better spent in other endeavors?

As the figures above show, the answer is “yes” in most situations. Many of these reps could take their efforts and be much more successful in launching a business or venture that they actually own.

Part of the appeal of MLM is that they are providing you with a product that they say is in hot demand. That is attractive because many people who think they would like to start a business have difficulty it trying to figure out what product or service they would offer if they did so.  It all depends on your situation and skillset – but pretty much any other business will have less saturation than MLM.

Why Are the Reps so Devoted?

Given the realities of MLM and a lot of the challenges that are faced, why do reps end up being so doggedly loyal to their companies? Why do they continue to push them so hard and try to pull other people into the company as well?

This devotion seems to be tied to an almost…cult-like indoctrination process that many reps undergo. From the seminars with inspirational music and promises of glory, there is a “gospel” that often gets reinforced. Check out this video for just one example.

The article on Amway above had this interesting note:

“‘The first part of the brainwashing,’ says Kyritsis, ‘was that ‘there would be no success without the system.’ What’s the system? The system is a series of seminars, recordings, and books that claim to be a guaranteed path to master salesmanship. Following Amway’s guidelines successfully is seen as the only path to success, so if you aren’t making money, it’s because you’re not “working the program” properly. Any success is due purely to their teachings, any failure is due to you not following them hard enough.”

All of the meetings, training, seminars, coaching, etc. almost deify the companies. They become infallible teachers, undeniable sources of wealth, and failsafe strategies. The products are better than anyone else’s, the system is better than everyone else’s, everything about them is superior in every way.

And with constant repetition from coaching and other training – those mantras start to feel true. So even when their individual businesses are going poorly, many still cling to the superiority of their particular MLM.

If I’m Interested in MLM, What Factors Should I Consider?

With four pages of negative commentary on MLMs, you probably think I am totally against them. I’m not – I just think it is very important to understand the realities involved with them. I think they have their place so long as the expectation is realistic.

So if you are interested in an MLM, what factors should you invesgtigate? I would consider the following:

  1. Do they place undo emphasis on training that you have to pay for? Training is rarely a bad thing, but if they continue to try and push paid training and seminars on you, then you might come to the realization that the company’s reps are actually their main customers.
  2. What is the potential for automatic reordering? Products that are consumable with an automatic reorder have a very real advantage over catalog products in my opinion. A cosmetic, lotion, supplement, etc. that will be used every single month and automatically reordered makes the potential for residual income much higher. Having to book a new Tupperware party to show off the new inventory might make you a living, but it’s going to be a lot of work.
  3. Are there ongoing maintenance fees? Almost every MLM has a sign-up fee to get a starter package, but there should not be any reason for large ongoing fees.
  4. How many of their reps appear to be making their primary living from their earnings? And how much hours do they appear to work? Does their overall financial situation match the story they are telling you?
  5. How much do their average reps make?
  6. Review their compensation plans. Many organizations will outline their plans and your earning potential. If they do not, you might wish to reconsider.
  7. How many other distributors are in your area?
  8. How much competition is there in that product’s space (health, beauty, etc.)?

Bottom line: MLMs are okay if you are looking for a hobby and maybe a little bit of play money. And there’s always a small chance that if you recruit someone they will be very successful and you will be substantial residual income from that – which is a fun prospect, however unlikely it is. But it should never be looked at as a way to support yourself full-time. If it happens, that is fantastic. But studies have shown just how rarely that is the case.

Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.