Multi-level marketing schemes are often lumped together with MLM scams. MLM scams are those “business opportunities” that promise you’ll make a lot of money if you just invest in their product and recruit others to do the same. MLMs, on the other hand, aren’t scammy at all – they’re an effective way to sell products or services through your network of friends and family.
If you want more information about MLMs vs pyramid schemes and how to identify MLM scams before investing, keep reading.
What is multi-level marketing?
Multi-level marketing is a business model that uses independent distributors to sell products or services. MLMs are legal – they’re not scams. The main difference between MLMs and pyramid schemes is the focus of their respective business models:
An MLM’s focus is selling its members quality goods or services at affordable prices, but with no upper limit on how much they can earn.
An MLM’s focus is selling its members the opportunity to make money by recruiting others and placing their initial investments in a common pool of funds, which will then pay out commissions when the recruits sell products or services. This creates an incentive to recruit more people into your downline because you’ll make money from their sales, too.
What are MLM Scams?
An MLM scam is a business that uses the MLM model to sell its products but fails to provide any real value for their members. Instead of selling quality goods at affordable prices with no upper limit on how much you can earn, MLMs will offer expensive or low-quality products and tell you that all the members of your MLM downline will also sell high quality goods at a low price with no upper limit on how much they can earn.
In MLMs, the focus is more often on recruiting others to invest in “your business” rather than selling them products or services. This makes it easy for MLM scams to slip in unnoticed among MLMs.
How do you identify an MLM scam?
It can be difficult to tell the difference between MLMs and MLM scams because they’re so similar, but if a business is using any of these tactics it’s likely that it’s a pyramid scheme:
- They claim their products or services are unique or special.
- They claim they can make you rich, no matter how much money you invest or who recruits you.
- They offer MLM bonuses or commissions on your recruiting more members into the MLM.
- You pay an entry fee to join their business opportunity and become a distributor.
- They charge monthly membership fees.
What are some red flags to look for?
You should be wary of MLMs that make these claims:
- They guarantee you’ll double your income in six months.
- Their products are miraculously “perfectly formulated” to help you lose weight, increase energy levels or earn money with no hard work required on your part.
Here are some things to watch out for with MLM bonuses and commissions:
- You can’t make money until you recruit more members.
- Your bonus is based on how many people join the MLM after you or are placed in your downline. You won’t receive a commission if anyone joins before they do, even though it was their purchase that made the business opportunity possible.
- You can’t receive a MLM bonus or commission on the sales of anyone lower in your downline than you. So if someone is placed directly under you, they’ll have to recruit more people into their own downline before you get paid.
Here are some things to watch out for with membership fees:
- They’re not refundable.
- They make it difficult or impossible to transfer your business opportunity and MLM bonuses – even if the MLM goes under – by requiring you to carry costly inventory, for example, that you can’t sell but must still pay taxes on.
What resources are available to victims of MLM scams?
There aren’t any government agencies dedicated specifically to investigating MLM scams, but other government agencies will investigate MLMs that are suspected pyramid schemes.
If you’re the victim of an MLM scam, your local consumer protection agency may be able to help or give you information about how to file a complaint. You should also contact the Federal Trade Commission at ftc.gov/complaint by calling toll-free, (800) FTC-HELP or by filing an online complaint. If you believe your MLM is a pyramid scheme seeking new members to sell products or services that are not unique and of high quality at affordable prices, file a report with the federal trade commission on their website.
What’s the difference between MLMs vs Pyramid Schemes?
MLM is a marketing strategy in which the sales force is compensated not only for sales they generate, but also for the sales of new recruits they bring into the company. MLMs are legal because of their unique business structure that focuses on selling products to consumers who use them rather than building an internal customer base.
A pyramid scheme is an illegal MLM that uses its members to recruit more members, rather than selling products to the public. It’s considered a pyramid scheme because it makes money only on new recruits and doesn’t focus on making sales of products or services.
Pyramid schemes always collapse because there are never enough new members joining to support those who came earlier and already invested time or money they can’t get back. MLM businesses have been around for decades, however, so it’s easy to find information from unbiased sources about MLMs based on real business experience.
What are some examples of MLM horror stories?
One MLM, called “ZeekRewards,” was investigated by the SEC. The agency alleged that it misrepresented how much money its members were likely to make and provided misleading information about what they would have to invest in order to participate. ZeekRewards told investors their initial $1,000 investment (and subsequent monthly contributions) would be used to pay commissions to members who recruited new investors, but the SEC alleged that more than 90 percent of investor funds were used instead to cover “lots of luxury items and lavish trips” for company officials. The MLM’s founder was also charged personally with operating a separate $600 million Ponzi scheme.
Another MLM called Fortune High-Tech Marketing (FHTM) was sued by the FTC in a civil lawsuit filed in federal court. The agency alleged that FHTM, which operated from 2001 to 2012 and recruited people as independent contractors called “consultants,” misrepresented how much money consultants could expect to make and how much time they needed to devote to working with it. The FTC also alleged that FHTM’s claim of high earnings were “a lie,” and the agency said some people working with it lost money.
The MLMs ZeekRewards and FHTM are no longer in business, but former participants may still be able to get their money back through a class action lawsuit against MLM companies suspected of pyramid schemes.
Independent MLM businesses avoid prosecution by the FTC for making false income claims because they have a legitimate product to sell and are not based on recruiting new members who will only buy products so they can advance in the MLM compensation plan, so it’s possible that corporations accused of being MLMs may actually be selling real products or services.
Why do most MLM companies fail?
It’s difficult for MLM companies to succeed when they’re based on recruiting new distributors rather than selling a real product or service that the general public will buy, because it means most people can’t make money through them and won’t be able to recruit other consultants who could also earn commissions from sales.
The MLM business model also requires consultants to buy large amounts of inventory upfront, so they have to sell a certain amount of products each month just to earn their money back. This means MLMs are more likely than traditional businesses with an online presence to focus on recruiting new members instead of making sales because the revenue from direct selling is small compared to recruitment.
Finally, MLM companies have to pay the company a percentage of revenue from product sales and recruit new members based on their performance in the compensation plan without being able to see how much money other consultants are making or what quotas they need to meet before earning commissions. As a result, many MLMs do not disclose information about exactly where recruits can expect to get with their MLM businesses.
Why do so many people think MLMs are a scam?
Most MLMs aren’t a scam, but the FTC says MLM companies have a reputation for being pyramid schemes because of how their compensation plans work.
Because MLMs can be so difficult to run successfully, it’s important to do your research before joining an MLM company.