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Imagine you had a friend who was about to join a multi-level marketing (MLM) business, despite your advice to the contrary. Another friend or family member had already convinced them the opportunity is a worthwhile business venture, and you couldn't change their mind.

Given that, what additional warnings would you give them to help them at least proceed with caution and with eyes open?

That is, what caveats or pitfalls should one look out for when joining an MLM business? What are the best indications that an MLM business is likely to be an unprofitable venture, or an outright scam? How to protect oneself?

(Let's not be specific about the MLM; expect that it is a typical kind where you need to both sell products, and also recruit others to in turn sell products & recruit. ad nauseam)

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MLM's might be securities like franchises, and thus regulated. Therefore, MLM fraud might be securities fraud. This suggests possibly complaining to the SEC or state securities regulators about the ripoffs your friends or family got involved in. mlmlaw.com/library/guides/securities4.html –  Paul Jun 15 '13 at 7:49

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The first thing to realize is that MLM is not really a selling job, yes they all sell products but that's not how you make any money. And be careful not to stockpile inventory, you'll end up with $4000 dollars worth in your garage that you'll never use.

MLM is really a recruiting and training sales people job. If you are willing and have the talent to recruit and train sales people then it may be right for you. The only people that make a good living recruit new sale people all the time, and have hundreds of sale people in there down lines. There is a lot of attrition and you have to keep recruiting to replace those lost.

Don't think you are going to get rich at this part time. There are a lot of millionaires from MLM but they work a lot of hours recruiting and training. If you don't have a lot of time to devote to it I wouldn't do it at all.

MLM is not for everyone, but the ones that are good at it and put in the time make a lot of money from it.

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I downvoted because of the notion that you can be successful at it if you "try hard", though you're entirely right that it's a recruiting job, not a sales job (which is why they're so damn fishy in the first place). –  Bigbio2002 Jun 13 '13 at 21:25
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-1. A MLM is usually about using people : friends, family, churchgoers, strangers, whoever, to accumulate company samples and advertising in an attempt to sell some crappy product either among the downline or to the public. OK, there might be a couple of legit product lines, like Tupperware or Avon, that got going this way. But most of them are likely scams. The only people who will make good money are the founders. –  Paul Jun 15 '13 at 7:06

Maybe I am a bit jaded but I don't spend a lot of time trying to convince friends or family members to avoid MLM schemes even though I personally see them as scams. If they specifically ask for my advice I will walk them through the economics of the particular MLM that they are interested in. I have found that if you get to pushy in showing your friends or family members that their new "business" is actually a fraud they tend to get defensive and it becomes counter productive to continue trying to convince them of their mistake. You waste your time and anger your friend or family member. It's just not worth it.

There are a few key questions I like to ask people about their MLM "business".

What does the business do? How do you make money? How do they make money? You would be amazed at the number of people that sign up and pay money to get into a business and they don't even have the slightest clue what the business actually does. Even fewer have an idea about how they can actually make money because the entire sales presentation focuses on what they could with all of the money they "are going to make".

Why does this business need you? What do you bring to the table that the business doesn't already have (skills, contacts, money)? Most MLM's and especially the pyramid schemes focus more on recruiting people than selling products because they make their money on over priced initiation fees, and their products are mediocre at best.

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First and foremost, I would warn about having to shell out your own money for start-up, inventory, or other sunk costs. If I have to significant amounts of goods and stockpile them, that would be a warning. Some goods-based MLM have significant start-up costs. Along with this - how realistic are your time expectations. Is this to be a part-time occasional endeavor - or your full-time occupation? Do you know enough people that you believe you can recruit, as it is the pyramid that makes you the money, not the goods themselves.

Secondly, market research. Companies that I would consider real franchise-like companies generally either have, or demand you do, significant market research in an area before you start. They don't want the good name of their company tarnished by having a venue close down. MLM generally don't care as much (generalization). Similarly, are there others in the same neighborhood/town already in the scheme? If so, and depending on the size of your community, many of your potential target recruits may already either be in the scheme, or already scared/annoyed.

Third, and last for my list are any kind of pressure tactics. Again - franchisee companies and their ilk generally want a long-term relationship with the right people - not just more and more people as part of the pyramid. MLM and the like tend to want expand at all costs.

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What is the focus of the program, sell the good or service or recruit new people? If it is the latter (as it often is) then show them this pyramid.

http://www.consumerfraudreporting.org/MLM_pyramid.php

Pretty much the number of people on earth runs out too quickly.

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Multilevel marketing does not mean it's a scam. MLM is one of a number of legitimate ways to run the sales leg of a business. It's also one of the fairest: you get paid for the business you bring back to the company, period. If you can keep a lot of referral salespeople working their butts off, great for you, you should reap the benefits for your effort. How many salaried jobs give you this kind of incentive?

If you have reservations, that's fine, but also be prepared to have someone smile and nod back at you.

The things I'd check:

  • Is there a product? There should be a real product being sold, and it should be something that people want. My wife loves her Mary Kay creams; she uses them regularly. The Pampered Chef has great products, and it also has a commissioned salesforce. Warren Buffett bought this company, so I doubt it's a scam.
  • Is the market saturated? This speaks more to growth than anything else. If there are too many salespeople competing in the same area, then it may be tougher to grow a business. Is this fair? Maybe not, but who said life is fair? Opportunities come and go.
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While there are legitimate multilevel marketing operations out there they are few and far between and even the best of them expect you to use your friends and family in order to make money. For instance with pampered chef the majority of their income is from the parties that people guilt their friends and relatives into attending and buying over priced stuff from. If the way the majority of your sales come from using friends and relatives your operation is slimy at best and a scam at worst. –  stoj Feb 22 '11 at 12:17
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The fact that Warren Buffet bought the company means it's legal and profitable (at least, profitably when you're on top.) I'm not convinced it speaks for whether or not it's ethical. –  corsiKa Jun 6 '11 at 23:42

Standard advice for these scenarios: Stay out of it unless asked specifically for advice, and even then, be wary of being too harsh.

You'll damage your relationship with your friend if you get involved.

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Agreed, and I've followed that advice studiously when friends have asked me about MLM in the past. Offer specific advice about how to make it work - if asked - otherwise leave it alone. –  Turukawa Feb 22 '11 at 22:04
    
Ouch. True friends tell you the truth, help you. I told a friend that a group he found who would help try to get his kid into show business or advertising as a child actor was likely a scam. The expenses started low and rose steadily. He suggested it could be a form of 'fantasy entertainment' and he cut it off when they wanted like $1000 to create a "legal trust" to hold the money the kid would earn from supposed TV ads until he was 18 and could use it for college. Yeah, right. –  Paul Jun 15 '13 at 7:11

Based on experience with friends that lost some money to one of these recently despite being warned:

  1. Put as little of your own money into it as possible.
  2. Take as much out of it as you can as soon as you can.
  3. Don't count your money as earned until you actually get it in your hands as 'cold hard cash'.
  4. Remember if its too good to be true it usually is - no matter how many of people assure you its not.

My friends joined some venture where they were getting 'paid' into an account and thought they were making lots of money. They signed their friends and family up (each with a hefty sign up fee) thinking it was a sure thing. Turns out the company was under investigation and the accounts were frozen. The money they put in was lost as well as these so called 'earnings'.

All of a sudden people realized they had never actually seen an actual physical penny the whole time.

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I think points 1 & 2 seem like they are playing with fire. The best advice is to avoid such scams, not try to get yours while the getting is good. –  MrChrister Jun 2 '11 at 18:17

Make sure you are paid on volume, not people. Almost all companies have a requirement to recruit a certain number of others. That's not bad - it ensures the company continues to grow without having to pay advertising and training costs. That's what the commissions are for. The largest cost of distributing a product (outside of MLM) is advertising and marketing. If I remember correctly, this adds up to about 66% of the cost of the product. If that's true, an MLM has quite a bit of money available to pay commissions and still have their products remain relatively competitive.

But, when all is said and done, you should be paid on volume, just like a sales manager position in a company. A sales manager has to hire and train a sales staff, but once they are out producing, the manager is paid a percentage based on the volume of their sales staff. If an MLM is setup the same way, then this is good. If they are setup to pay on recruiting people, then run away as quickly as you can.

The biggest problem with recruiting is not whether or not you can do it. It's whether or not the people you recruit can do it.

I have been involved with an MLM of sorts for 10 years. It pays a nice continual flow of income. I worked it hard for about 6 years and have coasted ever since. The problem was attrition. It was greater than I ever imagined. It became very disheartening. I never have and never will be a high pressure person. I would show them the business and if they were interested, great, if not, great. The problem was that people became interested, but didn't have the skills to be successful. I should never have let them join the business. So, they leave the business and say that MLM is bad. No, it just wasn't right for them or they weren't right for it.

Regardless of what business you join, make sure that you believe that EVERYONE you introduce to the business has the ability to do the same thing you are doing. If they do, great, otherwise don't even show it to them.

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There are lots of answers here, but I'll add my two cents...

The best way to win is not to play. MLM is not a viable business model.

Don't go in thinking you'll beat the system by trying harder than everyone else. The only way you'll make any money is by recruiting lots of people, and selling products that can be obtained for cheaper elsewhere at a normal store.

If your friend already committed to the decision and they're wise as to what's going on, yet gullible enough to try anyways, have them think about the ethics of exploiting the people down the pyramid from them. Maybe that will change their mind.

All of the other answers about not investing too much of your own money remain true. You don't want to blow your life savings on a pipe dream.

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Actually, the best way to win is to be the boss or the mastermind of it. –  Pacerier Nov 13 '13 at 4:13

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