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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)

  • 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

11 Answers 11

22

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.

  • 1
    I have also found this to be a less confrontational approach. Asking them to explain everything to you will highlight the gaps in their own understanding, which you can gently nudge towards the truth. Also, I like to point out that one key resource a MLM gets from its recruits is the ability to sell to friends and family, leveraging emotional connections already in place. The sales high they may experience on some initial (small) success will become more infrequent as they run out of people they know to talk to. – Grade 'Eh' Bacon Aug 2 '16 at 13:02
  • I agree that if you start to get pushy or confrontational, it's probably going to be game over. If pointed questions don't convince them though, and they are clueless that it might be a scam, I wouldn't be afraid to send them some educational information, depending on the situation -- how much they trust you already, how invested they are etc. I sent my cousin a video and explained it all, and she never signed up. She may have fallen for it if I didn't say anything. – Alexander Taylor Oct 8 '17 at 7:03
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Before I answer, you should know a few things about me.

  • I've paid to get into a couple of Network-Marketing/Multi-Level-Marketing (MLM) franchises, and I made a little money in it.
  • I have worked in financial services sales.
  • I later went on to get my Masters in Business Administration (MBA).
  • I've been there, and I know MLMs and Business in theory and practice.

There's room for some nuance here, but for the most part:

TLDR: Don't do it

  • You probably don't have the natural skill to sell products or franchises.
  • The people selling you probably don't either, and even if you do manage to sell other people, it will be the blind leading the blind.
  • The competitive market forces are very much against you.
  • The only exception I allow for is Mary Kay or similar products, where people actually make money providing services, products are add-on, and franchises are infrequently sold (and not a major selling point).
  • If you do have the skills to be successful, you'll be so much more successful in business to business sales.

Don't do it!

If you're good, you'll be better elsewhere

There's no snake oil out there that people can't get on their own. If you can sell it to them, then here's the simple case against it: if you're a good enough salesman to get other people to buy products or franchises from you (and really, you don't care about product sales, you care about franchise sales, because that's how they sold it to you, right?) you can make far more money selling business to business.

If you're a good enough sales manager that you can get good salespeople to buy franchises from you and sell more franchises, you'll make far more money managing salespeople selling business to business.

For the most part, people aren't good at sales, and that likely includes you. Most MLM's are sales groups with bad salespeople leading bad salespeople. It's the blind leading the blind. And as your friends get burned, and your family gets burned, and you start losing everyone who got burned, you'll start to wish you had never done this stuff in the first place.

The main reason the above holds true is that the people involved in MLM don't really create any value. They're looking to get a free ride on everyone else in the pyramid beneath them.

Exceptions to my warnings

There are exceptions, the main ones that come to mind are like Mary Kay, where budding makeup artists teach how to apply makeup without looking like a clown, and it's a skill, and it's part of how they create value. And it may well be the best option for someone whose chosen career is a makeup artist.

I'm not particularly an exception, but at the age of 17, I sold books door-to-door in Southern Mississippi, mostly to teach myself how to talk to people, since I had grown up with my nose in a book. It turned out that the business was structured like a MLM to encourage the salespeople to become managers, but I had no interest in that, I just wanted to learn people skills.

I also blew a couple hundred bucks on franchise fees on other MLMs, mostly because friends were in it - never did I see that money ever again.

Deeper analysis

Sales is hard

Sales is hard work. Teaching people how to sell is even harder, and impossible if you don't know how. If you're good at it, you'll do so much better in a business to business setting. Think about the economics of it. Salespeople get paid on volume of sales. Businesses have a lot more money than consumers. You have to sell to an awful lot more consumers than businesses to make the same amount of money.

Competition is impossibly hard

Think about competition, too. Considering Amway? You're competing with everyone from Walmart to the corner convenience store, and you will be asking everyone and their brother to join up. And many of them have already been pitched it, if they've been around long enough. The bargaining strength of your customers (they have lots of alternatives) and suppliers (their over-priced pricing structure is set in stone) is pretty strong. You have immense direct competition and product substitutes, and anyone else can go into the same business as you. Your competitive position is extremely weak. It's almost guaranteed to fail.

Special overpriced dietary supplement that only they have? Ridiculous. If it's that great, it will be available to consumers without going through a middleman than any Tom, Dick, Harry, and Sally (TDHS) can pay a small fee to be.

No value

Things that don't actually create value? We call that a pyramid scheme. That's the semantics. Sure, they can probably successfully argue in a courtroom that a reasonable person could be persuaded that they are creating value, but the proof will be in the success or failure of the scheme. And things that don't actually create value eventually wither up and go away. If your gut is telling you this won't last - trust your gut here, and run away.

Exceptions

High quality makeup? Were you destined to be a makeup artist? Ok, but keep in mind that your local market can only support so many such artists, and you need to be really good to support yourself.

Get selling experience without the failure

Do you want experience selling? Need to learn whether or not you can sell to people the hard way? These schemes, for the most part, are not illegal, but are almost guaranteed to fail. Give yourself a better chance to succeed.

If you are ambitious, and you want to sell things to people, don't sell something that you're going to offer any TDHS to sell too. Figure out a special product or service that only you can provide. Figure out what's unique about it. Here's some ideas: Provide a food product, or something tangible like clothes, jewelry, wood, or leather work. Provide a service - office-cleaning, lawn-mowing, massage, piano lessons, sewing, etc. Look into services that require a license, then study for and get the license, and you'll have something that not everyone else can do.

Conclusion on MLM: Don't do it!

You probably don't have the skills, you'll burn your relationships, and you'll make more money doing almost anything else.

  • 3
    Great answer - I have pointed people towards 'traditional' entry-level sales jobs to highlight the differences with their chosen MLM. Anything on the sales floor of a retailer which offers some level of commission is a great way to build the skills you're talking about, make some money, not risk your own capital, and not put emotional pressure on your friends and family. As you say, if the goal is to sell franchises to people who will sell franchises, they you need to be very good at it (and if you have no experience at this, you won't be good even if the product is real and has potential). – Grade 'Eh' Bacon Aug 2 '16 at 13:07
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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.

  • To be pedantic, sunk costs are costs that you've already paid, while the question presumes that these costs have not yet been paid. And to play devil's advocate: Don't all businesses require some kind of up-front investment? – Aaron Hall Aug 2 '16 at 14:05
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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.

7

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
  • When you say, Is there a product?, what would you define as a product. An ex-colleague of mine is now part of Empower Network (empowernetwork.com) and he did invite me once, but I haven't joined it. Can you please let me know how I can identify if it has a product. Should it be a physical commodity? – Kanini Sep 17 '14 at 14:19
7

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
  • It's easy to win at a game you designed yourself ;). – Bigbio2002 Feb 1 '16 at 23:44
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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
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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
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    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
  • Don't push too hard, yes. But if they haven't already been brainwashed and they trust you, don't withhold the truth. – Alexander Taylor Oct 8 '17 at 7:09
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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.

  • +1, I think a key way to "inoculate" people against MLM would be to teach them to ask this question to their recruiters: "What percentage of your income comes from signing people up to do exactly what you do, and what percentage comes from people who merely make a purchase and don't sign up?" (And if the two aren't even distinguished, then turn away.) – Wildcard Sep 7 '18 at 19:16
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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
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First of all, MLM was not made to make all members earn good money. An honest MLM is made to allow members to make SOME money using their connections - a good example is AVON, popular among students, who sell some cosmetics to their friends and make some money to repair budget. A scam MLM is made to lure naive people to buy some crap by making them believe they will get rich, and in that systems only the most successive scammers get rich.

Tell your friend to forget about the virtual profit from 'recruiting' other people and concentrate only on this what he/she will earn if he/she recruits nothing and simply sell some stuff. MLM gurus love to draw trees - state clearly, that every tree has more leaves than branches.

Of course, under that criteria, no MLM can make your living, but the truth is, to earn for life you need to generate volume, which is unlikely in such sales model, but you can use it to make some extra money to repair your budget.

protected by Chris W. Rea Nov 29 '16 at 4:43

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