BY: Savanna Pruitt
We’ve all had an old friend from high school contact us on Facebook about an “exciting business opportunity” selling a product and working from home, right? Chances are, most of those friends are parts of MLMs, also known as multi-level marketing organizations or direct sales businesses. What exactly is an MLM, and are these kinds of business models ethical?
What is an MLM?
As previously stated, an MLM is a multi-level marketing organization. According to Investopedia, MLMs “encourage existing members to promote and sell their offerings to other individuals and bring on new recruits into the business.” The product distributors then receive a cut of their recruits’ sales. This forms the classic “upline” and “downline” you may have heard about with existing distributors hiring distributors under them, those recruited distributors recruiting more distributors under them and so on.
Here’s a list of popular MLMs:
- itWorks
- LuLaRoe
- Herbalife
- Vector/ Cutco
- Avon
- Mary Kay
What’s the difference between an MLM and a pyramid scheme?
An MLM follows a similar model to a pyramid scheme, with organization members on top that recruit other members under them. According to South Dakota Consumer Protection, the main difference is that a product is being sold in an MLM, whereas there’s no real product involved in a traditional pyramid scheme.
What’s the problem with MLMs?
Many MLMs sell quality products, and there’s really nothing wrong with that for the most part. However, some MLM’s make claims about their products that simply aren’t true, and in some cases, the products are actually dangerous. For example, a 2004 study found that Herbalife products could actually cause liver injuries rather than boosting consumers’ health as promised.
In addition to the products being questionable, the MLM business model is inherently unethical. Those who are higher up in the MLM often promise their recruits endless earning potential and success. They often prey on college students, stay-at-home moms and anyone who’s looking to make some money on the side. In reality, Jobs in Marketing reports that only 25% of those who join an MLM turn a profit in the end. Of that small 25%, 14% never make more than $5,000. Even worse, 99% of people who join MLMs actually end up losing money, even if they do manage to make a few sales. That’s because MLM members are typically expected to buy the product themselves to sell. If the product doesn’t sell, the MLM member takes the hit. Some MLM organizations will buy back unsold and unused stock, but this is not the norm.
How can you spot an MLM?
Some MLMs can be pretty sneaky with their marketing and recruiting tactics. Here are a few things to help you determine whether an organization is an MLM.
- Is the person who’s trying to recruit me seemingly showing up out of nowhere, even though we aren’t close or haven’t talked for years?
- How long has this organization been in business?
- What is the organization selling, and can they back up the claims they’re making about their products?
- What are other people saying about this organization on the Internet?
- Do I have to pay upfront to take advantage of this “opportunity”?
Here are a few more resources if you want to learn more about MLMs:
- Multi-Level Marketing Businesses and Pyramid Schemes– FTC
- 9 Signs That Exciting New Job Opportunity Is Really An MLM Scam– HuffPost
- What is Multilevel Marketing (MLM)?– Corporate Finance Institute
