What Is MLM? Is Multi Level Marketing a Scam or Pyramid Scheme?

Multi Level Marketing (MLM) Explained

MLMMulti-level marketing is abbreviated as MLM.  It is also called network marketing, referral marketing, and pyramid selling.  It has become a controversial marketing strategy for the sale of products and/or services.  This is because the revenue of an MLM company is usually derived from a non-salaried workforce called participants, but also known as affiliates, distributors, down-lines, consultants, salespeople, promoters, independent contractors, business owners, etc.  These individuals sell the company’s products and services, while the earnings are paid out through a multi-level, pyramid-shaped commission structure.

The multi-level aspect refers to each participant’s ability to recruit and train other representatives to start their own business, and then earn a commission on their reps’ sales.  Income is earned on more than one level.  It comes not only from the commissions you earn from your personal sales.  You also receive a percentage of the sales commissions earned by other reps that you have recruited and that work down-line, or under you.

In this section, I review network marketing, and look at the features which are common to most MLMs.  I look at how each MLM is promoted, and why they want you to join their organization – what’s in it for them.  Most importantly, I try to show why it is difficult to make money with MLM and why the majority of participants don’t make much – or actually lose money.

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Is MLM Legal?

There are misconceptions about MLM, primarily whether it is legal or not. There are MLM organizations that are in fact, legal.  However, there are many MLMs that are not.  To be legal, an organization needs to show three things:

  1. Income is earned from the sales of products or services
  2.  The products or services must be of sufficient quality to provide value
  3. The focus must be on the sales or those products or services – not recruitment alone.

A program with no product – or an intangible benefit (like a seat at an imaginary dinner table) is a tell-tale sign of an illigal MLM.  Also, a program that focuses on getting paid per new recruit, is a telltale sign of an illegal pyramid scheme.

The fact that an organization has a pyramid structure is not the issue.  Don’t let the term pyramid confuse you. It’s not the shape of the organization that makes it illegal. In fact, most companies have a pyramid structure – a Top Boss, with Directors and VPs underneath at the next level, managers and supervisors below the VPs and so on.  Typical organizations have a narrow structure at the top and each level becomes broader and broader with more workers and employees.

What makes a pyramid scheme illegal is the lack of a quality product, and/or income is earned primarily by recruitment, and not as commissions from legitimate sales.

According to the US Federal Trade Commission “If the money you make is based on your sales to the public, it may turn out to be a legitimate multilevel marketing plan.  If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”

How MLM Scams Work

MLM scams tend to share a few common traits and aggressive recruitment strategies.  This is how they usually work.  First, you sign up and pay the buy-in fee to get your startup kit. Then you plug the social media feeds of everyone you know to tell them about your new business.  Next, you ask your friends and family to join you on your path to financial freedom.  Soon, you end up hosting a series of fake dinners or “coffee meet-ups” where your sole objective is to meet one-to-one and give your sales pitch. The meet-up is nothing more than a demo and a sales talk in which you pressure your friends into buying things they do not want or need.

Then, once they surrender, you try to win them over to join your sales team – or whatever term your specific MLM uses.  With most MLMs, it’s not about selling their products.  It’s mostly about recruiting more people for your team so they can go out and do the same things you just did. The real winners at most MLMs are the people who founded the company and the very first ones who were recruited by them.  That’s the top of the pyramid and the source of all success stories you will likely hear about within that particular organization.

Those most vulnerable to a recruitment focused pyramid scheme, tend to be people in smaller towns and rural areas. Market saturation prevents the growth in a small town, because once everyone you know starts selling, nobody can make more money.  Your recruiting efforts basically create your own competition and choke the recruitment chain.

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