The best way to avoid a scam, is to know the truth about a company or product. Here we will be looking at the many secrets that even the supposedly the best Multi Level Marketing companies (commonly known as MLMs) are trying to keep from us.
People often see MLMs as a risk free opportunity, but here you will see the many multi level marketing scams that you must avoid.
What are Multi Level Marketing Companies?
The Multi Level Marketing business model, is a model in which the company has a contract with independent distributors to sell and promote the company’s products. At the same time, the distributor has to recruit customers, and sign them up to also become distributors.
Some direct sales companies use the MLM model as a strategy to encourage their distributors to recruit new distributors. The incentive to recruit and build a down line, is that you get a percentage of the sales value of your recruits’s sales. So distributors make money through direct sales to customers, but they also get commission on the sales of their down line.
While some MLM practices are legal, Multi Level Marketing companies have been investigated by the Federal Trade Commission (FTC) for decades. The findings have been that the legitimacy of most of their practices, are questionable and bordering on being a pyramid scheme. Many hide behind a product, when in fact they are a pyramid scheme in disguise.
With the COVID 19 corona virus pandemic forcing more people to work from home, more people are searching for business opportunities to that they can conduct from home. With that, multi level marketing scams are on the increase. Beware of MLM companies that place misleading recruitment ads to con people to join, even on job seeking sites that appear to be legitimate.
The ugly truths MLMs don’t want you to know
The case with every Multi Level Marketing opportunity, is that you have to buy a starter kit, to join. So you pay to join, which means you are out-of-pocket even before you have started.
Research has shown that an average of 99.6% of people will actually lose money, if they pay to join a MLM company, and then have to deduct their business expenses from their commission payments. With many people having lost their jobs, or having been furloughed due to the corona virus Covid 19 epidemic, MLM companies are on a heavy sales and recruitment drive. They are simply preying on innocent victims.
The Federal Trade Commission (FTC) has recently sent warning letters to at least ten MLM companies, because of excessive claims on income and health that they have made on their corporate Facebook pages.
The compensation plan encourages and rewards recruitment and you cannot move up through the ranks if you are not recruiting. I personally experienced that when I worked for Usborne Books at Home.
MLMs are not the only home based business opportunity that is out there. There are many other ways of making passive income online, and my recommendation is to join Wealthy Affiliates. You can read my review about them here.
So let’s have a look at some of the hidden and obscured truths about MLMs.
1. MLM is a Type of Pyramid Scheme
By definition, Multi Level Marketing is a pyramid scheme. All MLM distributors will recoil in horror at the very idea they’ve been duped into joining a pyramid scheme. Even if a distributor claims to be working for the best multi level marketing company, that is exactly what has happened.
The definition of a pyramid scheme is “a form of investment in which each paying participant recruits two further participants, with returns being given to early participants using money contributed by later ones.”
And this is exactly what happens in a MLM. It is never free to join, so you pay them to join (usually with a starter kit or similar) and then make money from the people you recruit under you (your team members and down line). And the person who recruited you, makes money from you, and the person that recruited her makes money, and so on.
MLM companies would often argue that all companies have a pyramid structure, with lots of employees at the bottom, then leader and management levels, then presidents and finally the CEO at the top. The BIG difference is that the manager does not get a cut of the salary of employees that he manages, and the CEO does not take a percentage from the president or anybody else lower in the hierarchy of the company. Photo credit mlm.scam info
An employee also gets paid a salary for their time and effort and receive benefits, like paid holidays and sick leave.
2. It is virtually impossible to earn money with the Multi Level Marketing business model
The MLM business model is such, that it relies on new recruits to come in at the bottom, to sustain those that are at the top. They will saturate an area, without telling the new recruits how many other distributors are already working in the same area.
This makes it very difficult for new distributors to also come into the market. That was certainly the case when I worked for Usborne Books at Home, competition was rife.
MLMs will tell you that the amount you can earn is limitless, as long as you put in the work. But mathematically that is a lie. The more people that are in the MLM, the more difficult it becomes for the ones that are lower down the chain to build a substantial down line.
This is how Robert FitzPatrick explains it: “the recruiting chain pay-plan requires each participant to enroll a number of recruits before profit is possible. Therefore, a ratio of “winners” to “losers” is baked in right from the start.
If 25 are needed, then only one in 25 could ever be profitable. This would be true the day the scheme is launched and would never change. The “income opportunity” is therefore — by design — limited to one in 25, or 4%. Based on the proposition of gaining profit from recruiting, 96% would always lose for as long as the scheme operated. In practice, the actual ratio is far worse.”
3. MLMs rely on Recruiting, rather than Selling
Multi Level Marketing companies will describe themselves as being direct selling or network marketing or even social selling. Unfortunately, the reality for most MLM distributors, is that they make very little money from direct selling. The reality is that they have to rely on recruiting and building a down line to make any money.
The Federal Trade Commission (FTC) in the USA have investigated several MLMs, with Herbalife being the most well-known one. They ended up concluding that distributors can only make money by recruiting and building a team, not by selling the actual product.
The reality and truth is, that the only way you can make anything close to a livable income from working for MLMs, is to recruit a large enough amount of team members and add to the down line under you. The reality is that only four people out of a thousand will actually achieve that, so it is not direct selling, it is direct recruiting.
The odds are stacked against you if you are going to rely on sales alone. The potential for profit from direct sales just doesn’t make sense. Look at any MLM product and compare it to prices that you will be charged online or in the high street, and they are always more expensive.
Combine that with having to sell to your network on a weekly or monthly basis, and you quickly find that friends and family are avoiding you because they are going to be expected to buy from you again.
This was certainly my personal experience when I worked for Usborne Books at Home. Local book stores and supermarkets were offering special deals that was being sold at less than what I had to pay for my stock. Extremely frustrating and annoying. All the incentives and bonuses are based on recruitment, not on personal sales.
4. In Reality, MLM Distributors are unpaid Sales Reps
MLMs will promote the idea that you are you own Business Owner if you join them. They will call the Starter Kit your “Business in a Box” or advertise “Start your own Business”.
Why are they not a real business owner?
- In a real business that you own, you can shop around for the best deals from suppliers and choose which products you want to sell. Instead, with a MLM, you are locked in to promote their products, and only theirs, as most MLMs do not allow their distributors to be part of more than one scheme at a time.
- You cannot set your own prices. The MLM sets the retail prices and decide how much commission you will be paid.
- A distributor does not have exclusivity in an area, something which you get when you buy a franchise. Instead, you end up working in an already saturated market.
- You have no say in the decision-making processes or policy making of the MLM company. So you have no say or control over refunds and returns.
- Distributors are even told what they can and cannot post on social media.
MLM distributors are unpaid sales reps with no guarantees and no benefits like pension, paid leave, medical insurance or other possible benefits that are offered by employers.
When I joined Usborne Books at Home, I thought they were one of the best multi level marketing companies, but it quickly became clear that they were controlling what we could buy and at which price, and also the selling prices.
5. MLM Distributors are the Real Customers
To get to the real profit, a MLM distributor needs to deduct any business expenses from their income, to establish how much profit they made.
MLMs run incentive schemes, which entice the distributors even more to buy products, specially if there is just one order needed to get to it. They incentivise distributors to buy products to meet sales targets to qualify you for incentive schemes like cruises or holidays abroad.
With minimum monthly or quarterly order requirements that MLM distributors have to satisfy to meet the commission criteria, it is often the distributors themselves, that end up buying products to make up the sales quotas. Some MLM distributors will even encourage their down line to place personal orders to enable them to get a promotion.
Extensive research has shown that if you join a MLM, you are more likely to go into debt, than earn anything. You need to sell (or buy) minimum amounts to stay active, and that normally comes from the distributor that buys products. This is a multi level marketing scam that is a very closely guarded secret.
6. MLM Requires you to Work very Hard and often for NO Money
Many MLM distributors are making false claims about the income opportunity and earning potential that you have when you join them. It is often made out that you can work your own hours and fit it in around the family schedule, and the amount of time that is required to succeed in a MLM business, is quick and easy.
Well, that is easier said than done if you have a young kids at home. You end up working at nighttime when they are sleeping and the “promise” of an hour a day is all you need, means you earn nothing. Multi level marketing scams are rife and that includes promises of having to do very little for big rewards.
The reality is that you need to be doing much more than an hour a day to get your business off the ground and financially viable. Your up line will normally tell you that you didn’t do enough if you do not succeed.
You will have to put in a huge amount of time, effort and money, with very little reward.
7. Ongoing Recruitment to Replace those that Leave
MLMs continuously have to recruit to replace the amount of disillusioned and disgruntled distributors that leave. So the pressure is put on the existing distributors to recruit more team members and add to their down line.
There is market saturation because of too many representatives in the same area that are targeting the same customers. So don’t be fooled into thinking that you are with one of the best multi level marketing companies, they all use the same tactics of multi level marketing scams.
At the time that I was with Usborne Books at Home, the average lifespan of a team member was only eighteen months. If you are inactive for six months, they automatically cancel your account and kick you off, so the actual time that somebody stays with them, is only twelve months.
8. MLMs are Unregulated
Laws around MLMs are badly defined and vague and they are not legally required to publish income disclosure statements. That means they do not have to show how commissions are paid, or how much money distributors lose.
The Multi Level Marketing business model is designed to be complex and it is therefore difficult to unravel. So it makes it almost impossible to work out what the business opportunity is, and how they work.
Generally, MLM companies are not regulated, which makes it extremely hard to know if they are a fraud or legitimate. Unsubstantiated claims about health benefits of some products are also made by some distributors, making it even harder to distinguish the truth from the lies.
Very few MLMs publish income disclosure statements about how much (or little), their distributors are earning.
9. MLMs damage personal relationships
The first thing I was told when I joined Usborne Books at Home was to ask my family and friends to host a party for me. That is the way that most MLMs work, encouraging new distributors to exploit personal relationships. And after that, ask your neighbor or her friend.
They know that your family and friends will trust you, and they exploit that trust, damaging the special relationships you had. Many MLM companies have been described as cult-like in the practices that they employ to recruit and retain distributors, and alienating them from family members and friends.
Some distributors are left with stock that they cannot sell, so they dump it cheaply on eBay. I was lucky enough that when I left Usborne, I kept a few bits to use as presents, and the rest was bought by a school (yes at a special price, but at least I was not stuck with $500 worth of books)
Final Thoughts on How to Avoid Multi Level Marketing Scams
MLM is not the answer to financial security and they are not easy business opportunities. In fact, Jon Taylor from the Consumer Awareness Insitute says it is easier to win playing roulette, than making money working for a MLM. These are some of his findings:
- “286 times as great as the odds of profiting after enrolling as an Amway rep.
- 48 times as great as the odds of profiting after enrolling as a Nu Skin rep.
- 22 times as great as the odds of profiting after enrolling as a Melaleuca rep”.
So you have a greater chance of making money when gambling (which I do NOT recommend), than when you sign up with a MLM company, even if they claim to be different from others and to be one of the best multi level marketing companies.
Evidence shows that 99.6% of people who join a Multi Level Marketing company will lose money.
I hope this answered all your questions about Multi Level Marketing companies, but if you do have any questions or comments, please leave them below and I will get back to you.