Updated May 15, 2020
You have almost certainly heard of multi-level marketing. There is so much of it around and so many companies doing it such as Amway, Mary Kay, and Herbalife to name a few major players you may know. But is multi-level marketing a scam?
In this article, I will be defining and discussing what legitimate Multi-Level marketing is, and how it differs from a Pyramid Scheme. I think it is important to distinguish between the two. They are similar but not exactly alike. I will explain the difference shortly.
History of Direct Sales/MLM
I bet when I tell you the name of one of the very first multi-level marketing companies, you won’t really be surprised.
That company is Avon!
The founder’s name was David H. McConnell and he was initially a door-to-door book salesman (in the 1880s). He started making his perfume in his home and offering it free to the housewives when he sold the books. After a while, the ladies were more interested in the perfumes than the books so he changed up his business model and began selling his own home-made fragrances to his customers.
His concept grew and it became the ‘California Perfume Company’, which eventually became Avon. From the outset, he utilized the stay-at-home mom to distribute his product line (which had grown into toiletries and cosmetics) on a part-time basis, thus creating his direct sales/MLM company.
His first sales agent was a lady named Persis Foster Eames Alby and she was quite the entrepreneur herself. She was, in effect, the first ‘Avon Lady.’
What is Multi-Level Marketing Today?
The other names for this kind of business model are ‘referral marketing’ and ‘network marketing.’
At its foundation, MLM is a marketing strategy for the sale of services or products whereby the revenue of that MLM company is derived from a workforce of non-salaried salespeople, selling those services and products, and whose own earnings (the salespeople) is derived by what is termed a binary compensation commission system. While this is a somewhat involved payment system, it is nonetheless above board because ultimately all income is derived from the sale of products and not from the recruitment of other members (provided it is implemented correctly by that company.)
Multi-level marketing is a legitimate business model but it has come under criticism because it is so similar to a Pyramid Scheme.
At first glance, it is difficult to tell the difference between the two and many critics claim that there is no difference, but here are a few tips that might help you.
How to tell a legit MLM company from a Pyramid Scheme
The way to tell these two apart is actually quite simple.
If a company is selling its products primarily to a real customer, and those products are researched, updated, improved and/or developed, it is probably a legitimate Multi-Level Marketing company. In an MLM it should be possible to make money by selling directly to real customers.
These are other features that a legitimate MLM company should have:
- you are not paid for simply recruiting others
- the only way to make money is by direct sales to customers or by managing a sales team. A sales team manager gets a percentage of the sales of each person they recruited
- there is no mandatory starter kit to purchase as a salesperson and no minimum monthly order imposed in order to stay a member
If, on the other hand, a company is primarily selling its products to its members, who need to recruit other members to buy their products, then chances are it is a Pyramid Scheme, and therefore, a scam. One of the red flags for spotting a Pyramid is that the focus of the company is more on recruitment (of more suckers) rather than product sales.
More warning signs that a company may be a Pyramid Scheme are:
- they offer money simply for recruiting other people
- there is often a steep start-up cost and mandatory training, a starter kit of some type and a non-refundable membership fee
- you will come under pressure to purchase a certain amount of product, even if you have more than you can sell or use yourself (i.e. your garage is full of it)
- you will be harassed to do things ‘right now’ because this opportunity ‘will not last’ and you have to get in on it now or lose your chance (this is called a ‘false scarcity tactic). Don’t buy it!
- you may be required to buy products before you are eligible to be paid commissions or to receive certain bonuses
- you may have to pay on an ongoing basis for things like catalogs and other marketing materials, or training sessions
- you might be told by the company that you can earn exciting rewards such as exotic vacations, luxury cars or other prizes, but that, in order to qualify for those you must purchase even more products or recruit many more people and only a minute amount of distributors ever receive these incredible rewards
- they have multiple levels of distributors (5 or more) to collect a commission on a single sale
- they use high-pressure sales techniques and the promise of great wealth by flaunting their personal assets
Is MLM Good For You?
MLM could be attractive to someone who is looking for a kind of huge, extended family because it offers support with a network of like-minded individuals. On the other hand, many critics label some MLM businesses as having an almost cult-like devotion when they hold their conferences and get-togethers. Accusations have been made as well that young, stay-at-home moms (and dads), as well as military spouses, are the targets for these companies because, usually, these people are wanting to supplement the family income while staying at home with the kids and are looking for ways to do this.
If you have chosen a good company, with a great reputation, you could be very happy and eventually make some decent income.
Also on the plus side, it is relatively inexpensive to get into ( around $500) compared to a franchise where you could be paying tens, if not hundreds of thousands of dollars. However, you are usually asked to approach friends and family to get them to purchase products and maybe even recruit them, which can end up making people you care about to do an about-face and run the other way when they see you coming.
Are you good at sales?
You have to be if you want to compete in this business because that is what it is all about. You have to be thick-skinned and tenacious as well as competitive. You may well be all of these things and in which case, I applaud you if you choose to go into Multi-Level Marketing as a way to generate some income in retirement.
If you do decide this is the way you want to go, please do your homework and investigate the company as thoroughly as you can. Refer to those comparison points I mentioned above to determine if this is a legitimate MLM company or a Pyramid scam. In fact, I have created a checklist that you may want to look at which may help you decide if you want to pursue the multi-level marketing business model. Don’t be too quick to rely on friends who are in a program you are considering because they may be trying to recruit you to their benefit! Find independent reviews online and check with the Better Business Bureau.
So, in answer to the question I posed at the beginning, I do not think that Multi-Level Marketing is a scam. It is a legal, legitimate business model and people have become very successful in doing it, albeit it can take many years to make a lot of money. It depends on what you’re personal financial goals are and how much time and energy you are willing to devote to it.
Multi-Level Marketing is NOT Affiliate Marketing
People tend to get these confused and I can assure you that, as an affiliate marketer myself, they are not alike!
With affiliate marketing, you are generating commissions for yourself by promoting other people’s products on your own website which is based on your interests, hobbies, and/or passion.
For example, let’s say you have a passion for baking bread. Your website could be all about different types of bread, ingredients used for baking it, the best type of oven in which to bake it, etc. You then link up with companies such as the giant, Amazon, which sells a lot of these products. You write articles sharing your passion for baking bread and write reviews about the things you use and suggest to people that if they want to do the same, click on a link on your website which will lead them to Amazon to buy what you use.
That is how you get the commissions!
To learn more about affiliate marketing, and find out about the platform we recommend, which is free to join, by the way, I suggest you read Philip’s article Affiliate Marketing for Retirees.
I hope you now have a better understanding of MLM. Have you ever been involved with one yourself? I would just love to hear about your experience because I do believe that many are legit. Either way, if you could share with us in the comments section below it would be so useful to others that may be considering this as a business idea.
I will be reviewing Multi-Level programs here on CRIO, so please let me know if you have a particular one you would like to know more about. There are so many! The more we all know, the better we can make an informed decision on whether it is something we would like to pursue or not.
Personally, I have no interest in doing MLM.
If I am going to be putting in all that work, I would rather do it building out my own website and writing my own articles and reviews about subjects and products that I feel passionate about. Such as helping folks like us generate some online income.
To achieve financial success in the MLM business can take many years, but as an affiliate marketer, I don’t have to wait so long. I can create passive income and, over time, make enough money to supplement my retirement income. In fact, I am already doing so. There is no hassling of family and friends to pressure them to buy products from me or join me in my ‘team’ so that I can earn commissions from them. There are no corporate headquarters dictating sales quotas or putting us under pressure to sell and recruit constantly so that those above us make more money.
The most important thing, I believe, is that at this stage of our lives, we are doing something that we enjoy doing, without putting too much pressure on ourselves and that doesn’t require an instant result. Affiliate Marketing ticks all those boxes for me.
When we were looking for an authentic platform to learn affiliate marketing, our research led us to a friendly Canadian company called Wealthy Affiliate. Here you will discover:
- a platform with all the training, tools and resources needed to create your very own website based on something YOU like and feel passionate about
- a place to host that website
- 24/7 technical support
- a supportive global community of people just like you that are learning how to do affiliate marketing and succeeding
- a chance to come on in and try it FREE!
Hope to see you on the inside. Whatever you decide to do, I wish you every success!