Have you been promised to get rich quick if you just sold your friends enough products?
Multi-Level Marketing Schemes, from now on referred to as MLMs, don’t sound as bad as they really are. Yet, they aren’t exactly your friendly neighbor. Although ironically, it might have been your friendly and well-meaning neighbor who got you into them in the first place!
What is are MLMs? Now it is sometimes difficult to properly understand what an MLM is, but if you think of a pyramid scheme, you’ll get a serious grasp of it already.
At the top of this pyramid stands what is often referred to as a distributor. You can call them the CEO, the big boss or whatever you like. What this person mainly does is manage both product, and increasingly indirectly, the sellers.
Now how does this person get their sellers? Well, the top layer (the one closest to the distributor) can be, and is quite likely to be actual employees. As in, they officially work for the company and receive a salary as a result. On top of that salary however, they are likely to get bonusses for recruiting additional sellers to the MLM or for selling a certain amount of product to these sellers. Here is where it gets a bit more iffy:
These new sellers, who are not salaried and are at a risk in this scheme for making losses, now buy a certain amounts of product from the aforementioned distributor, and then try to sell this for a profit. If these sellers manage to make that profit, they have to kick back some of this profit to the distributor.
So far, we have identified three levels in this MLM, but often they have much more. Why? Because in turn, all the other sellers (the new, un-salaried ones) have to recruit new sellers as well, who will then buy products of them. As such, each seller with a layer underneath them is also in part a distributor themselves. They now have to sell, but also distribute product to their lower sellers, whilst at the same time still kicking back some of their profits to the initial distributor.
As such, product keeps moving down the pyramid, and money keeps moving up.
How to spot an MLM (or worse)? If a friend or someone you vaguely know is reaching out to you to make your aware of some great opportunities, it’s likely to be an MLM.
Now technically speaking, being in an MLM itself not that much of an issue. In many countries, they are in fact legal business models. However, you need to make sure it’s an MLM you’re signing up to, and not a Pyramid of Ponzi Scheme (definitely illegal). So, before you sign up, ask yourself the following questions:
Are you required to "invest" a large amount of money up front to become a distributor?
If you do have to pay for inventory, will the company buy back unsold inventory?
Is there any mention of or attention paid to a market for the product or service?
Is there more emphasis on recruitment than on selling the product or service?
The answers to these questions should be as follows, if you’re signing up to an MLM and not a Ponzi Scheme:
You need to figure out whether this charge is actually for inventory, as it might just be an investment request disguised as an inventory charge. Legitimate MLM businesses do not require large startup costs from their newly recruited sellers. Ponzi schemes often do, because they just want your money.
This is a dead giveaway. A legitimate MLM company will offer and stick to inventory buy-backs for at least 80% of what you paid. A Ponzi scheme will not. They want your money, they don’t want to give it back…
Multilevel marketing depends on establishing a market for the company's products. If the company doesn't seem to have any interest in consumer demand for its products, don't sign up.
Remember, the difference between multilevel marketing and a pyramid scheme is in the focus. The pyramid scheme focuses on fast profits from signing people up and getting their money. If recruitment seems to be the focus of the plan, run.
So keep in mind, if all the company cares about is getting into your money, and getting you to sign up other people for their money, it’s not an MLM. It’s just pretending to be an MLM.
Why are they bad? Now you’re thinking, is an MLM really that bad? Well, keep in mind that another name for them is pyramid selling. I’m not calling them pyramid schemes, or nearly as bad as a Ponzi scheme, because as I outlined above, they are very different. But the issue is an MLM can turn into one, and can easily be confused with a Ponzi scheme.
Another big issue is the fact that most of the sellers in this scheme suffer all the risks themselves, and there will also be the incentive to offload that risk by “trapping” other people into the same scheme.
Most annoyingly maybe, this is something people with good intentions do to their friends. MLM is also often referred to as network marketing. It is currently also done a lot through social media. I’m pretty sure by these stage, everyone has a friend who works “with” some obscure company pushing out essential oils, diet teas or some type of spiritual candles. It’s annoying. And no one wants to be the friend to trap others. But also, no one wants to be the friend who gets blamed when the MLM turns out to be a wolf in sheep’s clothing.
How to get out of an MLM? If you’ve realized you’re in an MLM, and no longer want to be, getting out in a legal sense is not that difficult. You either sell your remaining stock yourself, or sell it back (at a slight loss, but hey). You can contact the company to let you go and that’s often it (do read your contract carefully if you were ever given one).
If you had sellers underneath you, they will likely be transferred to a new distributor, unless they feel they now want to quit as well as you did. It is important that you are honest to the people you recruited as to why you are leaving. They signed up to work with you and no one else, so you owe them at least that decency. There are no repercussions for them leaving either.
The issue you might run into is that MLMs are so heavily socialized. As in, they target people’s social lives and direct relations quite heavily. So, you might have to temporally cut contact with those of your social circle who decide to remain in the MLM, because the risk of being sucked back in is quite high. They are quite insidious like that, which is, in my perspective, the biggest drawback to this scheme.
If it turns out you weren’t part of an MLM but a much darker version, the chances of your getting your money back are low to non-existent. If, after doing some research, you are pretty sure the scheme you were in is definitely not legal, be brave for your fellow humans and report it to the authorities.
Additional Resources: If you feel like you are being trapped in an MLM, or someone you know is, please do check out these resources for help on the topic: