Too Good To Be True: The Dangers of Multi-Level Marketing

 

Multi-level marketing is not a new concept. Even though several well-known companies operate in that business model,  not all multi-level marketing businesses are legitimate. In times of financial hardship, it is only natural to start looking for additional revenue streams that can supplement your income quickly. Unfortunately, the unscrupulous prey on desperation. Every few years, new schemes pop up with a different name and the same fervent promise: Get rich quickly by having others do the work for you. 

There is a reason that the adage “If it seems to be too good to be true, it probably is” holds true time after time. If you aren’t familiar with MLMs, you may recognize them by other names, such as pyramid schemes or Ponzi schemes. Does this mean that you can never make any money in a multi-level marketing environment or that all MLMs are scams? Not necessarily. However, before investing time or money in anything that promises unbelievable results, educate yourself on the investment and the people touting it.

 

Multi-Level Marketing Defined

You may not be aware that an opportunity is an MLM initially, but there are ways to identify them:

  • There is no salary, just commission from direct sales
  • The real money comes from recruiting other people into the plan

The first one isn’t uncommon in sales. The commission on the sale compensates for the efforts of the salesperson. However, the real hook is that to make big money, you must recruit other salespeople so that you can collect a portion of their commissions. The business model is predicated on building massive teams of salespeople to make more money from the efforts of the people below you on the pyramid.

 

Sobering Statistics

You may recognize a few of the mainstream multi-level marketing companies like Amway, Avon, Mary Kay, Tupperware, Rodan + Fields and Herbalife. Obviously, someone is making money. Amway is the largest in terms of revenue, with Avon coming in a close second. However, the reality is that only a tiny portion of the company gets the lion’s share of the money. In 100% of the 350 MLMs evaluated in a study by the Federal Trade Commission, they found that only the top 1%, known as top-of-the-pyramid promoters or TOPPS, made money, while 99% of participants lost money.

The FTC study cited a 1980 lawsuit against Amway that triggered an investigation by the Office of Attorney General for the State of Wisconsin. That inquiry found that the top 200 salespeople at Amway in Wisconsin made -$900 after expenses. That means that for all their efforts, the salespeople paid Amway to work there. According to Forbes, a Magnify Money survey revealed that 20% of people in MLMs never made a single sale. Those that sold under $500 within the last five years represented 60% of the respondents. 

 

What To Be Wary Of

In short, if you are told that something will make you rich quickly, run. If the business representative is a little more discreet, you may have to ask a few questions to determine the true nature of the business model. Fortunately, the U.S. Securities and Exchange Commission has a website that warns against the wolf in sheep’s clothing, otherwise known as pyramid schemes posing as multi-level marketing programs.

If you see any of these indicators, the company may be a pyramid scheme:

  • No legitimate product or service is sold.
  • Promises to make unrealistic returns in a short time, also known as “get rich quick.”
  • Make money without working.
  • There is no documented proof of revenue from sales.
  • An investment required, even if it is nominal.
  • They have a complicated commission structure.
  • There is a heavy emphasis on recruiting to increase returns.

 

The Bottom Line

Millions of people in the United States and all over the world have attempted multi-level marketing, whether from promises of riches or due to family or time constraints that make the siren song of passive income irresistible. Despite the recognizable pink Cadillacs on the road from the top Mary Kay salespeople, the statistics show that making money from MLMs is rare. If you are considering joining one to make extra cash, follow the facts and the guidance listed here to avoid losing time, effort or, most importantly, money. 

If you’re ever confronted with any suspicious activities or have questions about a job that seems too good to be true – reach out to us or your financial coach first. It’s important to get a trusted third party opinion, especially in uncertain financial times, if you are ever unsure about your finances or financial opportunities.

If you haven’t found that yet, we are here for you with a plan custom-tailored to help strengthen your financial well-being.  Contact us any time for a free chat. We are here to help.

 

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