Are MLMs pyramid schemes? And other questions you need to ask before joining one

Business

Got a question about MLM schemes? Wonder whether or not they’re pyramid schemes? Or why they’re so dangerous? You’ll find the answers here.

We’ve been investigating MLMs for more than four years now. And over that time have been asked hundreds of questions about them.

Some of them crop up again and again, so we thought it would be helpful to create the definitive FAQs on MLMs.

So here are the questions you need to ask before joining one:

What’s the difference between direct selling and MLMs?

The Direct Selling Association (DSA) and many MLM companies are desperately trying to distance themselves from the increasingly tainted ‘MLM’ label.

But the truth is that you can call a spade ‘a digging tool’, but it’s still a spade.

And network marketing, social networking and direct selling are all just other labels for multi-level marketing – aka MLM.

Indeed, according to Wikipedia, the definition of MLM is:

“Multi-level marketing (MLM), also called pyramid selling, network marketing, and referral marketing, is a controversial marketing strategy for the sale of products or services where the revenue of the MLM company is derived from a non-salaried workforce selling the company’s products/services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system.”

Direct selling can be distinct from multi-level marketing, but this is conditional upon it having single-level marketing, which means that a direct seller makes money by buying products from a parent organisation and selling them directly to customers.

Once you introduce layers – when you recruit people under you to sell the products too – it becomes multi-level marketing, or MLM.

So sorry DSA, but your attempts to rebrand the industry are futile and wrong. As long as companies feature recruitment in their compensation plan, then they are multi-level marketing businesses, or MLMs.

Are MLMs pyramid schemes?

Now we’ve got that out of the way, let’s get to the next big question we get asked all the time (and one every MLM company and rep refutes): are MLMs pyramid schemes?

In our opinion, based on four years of in-depth research, and meeting the Director General of the DSA, yes, MLMs appear to be pyramid schemes. (The FTC even went as far as to label former MLM AdvoCare, “an illegal pyramid scheme”.)

Just look at the shape of earnings in the income disclosure statements that some companies publish. Or even their recruitment diagrams. You’ll notice a distinctly triangle-shaped pattern emerging that rewards the tiny few at the top, at the expense of the many at the bottom.

But let’s get more technical. How is a pyramid scheme defined? Here’s Wikipedia’s definition:

“A pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal.”

They also go on to note: “Pyramid schemes have existed for at least a century in different guises. Some multi-level marketing plans have been classified as pyramid schemes.”

And here’s how the Federal Trade Commission (FTC) categorise a pyramid scheme:

“Pyramid schemes now come in so many forms that they may be difficult to recognize immediately. However, they all share one overriding characteristic. They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public.

“Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure. There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales.

Inventory loading occurs when a company’s incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company’s distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. The people at the bottom make excessive payments for inventory that simply accumulates in their basements.

“A lack of retail sales is also a red flag that a pyramid exists. Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.”

So, to sum up their definition, a pyramid scheme is a company that promises recruits profits based on people they recruit, rather than retail sales.

In every single ‘legitimate MLM’ we’ve investigated, the real money comes from building a team – NOT growing your retail sales. In fact, reps are encouraged to turn retail customers into recruits, clearly demonstrating that there’s more money in recruitment than in sales.

And if you look at EVERY compensation plan for MLMs, they encourage the building of teams over growing retail sales. Why else would the minimum sales requirement not rise the further up the ranks you climb?

According to the FTC, as far as we can see, this makes most MLMs pyramid schemes.

Let’s look at the other tell-tale sign of a pyramid scheme: inventory loading. Another constant feature of MLM compensation plans is a monthly sales requirement to remain ‘active’.

Basically this means that you need to sell a certain value of products every month (or in a set rolling time period) to remain in the compensation plan and get bonuses and commissions – or even to remain with the company at all.

These requirements are usually between £100 and £200 a month. And from interviewing many ex-reps from many different companies, we understand that it is this requirement that leads so many people into debt.

Because the truth is that it is HARD to sell these (usually overpriced) products. So reps are encouraged by their upline to buy what they need to top up their sales to meet their monthly requirement. Or sometimes they need to purchase the entire amount.

This leads to ‘garage qualifying’ where reps are left with hundreds or even thousands of pounds worth of stock they can’t sell. And it happens at all levels of the company – a former Black Presenter at Younique (the highest level of the company) confessed that she used to buy her monthly sales requirement.

If a rep at the top of the company can’t sell enough to qualify every month (or more likely, was forced to spend her time recruiting over selling, as she needed to maintain her team volume and sales) then how can a new rep at the bottom achieve it? We even demonstrate how difficult it is to make money in an MLM selling products here.

For this reason too, according to the FTC, most MLMs, as far as we can tell, are pyramid schemes.

Can you make money with MLMs?

Another big question is whether you can make money with MLMs. And the short answer is “no”.

Yes, MLM reps may woo you with social media boasts about their income, purchases and lifestyle. But these are often just lies.

Here’s what independent research, published by the FTC, says of the opportunity to make money in an MLM:

“In every case, using the analytical framework described above, the loss rate for all of these MLMs ranged from 99.12% to 99.97%, with an average of 99.6% of participants losing money. On average, one in 238 actually profited after subtracting expenses, and 996 out of 1,000 lost money – to say nothing of the time invested.”

So an average of 99.6% of participants will lose money. And it gets worse. You know how MLMs (and the DSA) are so keen to distance themselves from the illegal pyramid scheme label? Well it turns out that you’re MORE likely to make money in a pyramid scheme than an MLM.

…the loss rates for MLM participants (averaging at least 99.6%…) is far greater than for participants in classic pyramid schemes, which is approximately 90%.

This research is even confirmed by some of the MLMs themselves in their small print. Here’s what Valentus say in their Policies and Procedures document:

Yes, they actually admit that “Valentus Independent Representatives should NOT expect to make a profit”, and that most “earn less money each month in the compensation program than they are paying for their products”.

And it’s not just Valentus – every income disclosure statement we’ve seen tells the same sad story. (It’s also worth pointing out that the ‘free car’ boasts you see on social media are also a lie.)

What makes women such a target for MLM schemes?

Many people wonder why MLMs seem to target women – and particularly new mothers. But it’s not just women.

MLMs like to target vulnerable people in general – that’s people in low income jobs needing extra money or looking for a way out, people in debt, and people with limited work opportunities, such as people with mental health and mobility issues.

They know these people need money desperately, but have few options to do so. Which means they’ll be more keen to believe the MLM sales pitch and buy into the dream.

Another reason why we believe that MLMs see women as an easy target is that they are often not the main breadwinner, which makes it easier to ignore or hide mounting debt. 

We’ve observed that MLMs also appear to use female relationships to encourage recruitment and bind women in once they’re trapped. 

What are the dangers of becoming involved in a MLM scheme?

The primary, and most obvious danger, of joining an MLM is financial. As we have already revealed, according to research published by the Federal Trade Commission, 99.6% of all participants will lose money once business expenses are taken into account. And this is confirmed by income figures released by the companies themselves.

We have yet to speak to a woman who has left an MLM financially better off than when she joined. Usually they have lost a significant amount of money. 

Even some of the top earners are secretly hiding bankruptcy, enormous debt and liquidation, while being paraded on stage as ‘success stories’ and lying about their income and lifestyle.

We also know that some of the touted success stories ‘bought’ their success by borrowing money from family to climb the ranks and achieve bonuses. They now lie about their achievement, telling potential recruits that anyone could do what they did, without mentioning the six figure investment they made.

But possibly the most toxic danger of MLMs is emotional. MLMs operate very much like cults and encourage you to remove anyone ‘negative’ from your life.

Basically this is anyone who doesn’t unequivocally support your business. Women are told to end friendships, cut off family members and break up with boyfriends and husbands. 

Here’s an ‘inspirational’ graphic shared by an Arbonne rep:

And here’s another Facebook post by the same rep:

Notice the toxic reframe of anyone who loves you expressing genuine concern, as ‘criticism’, people who are jealous, don’t have the vision that you do, and just want to hold you back from the success you are destined for.

Much like abusive relationships, MLMs gradually isolate you from anyone who genuinely cares about you, so you’re surrounded instead by your new MLM ‘family’ – people who will reinforce your decision to stay, and encourage you to keep buying the products every month to remain active… and (from anecdotal evidence) get into more debt.

No wonder that the interviews we conduct with former MLM reps are more like therapy sessions. Many have never told people some of the bullying and coercion they were exposed to, feel shame at the things they were encouraged to post, and how they treated friends and family, and all were in debt.

One woman told us that the only secret she has from her husband is the credit card debt she’s run up from the MLM and can’t pay off.

And the women we speak to are ALWAYS scared of the company they have left, and what their former team will do to them if they speak out – and with good reason.

In an extreme case, one woman contacted us to say that she’d been threatened for speaking publicly about her experience, and bad reviews were left on her husband’s self-employed business page saying he was a ‘pervert’.

That is why all our MLM interviews are anonymous, and why newspapers and TV producers find it so hard to get people to go on record about their experiences.

Why don’t MLMs work?

MLMs, in our opinion, are structured like a house of cards. Everyone who climbs up the company ranks relies on a minimum number of team members in various ranks underneath them. And that team must sell (or buy) a minimum quantity of products every month for them to retain their position and earn their commission and bonuses. 

This means that they are forced to pressure everyone underneath them to remain with the company, keep their rank, and to sell and recruit – and those underneath them are pressured to do the same.

If, as is common, people don’t sell their minimum required amount of product a month, they personally buy it. (As already mentioned, this is where the debt often mounts up.)

This results in a toxic environment in which you are usually love bombed and bullied into keeping the house of cards intact. You’re expected to work constantly – even when you’re on the toilet – and are continually being told you’re not working hard enough, or don’t ‘want it enough’ if your efforts don’t lead to the required results. 

It’s never the company or the entire business model that has failed; it is you.

If MLMs are so bad, why are there so many success stories on social media?

When you join an MLM you are often instructed to ‘fake it ’til you make it’ in the name of attraction marketing. Or, as you and I would put it, to lie.

As we reveal extensively here, MLM reps lie brazenly and constantly. From stealing photos of someone else’s designer purchases and pretending they are their MLM spoils, to lying that high street stores are begging to stock their products.

All very easily exposed for the delusions and outright lies they are.

We’ve even seen evidence that the reps are TOLD to lie by their upline, and even the company themselves. Here’s just one example of reps being encouraged to fake success:

As we’ve already revealed, even some of the top reps are lying about their true financial situation, and hiding secret bankruptcy, insolvency and large debt – all easily discoverable if you look.

Other big name MLM influencers are showing off lifestyles paid for by their parents or partner, not their business, as they claim.

So the next time you see a success story paraded on stage, or a boast on Facebook about a rep’s lifestyle or earnings, don’t believe it. Just remember the FTC statistic: on average, 99.6% of MLM reps will lose money.

What should people consider before signing up to an MLM?

The only advice we can give people considering joining an MLM is “Just don’t!” We’ve been researching MLMs for four years. We have spoken to countless former members from many different companies, and we have met the Director General of the DSA, and there is not one positive reason for joining, in our opinion. 

When you’re being recruited by an MLM rep you need to remember that the person convincing you to join will benefit financially from you signing up – and it’s quite possible they NEED you to sign up to gain or keep a rank, or maintain their car bonus.

Likewise, anyone you speak to in that company is financially invested in you joining, so you will never be given any objective information. 

You’ll be told it’s easy to join – virtually a business in a box with little to no start-up costs and free support and training. You’ll be told how easy it is to earn, get bonuses and qualify for fabulous trips and prizes, and usually fed lies about the earnings and lifestyle people are enjoying.

And you’ll be told a fantasy about how the company is a supportive sisterhood bursting with positivity. 

But sadly this just isn’t true. If you want a more accurate picture of what it’s like in an MLM join one of the many MLM Facebook groups like MLM Lies Exposed and ask former members for an honest account of what it’s like in the company. 

What are the alternatives to joining an MLM if you need to make money?

As unhelpful as it sounds, you’d be better off doing nothing than joining an MLM!

You may earn nothing but at least you won’t get into debt and have your self-esteem and relationships potentially destroyed. You also won’t be expected to do things you are uncomfortable with, such as cold message 100 people a week, or target newly bereaved mothers – all things that people in MLMs have been expected to do.

If you need small amounts of money quickly, then look for ideas on reputable sites like Money Saving Expert.

If you like the idea of selling products, then you’ll make more money setting up yourself than joining an MLM. Make your own products or look for wholesalers and then create your own brand and website and start selling (you can create your own logo and site for free using online tools). Or sell on sites like eBay and Amazon. 

You can choose your own suppliers, set your own pricing and profit margin, and won’t be forced to hit monthly sales targets. 

If you have skills you can’t currently use face-to-face, is there a way to use or teach them online? Many fitness and yoga teachers are running online classes, and hairdressers teaching online tutorials or guided classes. 

Or you can monetise your skills and go freelance – even retrain as a social media manager or set up as a VA.

Anything is better than joining an MLM. 

Where can you read more about MLMS?

You can read our investigations into individual MLMs here:

You can also read more about the MLM industry in general in these articles:

And if you’d like to learn more about the history of MLMs, and theories as to why the business model has been allowed to continue despite an average of 99.6% of participants losing money, we also recommend listening to the first series of The Dream podcast.

Photo by Omid Armin