Are MLMs really pyramid schemes? Why you can’t make money selling their products
Have you accidentally joined a pyramid scheme? Find out why MLMs look very much like pyramid schemes to us, and why you can’t realistically make money selling products in one.
No one in their right mind would join a pyramid scheme. But hundreds of thousands of people every year around the world join a multi-level marketing company (MLM).
They join because they’re sold the dream of working for themselves. Of potentially earning a lot of money. And of having the freedom to create a lifestyle in which they can work flexibly in part time hours.
But the line between MLMs and pyramid schemes is very thin. And, not only are your chances of earning money in an MLM statistically tiny (on average only 0.4% of MLM participants will make any money), we believe that you could have unwittingly signed up to a pyramid scheme disguising itself as a legitimate business.
When does an MLM become a pyramid scheme?
Many campaigners believe that MLMs are, essentially, pyramid schemes. So what’s the difference between an MLM and a pyramid scheme? And when does an MLM become illegal?
The most significant difference between the two is simple:
- In a pyramid scheme the key earning potential is in recruitment.
- In a legal MLM the key earning potential must be from selling product.
Here’s what the Federal Trade Commission (FTC) in the US says about pyramid schemes and MLMs:
“In multilevel or network marketing, individuals sell products to the public — often by word of mouth and direct sales. Typically, distributors earn commissions, not only for their own sales, but also for sales made by the people they recruit.
Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s probably not. It could be a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”
So, in order for an MLM to be legitimate, and not classed as a pyramid scheme, the money their reps make must be based on their sales to the public. But is this really possible with MLMs? Can you make money from an MLM just by selling their products? We decided to find out.
Can you make money with Younique without recruiting?
To work out whether it’s realistic to make money in an MLM, we decided to pick a popular company in the UK and US: Younique. Younique is a member of the Direct Selling Association (DSA) in both countries.
There’s nothing particularly unique about Younique’s products, compensation plan or sales structure, so it will help give us an average impression of what opportunities exist for reps in other MLMs too. (In fact, Younique describe their compensation plan as “generous”.)
In order for an MLM like Younique to be completely above board, and not classed as a pyramid scheme, there must be a genuine opportunity to earn money from personal retail sales alone. Let’s find out whether this is the case, or not.
Can you realistically earn money on sales alone in Younique?
So how much can you earn as a Younique representative (their term for a rep) without recruiting? If you join Younique and choose not to build a team, you’re stuck at the entry level commission of 20% or 25% (depending on the volume of your sales).
If you remain at the lowest level of presenter (White) here’s what you’d need to sell every month to earn money with Younique on 20% commission:
- To earn £100 a month you’d need to sell £500 of products.
- To earn £500 a month you’d need to sell £2,500 of products.
- To earn £1,000 a month you’d need to sell £5,000 of products.
- To earn £1,500 a month you’d need to sell £7,500 of products.
If you sell enough to make Yellow status, here’s what you’d need to sell every month to earn money with Younique at 25% commission:
- To earn £100 a month you’d need to sell £400 of products.
- To earn £500 a month you’d need to sell £2,000 of products.
- To earn £1,000 a month you’d need to sell £4,000 of products.
- To earn £1,500 a month you’d need to sell £6,000 of products.
We don’t know about you, but that seems like a LOT of makeup you need to flog every month to family, friends, colleagues and random strangers.
Personally we’d struggle to sell £500 of makeup in a single month, let alone every month (and even if we did, it would only give us £100 in commission). The thought of offloading £7,500 of products every month is mind blowing.
As always, the commissions you see above aren’t pure profit: presenters need to take into account their business expenses. And, as we know from Elle Beau’s blog, once presenters do this, they can find themselves in the red. That’s right, they can actually LOSE money by selling Younique.
Most new Younique presenters don’t earn much on personal retail sales
Based on these numbers, we don’t think that it is realistic to earn a reasonable amount on sales to the public in Younique (or most MLMs). And the company’s own website appears to back this up.
To dig up some actual details about how much MLM reps are making on sales, we looked at Younique’s current leaderboard with the monthly personal retail sales of their top 10 new sellers in the world:
From our research, Younique’s PRS (personal retail sales) appears to be equivalent to US$1. So how much have their top new global sellers actually earned in commission from their retail sales this month?
To be generous, let’s assume they’re on the top level of commission (30%) paid by Younique on personal retail sales. Here’s what they’ve actually earned in commission in a month on these sales:
- Top ranked global seller Patte Cortesano earned $1,838.76.
- Number 10 ranked global seller Kelly Brown earned $841.59.
Younique’s top new personal seller would earn more money as a waitress
So, Patty Cortesano, the new top new Younique seller IN THE WORLD on personal retail sales that month, only took home $1,838.76 in commission (and remember, this isn’t pure profit – she needs to deduct expenses from this sum).
This is equivalent to an annual salary of just $22,065.12 before expenses. This hardly seems like an impressive amount. Indeed, here’s what other professionals earn on average in the US:
- A nursing assistant earns $35,476 a year.
- A secretary earns $34,040 a year.
- A foreign language tutor earns $63,997 a year.
- A library technician earns $28,806 a year.
There were no jobs listed on the USA Jobs site lower than $28,000. So the top earner in the world in Younique, earns less in personal sales a year than the lowest salary listed on the US Jobs site.
She’d actually have been better off working as a waitress (average annual salary $24,410) than relying on her personal retail sales from Younique. And remember, this is the top new global seller that month.
The top earners are less than 0.02% of Younique presenters
Not only are these commissions remarkably modest, but they’re also exceptional for Younique. As Younique themselves admit these presenters are “approximately less than the top 0.02% of Presenters”:
This means that the vast, vast majority of Younique presenters around the world won’t earn anywhere close to $800 a month in commission on their retail sales – proving that it’s not realistic to rely on personal sales with Younique (or most MLMs).
How likely are you to be a top earner with Younique?
So, if only 0.02% of new Younique Presenters stand a chance of making the hallowed leader board, what does that realistically mean for your chances?
As of December 2017, there were 230,000 Younique presenters globally. 0.02% of this number is 46. So, of all the Younique presenters in the world, only 46 stand any chance of earning as little as $841 dollars a month on their personal retail sales.
And even those 46 top sellers earn less than a waitress on their personal sales commissions.
You need to sell 125 in PRS every three months to stay active
Like many MLMs, you need to make a certain number of sales to remain as an ‘active’ rep (and not have your account suspended or terminated). Younique presenters need to sell 125 in PRS every three months. (At 20% commission this would earn you $25, or $8.33 a month.)
If you fail to make your 125 PRS in a three month period, your account is suspended. You then have three months to re-activate it. If you don’t your account will be terminated. If you then wish to rejoin, you lose your previous status and downline, and need to start from the bottom again.
So how many reps manage to sell this seemingly modest amount? From what we can glean from two presenters, not many.
The average presenter in one downline sells just $39.16 a month
To find out what kind of sales Younique presenters are making, we looked at the Younique page of Lianne Anderson, a Black Status Level 1 presenter – one of the three top UK Younique reps. On her page she says:
“In the last 3.5 years I have grown my organisation to 17k+ amazing women. we sell approximately 8 million dollars a year…”
So Lianne’s downline of 17,000 women (we’ve rounded it down to 17,000 for the purposes of calculations as we don’t know the exact number) sold $8million of Younique products in a year. This equates to an average of just $470 per woman – or $39.16 in sales a month.
And of course that is SALES. It’s not commission. Here’s what that $39.16 is worth in personal commission:
- If you’re White status on 20% commission you’ll earn $7.83.
- If you’re Yellow status on 25% commission you’ll earn $9.79.
This ties in with another presenter in the US, who bragged about her downline of 775 women selling $698,082 of makeup in 2017. This equates to $900.75 each annually, or $75 a month. In commission this is worth:
- If you’re White status on 20% commission you’ll earn $15.
- If you’re Yellow status on 25% commission you’ll earn $18.75.
(Again, this ‘profit’ is before business expenses are deducted.)
Both these presenters were boasting about these figures as if they were exceptional. But even if they were just average, and therefore representative of most Younique downlines, it means that many presenters aren’t making anything near their qualifying 125 in PRS.
Younique presenters NEED to keep recruiting
These figures indicate to us that, like many MLMs, there must be a high turnover of presenters in Younique – putting pressure on the senior presenters to continually recruit (and encourage their downline to recruit) to maintain their status.
To give you an idea of the pressure presenters are under, here’s what a Black Status presenter (the top level) needs to maintain every month to keep their rank:
- $500 USD in monthly PRS
- $80,000 USD in monthly company wholesales (75% of your entire company’s total PRS)
- 4 qualified presenters
- $10,000 USD in monthly circle whole sales (75% of your circle’s total PRS)
- 4 first generation elites
- 30% commission on your PRS
- 6% circle royalties – royalties/commission paid on total circle sales
- 3% first generation royalties – royalties/commission paid on your first generation elite’s total circle sales
- 4% second generation royalties – royalties/commission paid on your second generation elite’s total circle sales
- 5% third generation royalties – royalties/commission paid on your third generation elite’s total circle sales
Can you imagine the pressure a Black Status presenter must feel if presenters under them don’t sell enough, or are continually leaving the business because they don’t make enough to remain active?
The only way to guarantee their rank is to keep a steady flow of new presenters coming in, and to build as large a team as possible. Which means that your focus must be more on recruiting than actual selling.
The focus of Younique ranks is on their team, not sales
If MLMs like Younique were built around personal sales, not recruiting, we’d expect their compensation plans to be constructed around rewarding top sellers.
But as we can see from the requirements to maintain their top Black Status, there’s very little focus on their own sales. In fact, a Black Status presenter only needs to make a modest $500 of personal sales every three months (which would net you an equally modest $150 in commission) – the same amount you need to qualify for Yellow:
Most of the requirements for achieving and maintaining your Black Status involve the team under you, meaning that you cannot progress through the compensation plan without significant recruiting.
So, in order to progress up the ranks in Younique, you need to worry less about how much you are selling, and more about the people you recruit into your downline.
And Younique is far from the only MLM who structures their compensation plan in this way. Remember: we chose to focus on Younique in this article because it was typical of most MLMs we have investigated.
And indeed, the compensation plans of companies like doTERRA (who don’t raise their personal sales volume requirements at all, meaning their top reps only need to personally sell the same as new recruits) and Arbonne focus on rewarding team growth, not personal sales, only requiring very minimal personal sales from their top reps.
Surely, if MLMs like Younique, doTERRA and Arbonne (in order to avoid being classed as pyramid schemes) were constructed around retail sales to the public, they would incentise and reward increased individual sales? But instead, they require reps to make a token amount of personal sales, and instead incentivise them to recruit large teams below them.
Is Younique a pyramid scheme?
So, what does all of this mean? All the evidence we can find (interestingly, Younique doesn’t publish an income disclosure statement) shows that it is not realistic to earn a reasonable amount of money from Younique on retail sales to the public.
As we’ve just learned, their top new global earner this month earns less than a waitress. And only 0.02% of new presenters in the world, according to Younique’s own admission, stand a chance of earning that much on personal retail sales.
The other 99.98% of new presenters won’t be earning anything near as much. (Indeed, as recent research shows, the average MLM rep earns just 70 cents an hour.)
In order to make decent money in Younique, it seems, you need to recruit people into your downline – and continually keep recruiting to cover the presenters who don’t earn enough, and replace the ones who leave. But, according to the FTC, doesn’t that mean they’re a pyramid scheme?
Certainly, to us, they don’t look like an attractive proposition for someone hoping to earn an income from selling beauty products.
In our opinion MLM is an unethical business model
The calculations you’ve seen in this article are just one of the reasons why we campaign so passionately against MLMs. In our opinion the business model is unethical. It’s constructed in such a way that only the minuscule few at the top make money. The other 99.6% on average will lose money, according to research.
And it makes us even crosser when MLM reps prey on mothers, pitching their ‘opportunities’ to them as an easy income they can earn from home around their children. Here’s what one MLM rep says on a Facebook post aimed at recruiting new reps into her downline:
“I work no more than 10–15 hours per week… it’s a part time business with full time pay”
And here’s another Facebook post currently doing the rounds:
As we’ve just seen, joining a MLM is far more likely, in our opinion, to leave you broke, bitter and disappointed. And quite possibly feeling like you’ve been duped into joining a pyramid scheme.
You’d be better off starting your own business
If you do want to earn money from home selling products, you’d be far better off setting up your own business. You can easily buy products wholesale, and then either sell to people you know or set up an online shop.
And with no upline taking their cut of your sales, you’re free to set your own profit margin. So rather than a measly 20% or 25% commission, you can decide on your own markup. The average markup on makeup, for example, is 78%.
You’re also not bound by the rules set by an MLM, nor forced to maintain a PRS to remain active. If you have a quiet month, or fancy the summer off, you can take it. And pick up your business again when you’re ready.
Given this, why would you choose to join an organisation that effectively sold products to you at retail prices (most MLM products seem vastly overpriced to us), not wholesale, and then siphoned off a large proportion of the profits on your sale to people higher up the income pyramid?
Read more about MLMs
Want to know the truth behind some of the most popular MLMs? Read our income investigations into:
Photo by Stephen Leonardi
As always, we take great care to ensure our articles are as factually correct as possible. However, if we have shared inaccurate information, miscalculated, or missed important evidence that contradicts our findings we will be happy to correct or amend our article.