The 10 ugly truths MLMs don’t want you to know
Thinking of joining or buying from an MLM? Read the 10 ugly truths they won’t tell you and find out why you should avoid them at all costs.
Since we started investigating MLMs we’ve uncovered one shocking truth after another. We’ve been contacted by the Direct Selling Association (DSA), reps and even by MLM companies themselves. And not one has convinced us that it’s a legitimate, fair industry.
On the contrary, the more we learn, the more passionately we believe that MLMs only serve to make a tiny percentage of people at the top of the pyramid rich. The other 99.6% of reps will almost undoubtedly lose money.
The 10 ugly truths MLMs don’t want you to know
We’ve also had the pleasure of communicating with some of the world’s top MLM experts over the past few months. One of whom, Robert FitzPatrick, recently published 10 big truths about MLMs. Inspired by his truths, here is our own version, based on our own experiences and research.
1) MLMs rely on recruiting, not selling
While MLMs may describe themselves as direct selling, network marketing, social selling etc, the reality is that almost no MLM reps actually make a net profit from personal, direct retail selling. Instead, they rely on recruiting.
This is exactly what the USA’s Federal Trade Commission (FTC) concluded after a two-year investigation into Herbalife. They found that Herbalife distributors couldn’t gain a ‘retail profit’ income, and that the income opportunity was in recruiting more distributors under them:
“[Herbalife’s] compensation structure was unfair because it rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program, rather than in response to actual retail demand for the product, causing substantial economic injury to many of its distributors.”
As a result they fined Herbalife US$200 million and ordered them to change their structure. (You can read the full ruling here.)
Indeed, when you look at what you’re actually selling in an MLM, you can see that the odds are stacked against you if you want to rely on sales alone. Take doTERRA, an essential oil MLM. As we show here, their products are four times more expensive than you can buy from online retailers.
And it’s not just doTERRA. Compare any MLM product against high street alternatives and they’ll be more expensive. (One of the reasons why MLMs attempt to claim that their products are superior or contain a ‘magic’ ingredient – so you can’t compare them with identical, but cheaper, products.)
Also, when you consider the potential for profit, direct selling just doesn’t make financial sense. If you rely only on retail sales, you need to sell to your network every single week to maintain your income. And how many people have a large network of family and friends who need exactly what you sell and will buy from you frequently enough?
The truth is that the only way you can make anywhere near a livable income from MLMs is to recruit a large enough downline under you. Something only four people in a thousand achieve, making it much more like ‘direct recruiting’ than direct selling.
2) The MLM model makes it impossible to earn money
Of all the truths about MLMs this is the most important: when you look at their structure, it’s actually impossible for the majority of participants to make money from them (which is why so few do).
In fact, MLMs rely on the continuous recruiting of people at the bottom of the pyramid to send money flowing up to the tiny percentage of people at the top. This is one of the reasons why MLMs will happily saturate an area, like the small town of Miramachi in Canada, with no thought as to whether there is enough business to viably sustain the reps it’s happily signing up (and taking starter kit fees from).
Let’s look at this from a mathematical point of view. One of the lies an MLM rep will tell you is that the earning opportunity is limitless – as long as you’re prepared to work for it. But that’s just not true. Here’s how Robert FitzPatrick explains it:
“The MLM model actually is two-lies-in-one. First, obviously, as the number of participants increases, the chance to recruit a large downline diminishes for those at the end of the chain.
The “opportunity” is not “unlimited.” It is finite and diminishing. The thousands at the bottom of the pyramid cannot possibly enroll as many recruits as those few at the top already have. Saturation prevents virtually all from finding enough new people.
Second, saturation aside, the recruiting chain pay-plan requires each participant to enroll a number of recruits before profit is possible. Therefore, a ratio of “winners” to “losers” is baked in right from the start.
If 25 are needed, then only one in 25 could ever be profitable. This would be true the day the scheme is launched and would never change. The “income opportunity” is therefore — by design — limited to one in 25, or 4%. Based on the proposition of gaining profit from recruiting, 96% would always lose for as long as the scheme operated. In practice, the actual ratio is far worse.”
3) MLMs offer worse odds than playing roulette
As we have seen with the FTC ruling on Herbalife and Leonie Dawson’s doTERRA recruitment attempts, MLMs will happily lie and deceive to recruit. They’ll talk about the ‘income opportunity’, share examples of their top sellers, and flood any review site with false testimonies from ‘happy reps’.
But very few actually publish income disclosure statements which show the truth about how much reps are earning. And when they do, you can see why. Just read our own investigations into:
As Robert FitzPatrick predicts, most people at the bottom of the pyramid lose money. The only people making anything like a livable income are at the very top. This agrees with research conducted by the world’s top MLM experts, including research published by the FTC:
- “MLMs are the most unfair and deceptive of all business opportunities, and of all pyramid schemes”
- “On average, 99% of all participants received less than $10 a week in commissions, before all expenses.”
- “Less than 1% of MLM participants profit.”
- “I called 16 tax preparers… While none of them had any clients who reported profits from MLM participation (6% were active in MLM), they reported over 300 clients who reported profits from gambling!”
It also agrees with Forever Living’s own admission of their company in Uganda:
“Out of over 20,000 Forever Living members, for instance, Wasiama says only 83 are at various managerial levels. This means that over 95% of Forever Living members are yet to make it to the managerial level, to start earning above their monthly investment of about sh560,000.”
And this research into Nu Skin:
“99.997% of people working on behalf of Nu Skin made no profit or, more importantly, made a loss.”
In fact, Jon Taylor from the Consumer Awareness Institute found that the odds of winning on the single spin of a roulette wheel in Las Vegas were:
- 286 times as great as the odds of profiting after enrolling as an Amway rep.
- 48 times as great as the odds of profiting after enrolling as a Nu Skin rep.
- 22 times as great as the odds of profiting after enrolling as a Melaleuca rep.
He concluded his in-depth study with the following statement:
“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, of 1,000 people who join an MLM, 996 will lose money after subtracting expenses.
This statistic agrees with many personal experiences we’ve read. We recommend reading this firsthand account of an ex-Mary Kay rep, who rose to the top 2%, earned the pink Cadillac and large commission cheques, but ended up over US40,000 in debt and bankrupt thanks to the expenses and commission chargebacks.
And we need to be very clear here. We have yet to find an MLM that differs from this pyramid income structure. We have been contacted by the UK’s Direct Selling Association and some MLMs directly, and our opinion remains unchanged.
In our experience, MLMs use smoke and mirrors to recruit and will do all they can to hide the truth about the way they are structured, and the lack of income opportunity for over 99% of the people who join them.
4) MLMs incentivise their reps to buy from them
If you have a friend who works in an MLM you may have seen posts excitedly talking about the ‘free’ car or overseas trip they’re working towards, or photos of social events their company has thrown for them. Or they’ll share their thrill at working towards a higher status level.
There’s a very good reason why MLMs dangle these enticing carrots – their overpriced products don’t sell themselves (despite what reps may boast). So the MLMs promise wonderful rewards like holidays, cars and parties if you sell a certain quota by a particular time.
(As a side note they also use these rewards to tie you into higher sales – statuses and car payments are taken away from you if you don’t maintain your numbers. And in the case of your ‘free’ car this can leave you with expensive monthly lease payments to find.)
So what do you do if you’re a few sales short of your monthly quota to maintain your status (and keep your car payment), or to make the overseas reward trip? Easy – you buy yourself. This is why in Mexico it’s estimated that 70% of all Herbalife sales are from their top distributors trying to sell to other distributors after buying it in huge quantities.
5) MLMs need to constantly recruit to replace those who quit
So if it’s impossible for most people to make money in MLMs, why do so many people stay with them? The truth is that they don’t.
Herbalife, for example, loses 90% of distributors who are not supervisors, and 60% of supervisors in a year. And the turnover rate for other MLMs is often just as high.
The problem is that reps don’t talk about quitting – but make plenty of noise when they’re in. When someone joins an MLM they’re trained to blast social media with positive statuses – and even to lie about how well they’re doing.
They’re encouraged and sometimes told to cut and paste identical Facebook posts, just like this one that was shared by at least six different reps on the same day, all pretending it was a genuine status from them:
However when reps finally wake up to the reality of their MLM they either quietly slip away, too embarrassed to publicly admit they’d been fooled, or join another MLM in the hope that THIS one will work for them. (This is known as the MLM merry go round.)
Ex-reps are also bullied into silence by their MLM and the network of reps they used to count as friends. Why? Because if you’re still in an MLM you need the truth to remain hidden in order to recruit and sell. You really can’t afford to have someone telling the truth about the lack of income opportunity, or shoddiness of the products, so you bully and discredit them into silence.
(Kerri’s story, which sadly is far from rare, gives a good insight into the kind of bullying that can go on in MLMs.)
So, despite what you may see online, or be told by MLM reps, the truth is that MLMs need to recruit aggressively because they need to replace a perpetual turnover of unhappy reps.
6) MLM reps are unpaid sales reps, not ‘business owners’
Many MLM reps love to describe themselves as ‘business owners’ (or a #BossBabe) and will even emotionally blackmail family and friends into supporting them as a ‘small business’. But they’re not business owners – they’re unpaid sales reps.
Unlike a real business owner they don’t get to choose their own product range, and they can’t shop around suppliers for the best deals. Instead they’re stuck with the products and prices available from their MLM. They also can’t decide what profit margin they want to make – their commission level is decided for them.
It’s not even as if they’ve bought a franchise and have the exclusive rights to sell in a particular area. Instead, they’re often competing with any number of reps selling identical products at identical prices in a saturated market.
They also have no say on basic business decisions like returns and refunds, relying instead on what policy their MLM decide to adopt (and as we’ve seen with clothing MLM LuLaRoe, this can change overnight, with expensive consequences).
Reps are even often told what to post and how often on social media (and are told off if their personal social media posts don’t reflect the positive image the company wishes their reps to project).
In fact it’s hard to see in what way an MLM rep can possibly imagine they’re a business owner! They’re much more like unpaid sales reps with no guaranteed income, or employee benefits such as holiday pay.
7) MLMs are unregulated – you have no way of knowing if they’re a fraud
As we explain later, MLM business structures are designed to be complex and difficult to unravel. This makes it extremely hard to work out what the business opportunity really is, and how they even work.
It doesn’t help that MLM companies are generally unregulated, and the laws regarding MLM practices are vague or badly defined. MLMs are not even legally required to publish income disclosure statements showing how commissions are paid, or how much money reps lose.
Add in an army of reps desperately trying to recruit and sell on social media, and you have a situation where people will make crazy claims for money. This has led to the FTC warning doTERRA about claims made to treat cancer, Alzheimer’s and even ebola with essential oils. They also warned Young Living for ads like this from one of their reps:
The fact is that you cannot believe any claim made by an MLM or rep. If a rep claims they are earning an impressive amount of money, ask for a copy of their company’s income disclosure statement to check how the profits are distributed down the pyramid. It will tell a very different story (if their MLM produces one).
8) MLMs damage relationships
This is probably the saddest of all of the truths: MLMs often harm and even destroy reps’ relationships with their family and friends.
MLMs use reps’ relationships as opportunities to sell and recruit, forcing them to approach people they know to buy their products and even join them in the ‘income opportunity’. This experience by ex-Younique rep Elle Beau is just one example:
Sometimes when people leave an MLM they discover that they have lost the support of their family, close friends and social network. Some even remain trapped in MLMs as they no longer have a support network outside of it. MLMs have even apparently contributed to divorces and deaths:
“Divorces and rifts among extended families are commonplace. Even suicides and murders related to MLM participation, have been reported.”
In Malaysia, the Malaysian Chinese Association Public Services and Complaints chief Datuk Seri Michael Chong says that, “he had received cases where people had pleaded with cousins, aunts and uncles to invest in their company because they were not meeting their bottom lines.”
One husband had to divorce his wife and take his children after his partner lost the family’s savings to an MLM. Chong explains why MLMs encourage you to sell to your family:
“It’s easier to influence your cousin or aunty. They trust you. If they see this in an advertisement, they may not believe it but because it’s a relative, they let their guard down.”
And many of these MLM reps are desperate to cover their losses and make their quotas. But as Chong concludes:
“If your friends ask you to join their scheme, they are not your friends. They just want to get their money back and are willing to use you.”
9) MLMs are, by definition, pyramid schemes
All MLM reps will recoil in horror at the very idea they’ve been duped into joining a pyramid scheme. But that’s exactly what has happened.
The definition of a pyramid scheme is “a form of investment in which each paying participant recruits two further participants, with returns being given to early participants using money contributed by later ones.”
And this is just what occurs in an MLM. You pay to join (usually with a starter kit or similar) and then make money from the people you recruit under you (your downline). And the person who recruited you makes money from you.
Also, just like the classic pyramid scheme, only the top tiny percentage in an MLM ever really benefit, as Robert FitzPatrick explains:
“At least half of all “commissions” paid out to all levels of the entire chain are transferred directly to 1-4% of participants positioned at the top of the pyramid each year.”
Don’t believe that statement? Just look at the Herbalife, Arbonne and Stella&Dot income disclosure statements we investigated. Stella& Dot even admit that:
“The typical stylist (including inactives) during 2015 [in Canada] earned between $0 to $100…”
If you were to put this argument to an MLM rep, they would probably respond with the lie many of them have been fed that any company is structured like a pyramid. But as the comment under this visual explains, they’re completely different:
Not only does every managerial layer above you in a legitimate company NOT earn commission from your sales, but you are paid a salary for your time, you receive benefits such as holiday pay, and your work expenses are covered.
You’re not expected to work for free as an unpaid sales rep, with no protection from employment laws – which is exactly what MLM reps are.
We have yet to see any MLM income disclosure statement that tells a different story. ALL their earnings statements are pyramid-shaped, with 99% of reps earning very little (or, as we have learned, actually losing money).
10) MLMs operate like cults
One of the reasons why MLM reps defend their company so passionately is that they use cult-like tactics to recruit and retain people, something MLM campaigner David Brear has long argued. Here are just some ways MLMs are like cults:
- Just like a cult, MLMs offer the promise of a utopian-like existence (in this case making easy money working from home doing what you love, and making new friends).
- Just like a cult many MLMs are led by a god-like figurehead, or have equally worshipped key figures high up.
- Just like a cult they have unscientific, mysterious secrets to success (for example, mindset and the law of attraction). If you fail to be successful you’ll be told you had a negative mindset or just didn’t work hard enough – it’s always your fault, not the flawed model.
- Just like a cult they encourage alienation from any dissenting voices, even from family and friends. So if a friend tries to make you see sense, you’ll be told they’re negative or jealous of your success.
- Just like a cult they use unnecessarily complex structures to hide the truth of their business model. Hence PQVs and seemingly endless status levels, like ‘Purple’, ‘Diamond’ and ‘Crown Princess’.
- Just like cults they use shame and fear to recruit. If you don’t join you’re a ‘wage slave’ trapped in a job you hate on the conventional work-retire-die treadmill.
- Just like a cult they use fear to control. When one high status rep left, all her ‘friends’ in the MLM were warned not to talk to her. She was also discredited and slandered through the spreading of untrue rumours.
- Just like a cult they have an authoritarian grip over their reps. If you question anything you’re shamed for not ‘believing’ or ‘trusting’.
- Just like a cult they use the moral high ground as a cover or diversion – often by associating themselves with a charity or starting their own.
- Just like a cult, MLM recruits often appear to go through a sudden change in personality. One example is the relentless positive social media posts they make. They are not allowed to be ‘negative’ (or even just real).
And finally, just like a cult, MLMs can only exist with unquestioning devotion. If you examine them using cold, hard facts (like their income disclosure statements) they just don’t make sense as a viable business proposition.
This is why they so often use emotion and deflection to shut down any argument. Just try to have an open, honest conversation with someone in an MLM, or the MLM themselves and you’ll discover how hard it is to get facts out of them!
Indeed, we have no doubt that if you show this to a friend in an MLM they’ll dismiss it as lies, rubbish or negativity. But ask them to factually rebut each point and they won’t be able to. They’ll tell you how amazing their own experience is, or that their MLM is different. But it’s not.
In weighing up who may be telling the truth just remember this: there is no financial or other incentive for us to lie to you about MLMs. In fact, the opposite is true; we have turned down requests to promote MLMs for money. However, any MLM rep or the company themselves will financially benefit from convincing you their products or business opportunity is valid.
“How did I get sucked into this?”
Over the past few months we have researched MLMs extensively, and published a number of articles on them. And we have never uncovered one single fact, experience or insight that has made us believe they were a viable business opportunity.
Instead, from what we’ve seen, MLMs rob as many as 99% of reps of money, time, hope, relationships and self-confidence. Some ex-reps are in debt, or left with stock they cannot sell. Many more are overcome by guilt, shame and regret.
So it seems fitting to end this article with the experience of one former MLM rep (taken from this feature about LipSense). Please, if you are considering joining an MLM, heed Michelle’s words and ensure you’re not in that 99%:
“When I sit back and I realize how much money I was in debt and how little I made, I feel stupid… I have a college degree. How did I get sucked into this?”
This article was inspired by a blog by Robert FitzPatrick, president of Pyramid Scheme Alert, a non-profit, non-commercial association to expose, study and prevent pyramid schemes.
Photo by Caroline Veronez