As more people look for ways to make money from home or have dreams of earning income that isn’t from a traditional 9-5, it can be easy for someone to end up involved in MLM scams.
The lure of being an entrepreneur, making money on your own time, and working a flexible schedule is incredible enticing. But if it sounds too good to be true, then 99% of the time it is.
There are many companies out there that fall into multi-level marketing category that are following shady business practices and create a false sense of earning potential. Eventually Leaving you to feel overwhelmed, with little income to show for it.
So if you are new to making money on your own or in the process of a new work from home opportunity, make sure you understand multi-level marketing and the signs of multi-level marketing scams.
Don’t worry if you are unsure about the above, I’ll cover it all below!
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What is Multi-Level Marketing?
Multi-level marketing is a term used to describe a specific business model where companies sell their products through “sales representatives” rather than directly to consumers. And these “reps” also recruit new members and are paid percentages of their sales as well.
These sales representatives are normal people who usually have full-time jobs, and sell these products on the side to their friends, family and local communities.
They purchase product inventory such as nail polish, face cleanser, and supplements at a discount from the company, and then sell it for profit to their communities.
Typically, health, beauty, and other home care products tend to be the most common categories of MLM scams.
The main company does not consider these representatives employees – instead they say that each person is actually managing their own business.
It’s called “multi-level” because every representative gets bonuses and even more profit if they recruit their own sales representative.
The more representatives you recruit, the more commissions you earn. Really, your business has two main sources of income: commissions from other sales reps and selling the product for profit.
How Does Multi-Level Marketing Work?
Usually, it starts with someone inviting you to a sales event and presenting the product, lifestyle of a business owner and the various rewards you can earn as a sales rep.
If you’re interested, you then sign a contract and buy the inventory. It’s then up to you to go ahead and sell the inventory to other people.
So you might be wondering if multi-level marketing is a pyramid scheme. According to the Federal Trade Commission, it depends on where the money comes from.
If you make most of your money selling products to the public, then this is a multi-level marketing business. If you make most of your money recruiting others and gaining a commission from their sales, then it’s a pyramid scheme.
Pyramid schemes are illegal since they rely on recruitment and most people lose a lot of money.
With multi-level marketing , you’re supposed to make most of your money by selling products, but you’ll also earn a “small” commission on the income your sales reps make too.
You’re likely to also receive bonuses and rewards if you sign up new members, and you may even get invited to annual galas, dinners and retreats.
Why is MLM bad?
Not all MLM companies are bad, but generally this business model can cause people to lose money, ruin relationships with friends and family, and can impact your emotional and physical health.
While there are some legit and legal multi-level marketing companies, the industry as whole gets a bad reputation from many of the companies who prey on people.
Many organizations with these business practices promise quite a bit, but never deliver. And others are just pyramid schemes disguised to look like legit companies, yet ends up costing you money and emotional stress.
- According to research at the FTC, 99% of recruited sellers lose money in an MLM venture. That means on average only 1% actually turn a profit.
- A minimum of $25,000 in total expenses is required. This figure includes travel, advertising, computer supplies, giveaways, internet, phone, products, and incentives. (AARP Foundation)
- 90 – 99% of distributors in multilevel marketing only receive a couple of hundred dollars commission per year. (Source)
The Warning Signs of MLM Scams
As I mentioned, there are some legit multi-level marketing companies that you might be considering. Personally, whether legit or not, I would just avoid them at all costs. There are plenty of ways to make money online or from home.
However, if you do find a direct sales company that interests you, make sure you’ve understand these warning signs and red flags that could signal a multi-level marketing scam.
1. Investing a large amount of upfront money
Any “business opportunity” that requires you to invest a large amount of money upfront is suspicious. If they require you to invest hundreds or thousands of dollars, it sounds like an MLM scam. That’s because legit MLM businesses don’t require a huge amount of money to get started with.
2. Emphasis on recruitment
Pyramid schemes rely more on recruitment than selling products. If the other people in the business want you to focus on recruiting others rather than selling the product, that’s a sign that it’s a scam.
3. Strong sales pitch
MLM scams rely mostly on recruitment, so they prepare intense sales pitches to get people on board.
In order to keep earning more commissions, a sales representative needs to constantly find new people to recruit, and this is usually done at a sales pitch.
It’s usually a small conference or event with a PowerPoint describing the benefits of the product and the lifestyle that comes with earning more money.
If you’re invited to an event that seems like a lifestyle sales pitch, don’t bother going.
4. Cult-like community
Since lifestyle and recruitment is a large part of pyramid schemes and MLM scams, the entire business almost seems like a cult.
If you attend a meeting, you’ll see how they all gang up on someone to recruit them, or how hard they push the benefits of “being your own boss”.
You’ll also hear many backstories of how these representatives went from broke to financially secure thanks to selling these products, as well as other dodgy sales tactics.
5. “Revolutionary” products
At the sales events, you’ll notice how the products that are sold are described as “revolutionary.”
Many of these are beauty products, health and wellness items or products that promise miracles.
They’ll mention that the products reverse aging, get you super fit or cleanse your body of “toxins.”
This is a screaming sign that the products are full of BS and tend to be riddled with basis claims of results.
6. Pressure to buy inventory
The first thing these sales reps will want you to do is to buy the upfront inventory. This is what gives them a commission and adds you to their downline.
If one of the reps start implementing high-pressure sales tactics and trying to get you to buy the inventory right there and then, that’s a red flag.
It’s okay to have some samples upfront, but you should be buying boxes and boxes of product.
7. Terrible reviews
Search the company up on Google and read the reviews. If you see multiple people saying they lost a lot of money and that the company is a scam, it most likely is.
If the sales reps keep trying to defend the company and say that it’s not an MLM scam, it most likely is. Real companies don’t need to defend their business model or have a wave of obvious fake positive reviews.
Also, make sure to look the company up on the Better Business Bureau to see what kind of complaints the company may have received. If there are no responses or efforts to fix the complaints, you have yourself another red flag.
8. Misleading advertising or information
When it comes to many MLM businesses that are not following best business practices, you’ll find them to be misleading.
Whether that is the potential you can make, advertising how amazing the product is with no valid results, or promoting the work as a genuine “job.”
If you are offered income guarantees from your promoting efforts or selling how you barely have to work to make good money, your MLM scam senses should be tingling.
Businesses That Might Be MLM Scams
Now that you know some of the warning signs of multi-level marketing scams, are there any businesses that are known to fit in that category?
There are plenty and you may have come across news articles detailing the business and any investigations they may be a part of currently.
Below are a few that have fallen under the “MLM Scam” category at some point or have had some sketchy past issues.
HerbaLife is one of the oldest and most well known MLM scams in the world that focuses on selling health and beauty products. It was founded back in the 1980s and began as a pyramid scheme, where most recruits made money on commissions from other sales reps.
In 2016, they were sued and forced to refund the money of more than 350,000 people who had lost money through Herbalife. This huge settlement forced HerbaLife to restructure and become more of a legit MLM.
Still, almost half of low-level sales representatives pull out every year due to not making any money. And even today, articles about the business being a scam are written, like this one in Barron’s.
Arbonne was founded in 1975 and also sells skin care products. Most people purchase their inventory and then sell the products on social media.
Although they have a few fans, many people describe them as an MLM scam. While the company has try to ensure more legitimacy, there has been a few articles about people losing money or feeling scammed. Arbonne was covered in The Guardian back in 2019.
They file for bankruptcy reorganization back in 2009, and although now stable, most sales representatives admit that they don’t make much money.
Neora is another skincare MLM company that is a lot more expensive than other companies. It offers some anti-ageing products that cost as much as $250. Not only that, but some of their products have been deemed unsafe due to the use of toxic plants.
They’ve also claimed that their products help treat Alzheimer’s disease, concussions and other diseases.
In 2019, the FTC filed a lawsuit against Neora due to the fact that it’s illegal to advertise a product that treats a disease without appropriate scientific backing.
There are plenty of other creative ways to make money, that even legit MLM companies are not really worth your time. While they might be alluring, you are better off staying away.
Hopefully the above convinces you of that and you recognize the signs of potential MLM scams.