What is MLM? What are the red flags of MLM scams?

  • Published: Apr 24, 2024
  • Last Updated: May 06, 2024

MLM (multi-level marketing) business models are believed to have existed since the 1920s - it is estimated that approximately over 1,000 companies in the US currently use this model. MLM has gained immense popularity over the past years, especially among individuals who wish to earn extra income, want flexible work opportunities, have financial independence, or become entrepreneurs without the associated risks and overhead costs of starting a business. However, MLM is also often controversial and faces criticism because of its strong resemblance to pyramid schemes (these typically place more emphasis on recruiting new participants than selling a product or service). 

As such, it is important to approach MLM opportunities cautiously, conduct due diligence, and look for potential red flags to avoid falling for a pyramid scheme. In addition, due to the online nature of many MLM activities, it is critical to be aware of phishing attack and ensure robust privacy practices to protect finanacial and personal information.This article will explore how MLM works, discuss the potential pitfalls of this business model, and show you how to discern between legitimate MLM opportunities and MLM scams.

MLM (multi-level marketing

What is MLM?

MLM is a business strategy where a company sells products or services directly to customers through a network of independent distributors (sometimes called participants, contractors, or affiliates). These distributors are typically not paid salaries by the company; instead, they receive commissions from the products or services they sell. In many cases, the distributor also earns commissions by recruiting new distributors and for subsequent sales made by these recruits. MLM companies typically have a hierarchical structure that consists of three main tiers:

  • The company that makes or supplies the product or service is positioned at the top
  • Independent distributors are in the middle. These distributors are incentivized to sell the products and services and recruit others to join the MLM network
  • A downline consisting of individuals recruited by the independent distributor. These recruits also become distributors and get more recruits, forming a network beneath them. The more recruits and sales made within the network, the higher the potential earnings for each distributor

Given the pyramid-shaped structure of MLM companies, many people confuse them with pyramid schemes. However, a legitimate MLM company focuses on selling products and services, while a pyramid scheme typically emphasizes recruiting new distributors, most times without offering a legitimate product or service. 

Common Misconceptions about MLM

The most common misconception about MLM is that it is a pyramid scheme. MLM is also often erroneously portrayed as a get-rich-quick scheme that offers easy money with minimal effort. While there are several legitimate MLM programs, there are also MLM scams that utilize these misconceptions to exploit unsuspecting individuals. 

The table below lists common misconceptions and myths surrounding MLM and points out the actual reality of these programs:

MYTH

REALITY

MLM is a scam.

While there are instances of fraudulent MLM programs and scams, there are also many legitimate MLM companies that offer quality products or services and provide opportunities for interested individuals to earn additional income (through direct selling and recruiting). These legitimate companies typically also put mechanisms in place to prevent their programs from being hijacked by scammers.

Only the people at the top make money in MLM.

Yes, MLM is typically structured such that distributors at top levels earn more money (via commissions) than those at lower levels, especially if the former has a large downline. Nevertheless, lower-level distributors can still earn commissions through their sales efforts and by increasing their own networks.

MLM is illegal.

MLM is not illegal. Legitimate MLM companies operate within legal boundaries and comply with applicable local, state, and federal laws and regulations governing business practices and deceptive marketing.

 

However, be aware that unscrupulous individuals (and companies) may disguise themselves as a legit MLM program to pull off MLM scams and pyramid schemes.

MLM is a get-rich-quick scheme.

Building a strong, successful network and earning substantial income through MLM requires effective sales and networking skills and also takes time, effort, and persistence.

It’s all about recruitment.

Legit MLM companies focus on selling genuine products or services and typically provide proper training and support to distributors to help them with this.

What is an MLM Scam?

Legitimate MLM companies typically focus on selling their products or services and pay distributors based on their sales performance, regardless of whether they recruit new distributors. A legit MLM program also operates openly and provides clear information about the company, the products or services being sold, and the payment plan for distributors. On the other hand, an MLM scam operation typically focuses on recruiting people into the scheme and often pressures participants to do this and build a large downline instead of actually selling any products or services. In many cases, there is no genuine product or service being sold; when available, these products and services are usually overpriced, low-quality, or have no actual value or use outside the business. 

The main goal of an MLM scam is to get as many people as possible to join the scheme and invest money without getting anything of real value in return. MLM scams typically do this by making unrealistic promises of easy money, using high-pressure tactics to persuade individuals to invest, and withholding vital information to manipulate people into joining the scheme. 

Red Flags and Warning Signs

Here are some common red flags that indicate an MLM operation may be a money laundering scam:

  • There are no genuine products or services, or only low-quality ones
  • There are outrageous and unfounded claims about the product or service
  • The recruiter makes exaggerated claims and unrealistic promises about your earning potential 
  • The recruiter uses high-pressure sales tactics or tries to play on your emotions to get you to sign up for the program
  • There is an overemphasis on the need to bring in new recruits 
  • The company does not clearly communicate details on its products, services, compensation plan, and other relevant information 
  • You are pressured to buy and stock more products than you can use or sell, usually with the promise of additional bonuses or other rewards
  • There is an upfront fee to sign up 
  • There is a high initial investment cost that does not correlate with the type or quality of products and services available 
  • The company has poor reviews on websites like the Better Business Bureau and other trusted platforms 
  • The company cannot provide documented proof of revenue attained from retail sales

How to Spot MLM Scams

When it comes to MLM, being able to distinguish between legitimate opportunities and MLM scams is crucial. Some signs to watch out for include:

  • Exaggerated earning claims
  • Overemphasis on recruitment over actual product/service sales
  • Overpriced or low-quality products
  • High-pressure sales tactics 

Research and Due Diligence

Before getting involved in any MLM program, you should take the time to do your due diligence by:

  • Researching the company and looking into its background, history, and reputation
  • Considering the products and services being sold and determining if they are competitively priced and have actual real-world uses or benefits
  • Checking with your local consumer protection agency to verify if the company is registered and if any complaints or legal actions have been taken against it
  • Considering all associated costs (such as sign-up fees and the cost of training or marketing materials and seminars). Determine whether these costs are optional and if opting out will make you ineligible for bonuses, rewards, or commissions 
  • Carefully reading all the paperwork you are given. It is also advisable to get a friend or advisor to review this paperwork as well

Questions to Ask Before Joining

Here is a checklist of crucial questions to consider before signing up for an MLM program:

  • What are the company’s policies and procedures regarding sales and recruitment?
  • Are the products or services offered of genuine value and demand?
  • Is more emphasis placed on sales over recruitment?
  • What is the compensation plan, and how do distributors earn money?
  • Are commissions based on actual sales or the number of new recruits introduced to the program?
  • Do you want to be a salesperson?
  • Do you have a solid sales plan?
  • Can you realistically achieve success without relying solely on recruitment?
  • What are the return policies for products, and are there any hidden fees or requirements?

Approaching any MLM opportunity with a healthy dose of skepticism and critical thinking, conducting thorough research, and asking these questions can help you make an informed decision and avoid MLM scams. 

Protecting Yourself from MLM Scams

You can protect yourself from potential MLM scams by taking the following precautions before getting involved with an MLM program:

  • Thoroughly vet the program. This should include conducting research on the company and its products/services and checking reviews and testimonials from current and former distributors to get a sense of their experiences and also gain insights and perspectives
  • Pay close attention to the company’s compensation plan and take the time to understand how distributors earn money in the MLM program
  • Be skeptical of MLM programs that focus on recruiting new members over retail sales
  • Protect personal data by ensuring the company has robust privacy policies and practices in place to safeguard your information

Legal Recourse and Reporting 

MLM companies must comply with federal, state, and local business practice and marketing laws and regulations. If you suspect that a pyramid scheme is disguised as a legit MLM program or have fallen victim to an MLM scam, report the matter to your local consumer protection agency (or any relevant regulatory body in your area). You can also consider consulting an attorney for additional options and possible legal action against the fraudulent company.

Best Practices for Avoiding Scams

Here are best practices to avoid pyramid schemes and reduce the risk of falling victim to MLM scams:

  • Always approach MLM opportunities with caution
  • Do your due diligence before signing up
  • Be wary of offers that are too good to be true
  • Demand straight answers
  • Avoid companies that emphasize recruitment over retail sales
  • Avoid companies that do not have a clear line of communication or readily available information on their products and services
  • Ask trusted friends, family members, and mentors for advice and guidance before signing up for any MLM program
  • Review the contract carefully
  • Be wary of MLM programs that claim to have been enforced by a government agency
  • Be wary of distributors that encourage you to take a loan or open a new line of credit to sign up or purchase inventory 
  • Always trust your instincts 

Conclusion

In conclusion, while MLM may seem like an easy business opportunity, it requires hard work, persistence, critical thinking, and vigilance. According to the Federal Trade Commission, many people who join MLMs financial fraud; the loss is usually more severe for individuals who fall for an MLM scam disguised as a legitimate program. By taking proactive steps to vet MLM opportunities, recognizing the signs of a potential scam, such as exaggerated promises and a focus on recruitment over product sales, and understanding your rights, you can protect yourself from these MLM scams. 

Conduct thorough research and seek advice from professionals and trusted sources before committing to any MLM program. Lastly, remember to trust your instincts – if something feels off or too pushy, walk away. Erring on the side of caution is always better than falling victim to an MLM scam.

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