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Watch out for multilevel marketing schemes

Multilevel Marketing Scheme from FTCWhen I was writing my weekly Helpful Money Tips for You newsletter (see Newsletter heading above to subscribe), I ran across an article by a women who was upset because a new coffee shop in her area turned out to be secret “nutrition club,” a recruiting tool for Herbalife.

It included a video from 2016 by John Oliver on “Multilevel Marketing.” The video, above, is fabulous. I watched the entire video, even though I should have finishing my newsletter.

I suggest every consumer should watch the video on the dangers of multilevel marketing or MLMs. It lays out in a thorough, and interesting way, why you should never get involved in a multilevel marketing scheme.

Another article that I ran across and linked to in my newsletter, “When the Women in Your Life Join MLMs,” also was highly critical of MLMs. It’s worth reading, too.

Some MLMs include:

  • Amway
  • Arbonne
  • Avon
  • Cutco
  • DoTerra
  • Herbalife
  • It Works!
  • LuLaRoe
  • Mary Kay
  • Melaeuca
  • Monat
  • Norwex
  • Pampered Chef
  • Paparazzi
  • PureRomance
  • Rodan and Fields
  • Scentsy
  • SeneGence
  • Vector Marketing
  • Vemma
  • Young Living
  • Younique
  • Zyia

If you’re approached by someone asking you to consider being involved in an MLM, be highly skeptical. Some MLMs are illegal pyramid schemes.

Most people who join legitimate MLMs make little or no money. Some of them lose money. People who become involved in an illegal pyramid scheme may not realize they’ve joined a fraudulent venture, and usually lose everything they invest. Some also end up deeply in debt.

The Federal Trade Commission offers these tips on what you should know about MLMs and pyramid schemes, along with what you should do before joining an MLM program.

What are MLMs and how do they work?

MLM companies sell their products or services through person-to-person sales. That means you’re selling directly to other people, maybe from your home, a customer’s home, or online.

If you join an MLM program, the company may refer to you as an independent “distributor,” “participant,” or “contractor.” Most MLMs say you can make money two ways:

  • By selling the MLM’s products yourself to “retail” customers who aren’t involved in the MLM.
  • By recruiting new distributors and earning commissions based on what they buy and their sales to retail customers.

Your recruits, the people they recruit, and so on, become your sales network, or “downline.” If the MLM isn’t a pyramid scheme, it will pay you based on your sales to retail customers, without having to recruit new distributors.

What’s a pyramid scheme and how do you spot one?

Pyramid schemes are scams. They can look like legitimate MLM business opportunities, but if you become a distributor for a pyramid scheme, it can cost you and your recruits time and money.

The promoters of a pyramid scheme may try to recruit you with pitches about what you’ll earn. They may say you can change your life – quit your job and even get rich – by selling the company’s products.

Your income would be based mostly on how many people you recruit, not how much product you sell. Pyramid schemes are set up to encourage recruitment to keep a constant stream of new distributors – and their money – flowing into the business.

Often in a pyramid scheme, you’ll be encouraged or even required to buy a certain amount of product at regular intervals, even if you already have more inventory than you can use or sell.

You may even have to buy products before you’re eligible to be paid or get certain bonuses. You also may have to pay repeated fees for other items, such as training sessions or marketing materials. In addition, the company may say you can earn lavish rewards, such as prizes, bonuses, exotic vacations, and luxury cars.

However, it often turns out that you have to meet certain product purchase, recruitment, training, or other goals to qualify for the rewards, and only a handful of distributors ever qualify.

Eventually, most distributors find that no matter how hard they work, they can’t sell enough inventory or recruit enough people to make money. They also can’t keep up with required fees or the inventory purchases they need to make to qualify for rewards, and they can’t earn enough money to cover their expenses.

In the end, most people run out of money, have to quit, and lose everything they invested.

Here are some warning signs of a pyramid scheme:

  • Promoters make extravagant promises about your earning potential.
  • Promoters emphasize recruiting new distributors for your sales network as the real way to make money.
  • Promoters play on your emotions or use high-pressure sales tactics, maybe saying you’ll lose the opportunity if you don’t act now and discouraging you from taking time to study the company.
  • Distributors buy more products than they want to use or can resell, just to stay active in the company or to qualify for bonuses or other rewards.

Is an MLM right for you?

If you’re considering joining an MLM, know that some MLMs may not be a wise investment. Other MLMs may not be a good fit for your interests and lifestyle.

Here are some tips to help protect yourself against a bad MLM experience:

Ask questions.

  • Do you want to be a salesperson?
  • Do you have a solid sales plan?
  • What are your income goals?
  • Can you afford to risk the money and time?

Do your homework.

  • Research the company. Search online for the name of the company and words such as review, scam, or complaint. You may also want to look for articles about the company in newspapers, magazines, or online. Does the company have a good reputation for customer satisfaction? Check with your state attorney general for complaints.
  • Research what distributors are saying. Individual distributors often post training videos online to promote the MLM. Search for them. Be suspicious if the trainings make earnings claims, tell you that the fastest way to make money is to “recruit, recruit, recruit,” or suggest that all you need to do to build a downline is “find two people who find two people.” Claims like these are distinguishing characteristic of a pyramid scheme.
  • Consider the products. MLM companies may sell quality items at competitive prices. But some offer goods that are overpriced, have questionable benefits, or are unsafe to use. For example, be skeptical about health products advertised as having “miracle” ingredients or guaranteed results.
  • Understand the costs. Many MLMs make you buy training or marketing materials, or pay for seminars on building your business. You may need to book travel and pay for hotels and meals. Make sure you know what you’re required to pay for, and how much it will cost over time. If the company says some of these things – such as periodic product purchases or training – are optional, find out if you’ll become ineligible for bonuses or rewards if you opt out of them.
  • Ask about refunds. In many MLMs, before you can start selling the products, you have to buy them from the company. Get the company’s refund policy in writing. Make sure it includes information about returning any unused products, including restrictions and penalties. Consider whether you’ll get a full refund or only a partial one – and how long it may take.
  • Read the paperwork and have a friend or advisor review it. Read the company’s sales literature, business plan, disclosure documents, and any contracts or agreements you’ll need to sign. Ask an accountant, a lawyer, or someone else you trust – and who isn’t affiliated with the company – to help you review the MLM’s materials. Ask them to look at your possible earnings and whether the company can back up its claims about how much money you can make. Ask for their honest opinion about whether they think the MLM is legitimate and a good fit for you.

Talk with current and past distributors about their experience in the MLM.

Ask tough questions and dig for details. Don’t consider it nosy or intrusive: you’re thinking about starting a small business. A good businessperson needs those answers.

Here are some questions to ask:

  • How long have you been in the MLM?
  • How much money did you make last year, after expenses?
  • What were your expenses last year?
  • Have you borrowed money or used your credit card to fund your business? How much did you borrow? How much do you owe?
  • Do you need to have recruits to make money?
  • How many people have you recruited? How many did you recruit last year?
  • How many of your recruits have left the business?
  • What percentage of the money you made came from selling the product to customers outside the MLM?
  • What percentage of the money you made – income and bonuses less your expenses – came from recruiting other distributors and selling them inventory or other items to get started?
  • How much time do you spend on the business?
  • How much inventory did you buy from the MLM last year? Did you sell all of your inventory?

You’re trying to determine if a potential business deal that will require your time and money is right for you. The information you learn can help you decide whether it’s really a deal, a dud, or illegal.

Comments

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Carol Cassara

I have to admit that I make regular purchases from two of my friends in such a program. A legit one, but still. I know how it works. But the products are good quality. I wouldn't be a rep though.

Rita

Carol, I'm glad the products you are buying friends through multilevel marketing are good quality. I wouldn't be a rep either.

Jennifer

I know several people who do this but none do it for their sole living. Two are doing it to fund their vacations and the other is retired and started doing it to earn enough money to pay for her own product usage but now is also supplementing her income for trips.

Rita

People just need to be aware of the pitfalls so they don't lose money.

Rebecca Forstadt Olkowski

I actually became a director in one of those companies you mentioned and earned 3 cars but I agree that very few people make a profit in them including me even though I made it to the top 2 percent. The products are usually overpriced. They will claim it's a cheap way to run a business but there is a high overhead with meetings, inventory, networking, etc. I am much happier with affiliate marketing because it costs literally nothing other than a simple website, which you don't have to spend much money on and you can make a few extra passive bucks selling products you truly love and use without having to "sell" them.

Rita

Rebecca, wow, three cars. You must be a fantastic salesperson. Thanks for letting us know about your experience. I'm so glad affiliate marketing is working for you.

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