Is Multi-Level Marketing a Scam? Here’s How You Can Tell the Difference Between an MLM and a Pyramid Scheme

Multi-level marketing and direct selling are big business. In the U.S. alone, more than 18 million people — 73% of them women — have signed on as direct sellers with companies like LuLaRoe, Rodan + Fields, Amway, and Herbalife. Collectively, these companies did $35 billion in sales last year, according to the Direct Selling Association, as people snapped up leggings, flameless candles, essential oils and other products.

Herbalife

Herbalife | Frederic J. Brown/AFP/Getty Images

With numbers like that, plus the promise of freedom and flexibility that comes with being your own boss, is it any wonder that many see joining an MLM as a path to the good life? For stay-at-home moms, those who want a more forgiving work schedule, or anyone looking to make some extra cash on the side, it sounds like a golden opportunity.

But there’s a darker side to the MLM hype. Some say that these companies are little better than pyramid schemes. Rather than offering a legitimate path to success, critics say, MLMs are more likely to leave participants broke and frustrated.

What is multi-level marketing?

In direct sales, an individual salesperson sells products – like Tupperware or Mary Kay cosmetics — directly to others. Many people start by selling to people they know — their friends, family, and people in the community. The most successful sellers branch out, perhaps promoting their product through social media or selling at events.

MLMs add another element to the equation. People who work with MLMs don’t just make money through the products they sell. They also boost their earnings by recruiting new sellers to the company. These new sellers make up their “downline,” and the recruiter earns money when they sell products. Most, though not all, direct selling companies are MLMs.

The structure of an MLM looks a lot like a pyramid, which is one reason why some people think of them as scams. But there are some important differences between an MLM and a pyramid or Ponzi scheme.

Are MLMs pyramid schemes?

MLMs aren’t necessarily pyramid schemes, but the two share certain characteristics, which can make it hard to tell the difference between a legitimate opportunity and an outright fraud.

In a legitimate MLM, the focus is on a product that has inherent value. While recruiting other salespeople might increase your earnings, it should be possible to make money just by selling.

In pyramid schemes, there is no product, or the product that’s being sold is worthless, explains Investopedia. The only way to make money is by convincing more people to “invest” in the scheme, which will eventually collapse.

Here’s how the FTC explains the difference:

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.

MLMs that promise big earnings with little effort, require you to purchase a large amount of inventory upfront without a guarantee that you can return the product, and request start-up fees in cash or via money order or wire transfer might be scams, says the Better Business Bureau.

MLMs are a risky business  

Mary Kay makeup

Mary Kay makeup | Anna Webber/Getty Images for Mary Kay

Not every multi-level marketing business is a pyramid scheme. But just because something isn’t an illegal scam doesn’t make it a good business opportunity.

It’s not hard to find stories of disappointed direct sellers. Ninety-nine percent of people who sign up with MLMs lose money, according to one study and many companies exaggerate or misrepresent the amount of money sellers can earn, a Truth in Advertising investigation found. LuLaRoe, which makes patterned leggings and dresses, has been hit with lawsuits from former consultants who say the company is a scam.

Even if a company offers real products that people actually want to buy, that doesn’t guarantee success. Being good at sales is crucial. You also need to be willing to put in time to grow your business. And you need to pick the right company. Not only should it offer a good product at a reasonable price, but you must understand the rules about how much you’re expected to buy, and how sales, returns, and recruiting work. And if everyone on your block is already selling the same thing, forget about. The market is probably saturated.

“[E]ven the Direct Selling Association, the trade industry group, says the average income that people make from these types of companies is about $2,500 a year, which is, you know, maybe part of a vacation or something like that, but it’s not a full-time income at all,” Claire Suddath, a journalist who’s written about LuLaRoe, told WBUR. “And so you should be very wary of companies that claim that you can earn full-time income for part-time work.”

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