Multilevel marketing has a unique business model. It’s not uncommon for people to go into debt trying to see any kind of success, and even purchasing products from an MLM will likely cost far more than anticipated.
“The problem generally with multilevel marketing is that it's purely profit-driven,” said Randall Oveson, a former distributor. “They always have an undertone of religiosity, they always have an undertone of wanting to help other people. ... What nobody really tells you is that, if you buy a product through an MLM, you're going to pay a minimum of twice as much as it would cost if it was just sold directly at a store. Because there's always the need to take a huge portion of every sale and put it in a bucket to get divided out amongst everybody.”
MLMs are often compared to pyramid schemes, and sometimes what one might think is an MLM is actually a pyramid scheme in disguise.
According to Investopedia, “a pyramid scheme is a sketchy and unsustainable business model, where a few top-level members recruit newer members, who pay upfront costs up the chain, to those who enrolled them. As newer members in turn recruit underlings of their own, a portion of the subsequent fees they receive is also kicked up the chain.”
Technically not all MLMs are pyramid schemes, but whether they are or not, they function in a similar way to each other.
According to the Federal Trade Commission, an MLM is a company that sells their product through person-to-person sales. They typically promise that you can make money in one of two ways: selling products to customers or recruiting new distributors and earning commissions from what they buy and sell. “If the MLM is not a pyramid scheme, it will pay you based on your sales to retail customers, without having to recruit new distributors.”
The FTC continued by listing the warning signs of a pyramid scheme disguised as an MLM:
“— 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.”
These signs may sound familiar — they can be found in the recruiting tactics used by most companies recognized as MLMs.
In some cases, founders of an MLM may build their business model first and then create a product to sell. Marilyn Oveson, a former distributor of multiple MLMs, recalled hearing about a business plan from some men she knew from church.
According to her, two men who worked for another MLM were pushed out of the company, so they decided they’d move elsewhere and start an MLM of their own selling a similar product. They approached a group of scientists to formulate the product in a way that was different enough from the product they had previously sold that they wouldn’t get in trouble.
“They came in with an MLM, how they wanted to see it work, and a product list,” Marilyn Oveson said. “That was all they had. What they were really looking for was something to carry forward their MLM so they could make money out of it.”
They built the company around a business model rather than a product, perhaps for the purpose of making as much money as possible.
“(It becomes) insupportable,” Marilyn Oveson commented. “The people down at the bottom don't have a prayer … and they're making a fortune up on top. They can be making a fortune off of jack shit, but this whole mentality is sickening.”
Many have become frustrated by companies that choose to sell a product under the MLM business model.
“If you've got a good product, great,” Marilyn Oveson said. “Either promote it and sell it online for a great price, or else connect yourself to the health food stores or whoever, and sell it that way.”
Randall Oveson recognizes why people start businesses under this structure. He said it’s a deceptive way to get more money for those at the top.
“If you have a good product and you want to provide it at the best price to somebody while still making a fair profit, an MLM is not the way to do it,” Randall Oveson said. “An MLM is the way to do it if you want to play on people's emotions, if you want to deceive people and try and get them in, thinking, 'Hey, not just are you going to get this with this product, but you're going to make a lot of money.'”
Renee Carver, another former MLM distributor, also notices the flaws in the model and how it hurts the people at the bottom of the pyramid.
“I personally don't even purchase products from MLMs,” Carver said. “Even though I support the people who may be selling them and respect their hustle, I don't appreciate the companies that are abusing them, whether they recognize it or not.”
Many people have chosen to participate in this business model because they promise great results from the products or an opportunity to make tons of money, but whether or not to join is a serious decision. The FTC encourages those interested in joining MLMs to do their homework by talking with current and past distributors and researching the company and its products.