How to Spot a Shady Multilevel Marketing Scheme

black and white Hustle-printed ceramic mug on table
by Advice Chaser
by Advice Chaser

Nowadays, a lot of us find ourselves in need of a side hustle. Maybe you have a decent job but can’t make ends meet due to rising costs of living. Maybe you’re home taking care of your kids and hoping to make a few bucks during naptime. If you’re in this situation, you’ve probably heard of multilevel marketing and want to know if it’s a legitimate business opportunity or a scam.

Or maybe you’ve been hearing a lot about scammy marketing schemes, and want to know how to spot one before sinking your time and money into it.

black and white Hustle-printed ceramic mug on table

Network Marketing, MLMs, and Pyramid Schemes

At their most basic, direct sales companies sell their products using a format known as network marketing. Companies that use network marketing don’t stock their product in stores. Instead they depend on person-to-person sales by independent representatives. One of the most iconic forms of network marketing is the “Tupperware party,” wherein consultants would invite other women to their homes to socialize and sample their wares. 

Network marketing sometimes has just one level—consultants selling to customers. However, many companies have multiple levels of consultants, leading to the term multilevel marketing. In addition to earning commissions and/or free products from sales, consultants make money by recruiting other consultants, encouraging them to recruit other consultants, and so on. These other consultants are known as your downline. Consultants will generally make a commission whenever anyone in their downline purchases a product. They will also often make a commission whenever anyone in their downline sells a product. 

You might be thinking to yourself: wait, if there are people at the top who recruit more people who recruit more people, isn’t that a pyramid scheme? The answer is a definite maybe! 

Pyramid Schemes

The primary difference is that pyramid schemes are illegal and (some) multi-level marketing is not. The Federal Trade Commission, responsible for regulating and arbitrating these sorts of issues, says that promoters of a pyramid scheme will make lavish promises about your earning potential while emphasizing that the best way to earn money is to recruit more and more people. In a legitimate multi-level marketing system, you will be able to make money—though not necessarily much—simply by selling the product to customers. Promoters of pyramid schemes also often use pressure tactics to get you to buy in and then keep you committed. For example, they might make a “limited time offer!” in an attempt to convince you to join up quickly without doing your research. 

Questions to Ask

So how do you avoid scams without avoiding direct sales altogether? As with any other financial venture, you have to do the research. That includes searching the internet for third-party information. Searching the name of the company and “legitimate” or “scam” will often turn up reams of statistics and testimonials.

Find out how current consultants make their money. If they won’t tell you when you ask, that in itself is a red flag. Do they make most of their money from sales or do they focus primarily on cultivating their downline? Does the company require “inventory loading”? This is when the company makes you buy a massive amount of their product before you can even begin selling. This means you start off your consultant relationship deep in debt. Does the company guarantee a refund on unsold products? If not, you run the risk of having a basement full of expensive products you can’t sell.

Also consider whether the market for whatever you’re selling is already saturated. If your entire friend group is all part of the same downline, then who’s left to be customers? Will you be selling to people who already have half a dozen others trying to sell them the same thing?

Most importantly, remember that just because a company technically avoids breaking the law doesn’t mean you can trust them with your hard-earned money. 

Multilevel Marketing and Mompreneurs

According to the Direct Selling Association, in the U.S. about 74% of representatives working for various network marketing companies are female. Why is that? Is it just because MLMs coincidentally sell cosmetics and home goods and leggings, products undeniably more popular among women? Or do MLMs exploit deeper vulnerabilities?

Some of the earliest MLMs, in the 1950s, targeted mothers returning home after the boom of women workers during WWII. Having Tupperware parties allowed women to earn a little money of their own while still cultivating the ideal “homemaker” aesthetic that was the hottest trend of that era. 

Even 70 years later, many women face pressure to be homemakers even while facing financial pressures. MLMs will frequently play up the “mompreneur” image—an updated 1950s housewife who can make money, stay home full-time with her kids, and still be put-together and energetic when her husband gets home at the end of the day. 

It’s hard to resist the idea of gaining financial independence while chatting with your friends about a product you already enjoy. However, the vast majority of MLM sellers will not make money, let alone enough money to cover their expenses. For every success story testimonial shared with new recruits, there’s a blog full of horror stories. Some people spend their life savings or take out a loan only to find themselves with thousands of dollars worth of inventory they can’t even give away. Some networks pressure sellers to put on a social-media show of wealth, but in reality, 99% make nothing or lose money.

Find a Side Hustle Without Going Bankrupt 

So what do you do if you need an extra source of income but don’t want to get scammed? First, of course, you can consider opportunities that don’t involve multilevel marketing. A good sales job will pay you a base salary rather than expect you to purchase your own inventory. Second, do your research. Get a trusted friend or relative to look over any job opportunities with you to make sure you aren’t being dazzled by promises that aren’t backed by facts. Take only as much risk as you can actually afford to take. 

If you want a professional to help you sort fact from fiction, contact us to connect with an experienced financial advisor. 

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