Do Multi-Level Marketing Companies Differ From Pyramid Schemes?

Chris Parker first learned about the Tower Garden while attending a business networking event hosted by his local Chamber of Commerce, and thought the innovative growing system might make a lovely gift for his wife.

A self-employed business and marketing consultant, Chris hoped to trade some of his services in exchange for a free Tower Garden instead of purchasing one outright. He kept in touch with the distributor who’d initially introduced him to the product, eventually accepting an invitation to another distributor's even to see the garden in action.

During that time, it just so happened that Chris was already considering alternatives to supplement his income. So, when the event turned out to be about another line of products, Juice Plus+, and he was presented with the chance to become a distributor for only $50, Chris decided to jump on board.

A Great Product That Will Practically Sell Itself

“I wouldn’t say I got caught up in the excitement, as much as I realized from a salesperson’s perspective how easily others could,” said Chris. “I was confident I would have success with the Tower Gardens, and pretty sure I would get some folks on board with eating the Juice Plus+ line of stuff as well. After all, what was $50?”

Just two weeks later, Chris found himself driving all the way from his home in Dallas-Fort Worth to Phoenix for what’s called a Leadership Conference—a kind of Multi-Level Marketing event designed to get everyone pumped up for sales.

“That is where the excitement and thoughts of ‘Hey, I can really do something with this’ really kicked in,” remembers Chris.

“I came back to Texas more fueled and excited about it than I ever thought I would be. I purchased the full line of Juice Plus+ products for myself, my wife, and our two children. We also purchased three Tower Gardens. I knew I couldn't sell it if I didn't own it!”

Chris harness the spark of excitement he felt at the Leadership Conference and started actively looking for opportunities to showcase the Tower Garden. He was exhibiting regularly at local fairs and shows around Dallas and Southern Oklahoma, showing the Tower Garden off every at every possible chance.

When not devoting time to promoting the Tower Garden, Chris attended team events, National Leadership Conferences, and guest speaker events. The excitement was contagious, and Chris found himself inviting all of his friends to join. With each successful recruitment, Chris was promoted up to another level of commission until he reached the top possible tier.

You Won’t Believe It ‘Till You See It

But, after two years of pouring every moment of time and energy into promoting the Tower Garden, Chris was forced to take an unbiased look at his bottom line. What he realized changed everything.

“By this time, I was averaging about $600 per month from my commissions. According to The Plan I should have been earning three times that,” said Chris.

“When I averaged it out over the course of the two years it was closer to $300 per month, including the bonuses earned by various accomplishments.”

Even more shocking than the minimal earnings were Chris’s costs. “I was spending about $250 per month on the products for my family alone. When I added up what I had spent for our own products, all of the events, shows, presentation equipment, flyers, etc., I had spent close to $20,000 at this point. I'd only been paid around $8,000 total.”

“I had spent close to $20,000 at this point. I'd only been paid around $8,000 total.”

After evaluating his income and costs, Chris decided that he had to step aside. He stopped taking part in any aspect of the business that required money to be paid, including the events, exhibiting in trade shows, and other promotional activities.

He says of his experience, “I love the people I've met, the health benefits that my family has had, the health improvements I've seen in others, and those I was able to help. Some of the stories sound truly miraculous, and they are 100 percent true. I saw these things with my own eyes!”

“The problem with miracles, is that no one believes them. I realized that I did not know enough people (or people of people) to convince enough that these things were possible with fruits and vegetables in a capsule. At least not enough to earn a living off of that was sustainable.”

Chris has no intention of working the business again. However, he’s still an active distributor with the company with has an active team under him, and continues to pay his Distributer Fee of $50 per year.

“I spend about $200 per month on the products that I family consume. I believe with all of my heart in the benefits of the Juice Plus+ line of products, and we never miss a day (not even my five yr. old). I earn just about enough commissions to cover my cost of using the product...and that is enough for me.”

Chris Parker wound up spending $12,000 on a plan that promised to help him earn income. You might be thinking, “Surely, this is some kind of fluke!” Unfortunately for the tens of thousands who are lured in by multi-level marketing promises, you’d be wrong.

Companies that use multi-level marketing models for compensation have frequently been the subject of criticism and lawsuits due to high entry costs in the way of marketing kits and products, emphasis on recruiting other distributors over actual sales, and the cult-like methods that some groups keep up their member’s enthusiasm for the program.

But, before we break down why multi-level marketing programs rarely fulfill their promises to distributors, let’s learn a little more about what distinguishes a multi-level marketing program.

What Is Multi-Level Marketing?

Multi-level marketing—sometimes called network marketing or MLM for short—has been around for a long time. It’s technically a legitimate business model, though the Federal Trade Commission (FTC) has been on record as out of answers when it comes time to clearly differentiate between multi-level marketing businesses and outright pyramid schemes.

Sure, there are a few qualifiers (we’ll get to those), but the FTC admits that not even all MLM’s that abide by the agency’s standards are legitimate. The line between multi-level marketing and pyramid schemes is so fuzzy that the FTC leaves it up to the average Joe and Jane to decide for themselves what’s worth the risk with this guiding statement:

“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 not. It's a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.

If you’re considering buying into a multi level marketing plan, get the details.”

That laissez-faire attitude and a lack of regulation are even less comforting when faced with the numbers: Over 10 million people in the US alone are involved in a multi-level marketing business. And, while those on the bottom are often left for broke, multi-level marketing companies still manage to make a combined $30-billion a year.

But, we’re getting ahead of ourselves. Before digging in deep, here are the basics about what makes a multi-level marketing business model.

MLM: The Amazing Money-Making Opportunity You Just Have to Hear About

Multi-level marketing companies sell products into a distributor system at a discount that’s deep enough to make the products or services appear inexpensive, when compared with competing products.

But, to be a part of an MLM business as a distributor, you’re often forced to buy in bulk—forking over your own cash upfront.

In an ideal multi-level marketing scenario, a distributor not only makes money from their sales of the product or service, but also from both bonuses and commissions. The bonuses are awarded as incentives to keep distributors selling. However, it’s the commissions that put the “multi” in multi-level business marketing.

That’s because, in this ideal MLM scenario, a distributor (that’s you!) recruits others to join up. Then, that distributor not only receives accumulated commissions on the sales made by his or her recruits, but also from the sales made by each recruit’s recruits—and so on down the line. This is why MLM models are sometimes called downline marketing.

To paint MLMs in a pretty light, a family tree analogy is often used when describing the business model to new recruits, with roots extending down five, eight, or even ten levels. Of course, this sounds like an amazing opportunity! Especially if each distributor were to really make commissions on the sales of everyone below them.

What Happens When There’s No More Growth

The math that drives most multi-level marketing businesses is selectively calculated to make a strong impression on recruits. However, it doesn’t generally stand up to basic arithmetic.

Consider that if Person A recruits six people, who each recruit an additional six, the total number of people in the program is 43 at the third level. While that might sound reasonable, it’s 9,331 by the fifth level—and more than 10 million by the ninth.

The exploding numbers of geometric progression are what makes multi-level marketing models so unrealistic. However, it’s still technically legal.

The exploding numbers of geometric progression are what makes multi-level marketing models so unrealistic.

It’s how they compensate for that non-viability, combined with an almost evangelistic approach to recruiting, which blurs the line between MLM and illegal pyramid schemes.

Multi-level marketing companies use psychological tactics similar to religious revival meetings, to draw people closer, drive higher sales numbers, and encourage dismissal of any naysayers. Particularly in annual gatherings, MLM companies will often include songs and testimonials stressing dedication to the business. Some companies go further, encouraging their distributors to follow an approved way of life.

Wait, What Makes Multi-Level Marketing Legal?

That’s a question plenty of people are left asking—and, again, one with a fuzzy answer. According to the FTC, multi-level marketing is legal because you can technically make money selling products. This is in comparison to pyramid schemes, sometimes called Ponzi schemes, that are based solely on you recruiting new people.

While, in theory, multi-level marketing emphasizes selling over recruiting new people, the reality is that’s often not the case. This is because, in most MLM businesses, you make more money signing people up than you do through actual sales—though “more” of close to nothing is still pretty darn low.

How Rich Can You Get Through Multi-Level Marketing?

The nonprofit Consumer Awareness Institute analyzed available data published by the MLM companies themselves. Of the companies surveyed, they reported the least successful was Amway/ Quixtar, in which 99.99% of distributors lose money. The most successful was Herbalife, in which 99.42% of distributors lose money.

Want further proof you shouldn’t quit your day job?

A UK government investigation in 2008 showed that out of an IBO (Independent Business Owner—which is what distributors are called) population of 33,000, “only about 90 made sufficient incomes to cover the costs of actively building their business.” That’s a 99.7% loss rate for investors.

To put it in perspective, you have a better chance making your retirement in a Vegas casino.

More of What Makes MLMs Fishy

Again, multi-level marketing models are legal. But, many MLM companies are accused of pressing the limits of the law with shady business practices, anti-pyramid regulation violations, and making false claims about “miracle” products, as detailed by MLMwatch.org.

And, in case the odds didn’t dissuade you, there are a few other aspects of multi-level marketing plans that might inspire you to run for the hills, should someone present you with a “great business opportunity.”

Other problems include what’s called “inventory loading,” which is when MLM distributors are encouraged to buy a basement full of products in order to be able to reap a higher sales commission for the person above them in the chain. Of course, much of that merchandise never gets sold.

Even in what’s considered a legitimate MLM model, the turnover rate is high. Most MLM companies remain in business for less than two years total, while distributors typically drop out after only one.

A final note on fishy MLM practices, a Cracked article reports that failed MLM companies often re-emerge under a different name, making it difficult to spot bad apples by reputation alone:

“Once a company has reached market saturation in one area, they often rebrand into new companies, so that the same people they already screwed over will see them as a brand new opportunity to get rich quick, FOR REAL this time. For example, Nu Skin has also been known as IDN, Big Planet, Pharmanex, and Photomax over just 30 years. Amway is sold under so many different names that I can't give you a definitive number because I kept finding new ones, but rest assured it is more than 20. Again, this is all perfectly legal, despite being objectively terrible.”

The thing is, multi-level marketing models weren’t always bad. Back in the day of wheeled wagons and town market’s, it made sense for a successful merchant to recruit independent sellers and reward them with incentives.

However, times have obviously changed. With the growth of discounters including Wal-Mart and retail websites, few people need to buy toiletries, detergent or vitamins from a friend or neighbor, especially with the higher prices charged so all the commissions can be paid.

This is why and where the line becomes blurred: It’s nearly impossible to compete in such a saturated market, leaving most MLM distributors to make their money recruiting more people, selling them training materials or persuading them to buy large stocks—instead of selling to anyone outside the organization.

And again, that money doesn’t amount to much.

USA Today reports the story of a former Amway distributor who worked night and day on his business, but could never surpass $115 a month. Of the business model, he says “The primary product is opportunity. The strongest, most powerful motivational force today is false hope.”

How to Tell If a Multi-Level Marketing Opportunity Should Be Avoided?

Unfortunately, there’s no single question that can help you determine which MLM opportunities are considered bad apples. The FTC gives the following advice to aid you in determining whether or not an MLM company is legitimate:

  1. Consider the product. The FTC advises that you compare a the product with others on the market, and apply a healthy dose of skepticism when evaluating products that claim to be miracle-workers.
  2. Learn more about the company. Do a thorough search of the company online to learn of their track record. Include the words scam, review, and complaint in your search to get a full picture.
  3. Evaluate the plan. Ask your sponsor detailed information on the compensation structure, your potential expenses, and support for claims of how much money you can make. Avoid plans that pay more for recruiting new members than for selling the actual product.

The FTC’s complete advice on evaluating multi-level marketing plans can be found here, and includes a list of questions that may assist you in determining an opportunity’s legitimacy.

The Bottom Line on Multi-Level Marketing Models?

What makes a multi-level marketing business model legal is that there’s an actual opportunity, albeit very small, to make money from selling a product instead of simply robbing Peter to pay Paul.

We’re not saying that MLMs are smart, or even ethical, but it’s that factor which the FTC defines as differentiating them from a scam.

In our research for this article, we found one forum comment that hypothesized that the aim of MLM companies isn’t to make members rich, but to turn members into customers. They further described the multi-level marketing model as a giant game of "The Emperor's New Clothes"—where no one can state the obvious because then they might lose potential earnings. Expressing disbelief in the business also means going against the tide of excitement and evangelism that’s carefully crafted to keep members engaged.

With that in mind, we advise being highly cautious when considering any MLM opportunity. However, should you feel like one passes muster, make sure it’s also for a product or service you really believe in—since you’ll likely be buying a lot of it.

More on MLMs:


Autumn Yates

Autumn draws from a reporting background and years of experience working remotely, while living abroad, to focus on topics in travel, beauty, and online safety.


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