Hey babe, I’ve just sent you a message about a great business opportunity!
I was just scrolling through your page and think you’d be great at what I do. Are you interesting in earning some extra income at all?
Sound familiar?
A few years ago a local lady would drop off a catalogue every now and again, my mum would buy a nail polish, my nanny some talc perhaps, then I’d rub and sniff all the scented pages. And that was that. Nowadays, these companies known as Multi-level Marketing companies (MLMs) are flying at us from all directions, encouraging us to sign up, join in and invest. MLM schemes pose as feminist, empowering companies that allow women financial freedom and the chance for success. They’re especially attractive to mums, with the promise of earning big while working around their existing commitments. But what may seem like harmless, if not slightly dead-end social media schemes are targeting the susceptible and promising revenue that ends up being little more than fantasy.
The basic structure of an MLM company derives revenue from a non-salaried work force. In other words, recruits of the business are not paid a regular wage, but make money when they sell products via commission. The MLM will probably frame this as “owning your own business”, to justify the idea that you’re not receiving a wage for your work.
More importantly than selling the companies products, participants of MLM schemes can earn by recruiting others for their “downline”. Sellers make a percentage of commission from their own recruits, effectively funnelling money upwards as sales are made. This is where those pesky online recruiters come in, pandering for your participation in their “exciting business opportunity”.
Recruiters might pitch their scheme under a number of guises, including network marketing, referral marketing, affiliate marketing or duel-level marketing – but they’re all the same thing. So what makes these schemes so problematic?
As opposed to income being generated from products that each participant sells, the majority of revenue comes from the recruitment of new members and making commission from their sales. The people you recruit are called your downlines, and the people they recruit are their downlines, and so on. This is why people involved in MLM schemes are so keen to recruit new members, and why your inbox is constantly flooded with messages trying to sign you up.
More often than not, in order to start “your own business” under an MLM, you’re required to buy the products yourself. This is often framed as a “starter pack” or something similar, but essentially has you funnelling money into the business before you’ve made a penny.
Some companies require participants to make a minimum number of sales in a given time frame. Often the most lucrative way to meet this target is by recruiting new members and making commission off their starter packs and their sales. This is also the reason you might see a friend so fired up about their “new business” selling their skincare range or get-thin-quick shakes one day, and silent on the matter a few weeks later when they’ve failed to meet sales targets. Even if there is no pressure to meet targets (some companies use this as a persuasive selling point), the fact remains that in order to make money, you must sell products.
But hang on – aren’t you describing a pyramid scheme?
You’d be forgiven for thinking an MLM sounds shockingly similar to a pyramid scheme, but there is a crucial difference. If you tell a recruiter that you don’t wish to be part of their pyramid scheme, you’ll often receive a quick and defensive reply, telling you that pyramid schemes are illegal - and that’s not what “their company” is.
And they’d be right to tell you this, too; pyramid schemes are illegal in all 50 states in America and the UK too. The reason they’re illegal is because they promise extraordinary returns based on flimsy structures that are impossibly unsustainable and likely to collapse. They rely on a never-ending stream of new recruits, filling the pockets of those at the top, leaving the majority at the bottom worse off than they were before.
It can be difficult to tell the difference between a pyramid scheme and an MLM. The main distinction is that MLM representatives do have the opportunity to make money through selling products and services, and they are legal. Pyramid schemes don’t actually sell a product or service, and they are illegal. So although MLMs do often make money and funnel it upwards in a pyramid style structure, they are different from illegal pyramid schemes.
This doesn’t mean that those involved avoid facing the same issues that make pyramid schemes illegal. Just as in a pyramid scheme, very little money is made selling to those outside the company, and the only real profits are made via an endless stream of new recruits. All a company has to do to stay on the right side of the tracks between an MLM and a pyramid scheme is show that their primary purpose is to sell a product, rather than recruit new sellers.
What about franchises, and door-to-door sales?
Some will argue that door-to-door sales people are also providing a product directly to the consumer. What’s the difference? On the surface, this does seem to work in the same way as an MLM. The main distinction is that those selling double-glazing or encyclopaedias door-to-door aren’t required to buy a certain number of windows or books before passing them on. And they’re not pressured to hire friends and family to sell windows or books either. They make commission on products sold, not by coaxing more distributors into the chain.
Franchises like Mcdonalds and KFC require payment to the parent company to set up a franchise, just like buying a “starter pack”, and MLM sellers will often use this as a good justification as to why their business is viable. But McDonalds and KFC will look carefully at the geographical location of the new franchise before giving it the okay, and be extremely careful not to saturate the market to ensure there is still a reasonable demand. And again, those who invest in a franchise are not desperately urging their friends to also invest in chains of Mcdonalds and KFC, because that would decrease the demand at their franchise.
One of the most crucial flaws of MLM schemes is this issue of saturation. If you’re a mum selling your MLM product at the school gates, and you recruit a handful of those other mums, not only will they no longer be buying your product but also that entire social circle is saturated with sellers. They have to find other circles to distribute in, which can be difficult.
This means that the best way to make money is recruitment, and suddenly the main purpose of your position as an ambassador is to recruit others into the company. Others who will inevitably funnel money upwards in order to get their “business” started.
In 2017, one small town in Canada of 17,000 inhabitants was found to have 30 reps for one specific MLM named Younique. What’s more, 10 of these reps were holding parties at the same time - one rep was holding 2 simultaneously.
Here’s what Younique say about their parties:
“Hosting a YOUNIQUE virtual party is as simple as sharing a link. When your party’s open, invite your friends to shop with a link shared via social media, email, or text. The more they shop, the more rewards you’ll earn. It’s simple and easy! Every product purchased from a virtual party gives you Party Points. Reach at least 200 Party Points, and you’ll receive 10 per cent of the total points earned in Party Rewards.
“Use these rewards to purchase Younique products. Try new Younique products or stock up on familiar favorites—it’s up to you! Enjoy the rewards of a party well thrown.”
Of all ten parties, unsurprisingly, not a single one of them made the minimum 200-point requirement. Market saturation goes against all reasonable business models, but it’s exactly what MLMs do. In fact, it’s their aim - to recruit as many sellers as possible, regardless of existing sellers in your area.
A previous study of eleven MLMs by Robert Fitzpatrick, author and president of Pyramid Scheme Alert shows astounding losses for participants of these schemes.
99% of all participants studied received less than $10 a week in commissions, before all expenses, and less than 1 in 1,000 participants were shown to make any profit at all. It was shown that virtually all MLM participants never make money, and that MLM claims of a broad-based "income opportunity" are fiction.
In ten out of the eleven companies studied, 50% of profits were funnelled to the top 1% of sellers, and in several cases they received over 70% of profits. But the schemes maintain the myth of income opportunity partly by convincing the failed victims that their financial losses were their "own fault". I spoke to an Arbonne ambassador from the UK, who told me Arbonne is “all or nothing” and that “you have to put a lot more in to get something out of it, especially at the start”. She was under the impression that her dedication to her other salaried job was the reason for her failure, not the structure of the MLM scheme its self.
The total revenue of the eleven companies exceeded $12 billion. Approximately 9 million consumers worldwide invest in these schemes each year as representatives though little of the products are ever actually resold to end-users outside of the company. The newly recruited salespeople become the de facto end-users when they fail to move the products they have to purchase. Their own direct purchases and fee payments represent nearly all the companies’ revenue. With churn rates of about 60% across the companies, at least six million new people are enrolled in the schemes each year. The annual recruitment of these six million consumers is based largely on the companies’ false offers of an “income opportunity.”
But MLM companies seek to obscure these devastating failure rates by disclosing the number only of "active" participants and limiting the income figures to one-year, or even shorter, time frames. This allows them to conceal the on going and mounting losses of new participants, by excluding the boundless number of failed representatives from the equation.
This is also why MLM products often receive glowing reviews and even awards for customer satisfaction; the so-called “customers” are also the ones pushing the products. They’ve got a vested interest in the company's success and want to be well represented. There’s no better selling point than phenomenal levels of satisfaction from those using the products.
So where do mums come into all of this?
MLMs often appeal strongly to those who are unaware of their methods, or are in need of extra cash. They pose as an “income opportunity” or a way to make money from home, working around a schedule that suits you. This is why mums are ideal targets for MLM sellers. Most importantly, the schemes offer them the opportunity to work hours that fit around their husbands, kids, housework and potential other jobs.
They have wide networks of friends, often women of a similar age or other mums who will benefit from the flexible hours. They’re probably interested in the small business style beauty, health or weight loss brands that MLMs tend to be, like Arbonne, Avon, and Mary Kay. Women trust in the company when a friend or colleague, who inevitably raves about their success in order to convince potential new participants, poses it to them.
There are mums who possibly had high paying or successful careers, which they chose to give up or put on hold to have children. The offer to make money quick, and own “their own business” is an appealing opportunity to regain this financial success and freedom. Additionally, mothers can be extremely subject to low confidence, making them vulnerable and easy targets for this type of scheme.
The rise of social media, especially among middle-aged women and young mums is hardly helping. In the pre-Facebook days, MLM sellers would rely on their social circles to recruit and push products in person. Thanks to the internet, we can now contact old friends, high school acquaintances and even perfect strangers with the click of a button. A quick copy and paste, and you’ve reached out to hundreds of potential buyers in a matter of seconds. What’s more, with photo editing and filters, “real results” are very easily fabricated, and the power of persuasion grows ever stronger.
But MLMs and their products are rarely the heaven sent opportunity they’re made out to be. The pressure to meet targets and make sales can put strain on people’s personal relationships; any social interactions become potential business opportunities and friends and family soon get fed up with persistent badgering and sales pitches. What about when you do manage to recruit a member of your family or social circle? Tensions will arise about selling territory, who gets to recruit mutual friends, and once they clock on that you’re making money out of their sales, things can quickly turn awkward. Or even worse, what if their business fails, and they end up losing big bucks all thanks to you and your “life changing business opportunity”? MLM selling has the potential to destroy relationships, and quickly isolate those who become too involved.
On the other hand, joining an MLM offers friendship opportunities to women which, for stay at home mums that are prone to feeling isolated and lonely, is a persuasive pull. The companies offer the chance to be part of a growing “family” or “girl gang”, who motivate each other and provide a supportive network of businesswomen. They might even invite sellers to lavish parties and events, where members can dress to the nines then pose in front of balloons and flower walls that they show off to their followers. But in reality, these relationships are based on the assumption that recruits will earn you money, and once you decide to leave the scheme it’s unlikely those “friendships” will last. Those in your upline are much more likely to invest their time in people that will sign up, and effectively make them money.
But I know someone who has made thousands from an MLM?
It’s true that there are a lucky few, who find success via an MLM. Whether it’s someone we know personally, a friend of a friend or an example rolled out by the company themselves, we’ve all known them and felt the envy. But in reality, these people are probably one of the first sellers in their area, and those who attempt to imitate their success usually fail. It’s in the company’s best interest to greatly reward a handful of ambassadors to motivate and inspire their downlines to sell, sell, sell. After all, if it were so easy why would anyone bother with a nine to five? We’d all be pushing LuLaRoe or Herbalife via our Instagram while swanning off on lavish holidays to the South of France.
So while it’s true that a small percentage of people make money from multi-level marketing schemes, it’s often at the expense of those in their downline. Sadly for the majority of people, they simply end up being a costly lesson. Dare to dream, but accept the fact that MLM selling is always accompanied by a high risk of failure.