Multi-Level Marketing: Risks and Rewards


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Written by: Guest | Best Company Editorial Team

Last Updated: February 24th, 2020

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Guest Post by Ben Lovell

“There is an urgent need for all network marketing leaders to steer clear of hypocrisy in the network marketing industry in order for our upcoming generation to prosper through it.” ― Olawale Daniel

My first job out of college was as a representative for a direct marketing company. For the uninitiated, this was code for cold-calling, in this case pushing coupon books door-to-door. My interview consisted of a day-long walk along with Jose, a current employee with two major objectives:

  1. Sell enough coupon books to make the drudge worth his time
  2. Recruit me to the company and to his team

To his everlasting credit, Jose (who is actually a pretty swell guy) accomplished both of those goals that day. He netted $120 (cash in hand) and got me on board. The next three months constituted a very unpleasant period in my professional life. I spent 60 hours a week eeking out a living on 100 percent commission at $10/pop and attempting to recruit people to a job I actively hated.

The job wasn’t illegal, and it wasn’t a scam. It was simply a multi-level marketing company that did a really good job of highlighting the positive and downplaying (or ignoring) the negative. Businesses of this type can run the gambit from high-potential entrepreneurial opportunities to illegal hustles that snake people (often the employees) out of their money.

Let’s take a look at some of the potential risks and rewards about multi-level marketing companies.

Multi-level marketing company or pyramid scheme?

Sometimes the terms multi-level marketing and pyramid scheme get used interchangeably. This is incorrect.

Multi-level marketing (MLM) (also called network marketing or direct sales) describes a company where employees sell products or services directly to the public. The employees are, at least in part, compensated based on the value or quantity of their sales. Employees are also encouraged to recruit and incentivized by additional compensation for sales in their employee down-line.

MLM Companies may or may not be a good fit for you, but they are not illegal. Certain industries (such as cosmetics and health/diet) lend themselves to this sort of structure. Notable successful MLM companies include Mary Kay, Amway, and Rodan + Fields. If you enjoy sales and believe in the product or service you are pitching, you may prosper in a position at an MLM company.

Pyramid schemes are illegal, fraudulent scams that masquerade as MLM companies. In a pyramid scheme, the product is either illegitimate or non-existent. Often recruits are asked to invest in the company and then recruit others to do the same (as a means of earning).

A primary initial indicator of whether a business is an MLM company or a pyramid scheme is where the majority of the revenue originates. If it comes from the sale of a product, it is likely MLM. If proceeds are earned directly through recruiting, it is probably a pyramid scheme.  

The most notorious type of pyramid scheme is a Ponzi scheme, named for millionaire con artist Charles Ponzi. Investors are lured under false pretense with the promise of a quick financial turn-around. Their investment is used as the return for earlier investors, and on and on. No one is actually investing in anything. There is no product.

Here are some questions you should ask before you commit to a position in a multi-level marketing company:

Who will you be working for?

Probably the most important question is the most basic: Who are these guys?!  Here, the internet is your friend (if you use it wisely). Do multiple searches for the business and click on several different sites, delving far down into the search results. This will help you avoid content by the business itself or paid sponsors. 

You’re looking for unbiased, third party feedback. Look for answers to these questions:

  • Who owns the company?
  • How long has it been in business?
  • Has it been sued or otherwise involved in legal difficulties?
  • What do current and former employees have to say?
  • What’s the general buzz about the company?

While you shouldn’t consider any one source of information to be the gospel truth, websites dedicated to ranking MLM companies can provide a useful hub of information.   

What are you selling?

The main difference between an MLM and a pyramid scheme is product, or lack thereof. Investigate the product itself by asking the following questions:

  • What products and/or services are you selling?
  • How do you take possession of the inventory, if at all?
  • What are the consumer reviews of these products?

Remember, the cornerstone of any good business (MLM or otherwise) is the product.  If the company is vague about what it sells or the feedback is negative, be concerned.

How will you earn money?

This is a crucial question related to what you are selling. A hallmark of MLM companies is to incentivize bringing in new employees. However, if the emphasis seems to be recruiting instead of sales, that is a major red flag. In a legitimate MLM company, you should be able to remain employed and turn a profit whether or not you have a downline. You need to know the answers to these questions:

  • Does the company offer any base compensation (hourly or salary)?
  • Is compensation based on a fixed percent commission?
  • What incentives do you have for recruiting? 
  • Are your recruiting incentives tied to the performance of your downline?

Most experts in the field recommend maintaining modest initial earning aspirations, regardless of (or despite) what the company tells you. Many people supplement their income with work-from-home MLM business. A much smaller number actually make a lot of money.

What is required of you?

Flash back to my personal narrative. This story was a tale of disappointment, not disaster. The biggest difference? Besides a few months of my youth and a little faith in humanity, I didn’t lose anything. 

Once you’ve fully vetted the company, consider what is being asked of you:

  • Is a financial investment required?
  • Do you have to sign a contract?
  • Do you have to purchase the products you sell?
  • Do you have to use personal resources (car, home, computer) and are you compensated?

If you do need to invest in materials or products to begin your work for the company, consider your current financial situation. If you need to see a rapid or substantial return on your investment for the opportunity to make sense, look elsewhere. Some people take out loans or credit cards to pay for their start up costs, which is a terrible idea because you can’t guarantee a return on your investment from sales. If an MLM encourages you to take on debt to get started, that’s a big red flag. Getting a business credit card for your MLM business is only a good idea if you’re already established and use it to earn rewards points on business expenses like travel and dining.

Besides the risk of financial loss, there may be legal ramifications to joining an MLM company. If you sell a product that is unsafe, you could be personally liable for customer injury. If you recruit someone else to the company under false pretenses, you could be legally implicated in fraud.

The bottom line

As always, the bottom line is do your homework on multi-level marketing companies, in general and specifically. In this age of instantaneous information sharing, there are plenty of bogus facts out there, but there is also a plethora of reliable information. Do your due diligence and protect yourself — your money, your personal safety, and your reputation.

Finally, trust your gut. Intuition isn’t magic; it’s a complex compilation of stimuli and experience. If you have a weird feeling about a proposition, there is likely a good reason. Hindsight isn’t the only vision that can be 20/20.
A firm believer that freedom of information improves business, travel, and life, freelance writer Ben Lovell is committed to sharing best practices. Read more of his articles at the Gothic Optimist.

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