12 MIN READ
Multi-level marketing (MLM) companies have become more and more prevalent and are no longer just Amway and Mary Kay. These companies, also referred to as network marketing companies, are quite diverse in their products from makeup and beauty products to essential oils to fitness products and meal preparation services.
Chances are that whatever product you are looking for (or not) is being sold by independent consultants as part of an MLM. While these companies are not illegal pyramid schemes as any member will loudly tell you, they do employ a nearly identical structure and business practices as illegal pyramid schemes.
The primary difference being that MLM companies sell a product to the general public while illegal pyramid schemes have no products for sale. While it can be easy to write these companies off as a scheme you would not fall for, they are remarkably successful at getting people involved, so I wanted to look at how that happens, what awaits you if you join, as well as provide some insight into what the end game looks like.
First we should start with what an MLM company is and what it is not, because this has been debated back and forth in the courts. Many people think of MLM’s as illegal pyramid schemes, which is technically incorrect and has been upheld by federal courts. Pyramid schemes rely solely on the recruitment of others in order to make money and don’t involve selling a product. These recruited people become your downline and they recruit their friends which not only creates their own downline, but also adds to your downline. Pyramid schemes depend on your ability to recruit others in order to get your investment payouts and have no product sales to the general public. Their “corporate” structure is easy to discern as those who join at the beginning or who found the company are at the top of the pyramid and make far more than their initial investment, whereas those that join later fill out the bottom of the pyramid and are left with nothing. These have become illegal in the US and elsewhere for their predatory business practices.
Now that we have defined a pyramid scheme, we will take a look at how MLM’s operate and the differences between the two. MLM’s operate by recruiting others and having them recruit more people below them. The people you recruit become your downline, and the people they recruit become their downline as well as adding to your own. Sound similar? However, MLM’s have a product that its members can sell to the general population without the need for recruitment. This means that you can buy Herbalife, BeachBody, or Young Living products without becoming a member of these companies. Commissions may be paid to a long line of distributors in an MLM, but it is supposed to be limited to retail sales and not recruitment.
These differences, although relatively small, are easy to detect when laid out like that. However, what happens when there’s more gray area and the lines get a little muddled? For example, what about when a company either explicitly or implicitly forces a distributor to buy merchandise for sale to the general public despite the distributor not having the means to move the product to market? That seems pretty shady, but it does have a product for sale, so that seems to fall under an MLM. This is in fact a fairly common practice for MLM companies, especially DoTerra, Herbalife, and Young Living and it is called inventory loading. However, according to the Federal Trade Commission (FTC), this behavior constitutes an illegal pyramid scheme and is a main reason many MLM companies have been taken to court. In the same vein, a company promoting their products as being in demand or selling well when the primary transactions are to new distributors or between distributors is another red flag that the company is a pyramid scheme.
If these gray areas and blurred lines seem like they would be confusing, the FTC agrees saying "pyramid schemes now come in so many forms that they may be difficult to recognize immediately. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure. There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales.” The FTC, which regulates these businesses, has a hard time wading through all the company practices and determining whether the company is an MLM or a pyramid scheme. With the amount of fines and suits levied against MLM companies in recent years, the cry of “we are not a pyramid scheme!” seems to ring a bit hollow as the regulatory agency cannot easily determine if that is in fact the case. Now that we have laid out the basic differences and similarities between pyramid schemes and MLM’s, we will look at their recruitment pitches and how they get new people involved.
Join or Be Left Behind
While MLM’s claim to not rely on recruitment in order to build the business, if you have any friends who are involved you will know how often they are broadcasting the opportunity to join their team. Recruitment of other team members is the only viable method for the majority of distributors to make any actual money working for an MLM, so that is the avenue they market the hardest. This is all usually encouraged by their upline, because remember the more people that get brought in below you, the more commissions you earn. Unfortunately, there is a limit to the amount of recruitment that can happen which is dictated by math. There is simply a limit to the amount of people you can recruit because the earth only has so many people. These companies, whether they be illegal pyramid schemes or MLM’s, must eventually collapse due to running out of people to recruit. So, we are going to look at the three main recruiting pitches that they use to get people interested in joining their team. For this segment, we will simply focus on the pitch and we will look at why these tactics may fall flat later on.
The first pitch revolves around getting rich and improving your lifestyle, all for working on your phone! By showing you what fabulous prizes and bonuses you can win by being successful, it certainly appeals to those who are looking for quick money and an easy path to wealth. Even though most of my readership works in healthcare, pretty much everyone is at least a little interested in an easy way to make money. Most MLM’s showcase the luxury lifestyle that the founding members enjoy and market that as something that’s attainable for everyone who joins. This famously includes the pink Mary Kay Cadillac, but many other MLM’s have programs for winning luxury cars or expensive trips.
With good jobs becoming more and more scarce and the amount of debt rising to unheard of levels, an opportunity where you can easily generate wealth by spending time on your phone or social media is an attractive pitch. This certainly applies to many within the medical profession as nurses and PA’s see MLM’s as a way to bring in extra money while not sacrificing too much of their time away from the clinic or hospital. With the amount of student loan debt that is placed on those who enter the medical profession, finding ways to pay off the loans faster is a priority for most people. Pretty much every person is susceptible to an opportunity to make easy money on some level, which is why this has been such a successful pitch for MLM companies.
To piggyback off the last point, providing side income is also a prevalent pitch used by MLM’s. However, the main thrust of the side income pitch is aimed towards stay at home mom’s (most MLM companies target women) who are looking for ways to provide income for their families while also being able to spend time with their kids. For stay at home mothers, this can be an especially alluring appeal as there can be some unresolved guilt about not contributing as much to the family’s financial well-being. Whether that guilt is warranted or not, it can be a strong angle for MLM companies to play up, while offering the bonus of not needing to actually go to work as you are able to work from home. By marketing MLM work as side income it softens the blow in terms of expected effort in order to be successful. You may not have time for a full time job, but some income on the side can fit more easily into your schedule. If you are a new mom and you have tried to find social groups to be a part of, it is likely you’ve encountered someone who is there to sell you products or join their MLM team. This leads us nicely to the next pitch, community.
Joining a community of like-minded people in an MLM is an angle that is especially helpful in recruiting new members. Because humans are social creatures, we all have a desire to find a community we can be a part of and use to identify ourselves. Most MLM companies target women, which means that distributors pop up in mother’s groups, exercise groups, online marketplaces, as well as ordinary places of employment. If you have ever had a coworker talk to you about the benefits of all natural essential oils you know what I mean. If you have joined a new mom group to meet new friends and find a community only to end up at a pitch for BeachBody or beauty products, you know what I mean.
Community is such an important aspect in our everyday lives, which is why many MLM distributors spend much of their energy trying to get into new communities in order to find new recruits for their downline. Building up this community is vital to maintaining a grasp on the people they recruit as it will allow them to wield more and more control over their lives. Most people are far more hesitant to make a change if a community they belong to would be taken away from them. These are three of the most prominent prongs of the standard MLM pitch, but are by no means the only way to get new recruits. While easy money, side income, and community are all good things, we will take a look at what actually happens when you get involved with an MLM.
Making the Money of Your Dreams
So, if you get pitched on this great new idea to work from your phone and make plenty of money on the side and you sign up, let’s look at what awaits you. For this example I will use Young Living and DoTerra as they tend to enjoy targeting healthcare professionals. Here is a link with many of the income reports that I have found, but we will quickly look at these two companies. For DoTerra, 76% of those that joined never made it past the first level and 63% made absolutely nothing. Keep in mind that that means they had no revenues, but were still responsible for paying for product, which means that they lost money on the deal. 63%, or 1,890,000 people lost money by joining DoTerra. Most of the response to this is that those people simply didn’t work hard enough or put the required amount of time into the business (which makes you wonder if it actually is side business material) and that if you do you will be rewarded. Perhaps you are not in it to make much money, maybe you think you could use an extra 10k a year and if you hit that number you will be happy. Well, according to their income disclosure only .92% of their distributors made more than 10k. Less than 1% is not great odds in terms of making 10k. But that’s DoTerra, and you sell the essential oils from Young Living, so things are better over there.
Technically, Young Living is better in terms of the money they pay out to the majority of their distributors, but not by much. 94% of the Young Living distributors earn $12 a year. Just like DoTerra, that’s a gross number, not net, so they also lose money throughout the year. Only .6% of distributors make above $6k a year, which isn’t great odds to make a small amount of money. So while members may post that they are living their dreams and buying luxury cars and taking amazing vacations, just remember that the overwhelming majority of them lose money by joining these companies. For those who want to make money on the side, I would very very strongly suggest you look at basically any other opportunity to do so. In fact, by putting a small amount of money into brokerage account every month it will provide much greater returns over time and will not require joining an MLM. These companies will take your money, make money off of you staying involved, and pay out essentially nothing. What about if the money isn’t really an issue and you see it as a way to get involved in a new community?
A New Family...Until You Leave
Many people are looking for “their” group, a community in which they belong and they can thrive socially. A large part of the appeal of MLM’s is that they offer a great sense of community, especially marketed at women, and you are able to find “your” people. Many of the testimonials I have read and almost everyone I talked to about this say the same thing, everyone involved is incredibly gracious, welcoming, and supportive. Until you leave. Similar to many cults, they place a premium on drawing in potential distributors and then work hard to isolate them from friends and family who disagree with their choice to join the MLM. Those close to you that disagree are simply being negative and in order to be successful, you need to purge the negative influences in your life. One person I talked to about their experience with the MLM Amway in the early 90’s loved the community they were able to build, but became more and more hesitant about continuing as the company gave “sermons” at rallies in an attempt to generate fervor in their distributors. This person realized that because he was relatively successful he would soon be on stage expected to deliver these “sermons” and decided that was off putting enough to leave.
Your upline will constantly push you to recruit or sell product so that they can make money off your efforts, even if you further alienate yourself from friends and family. This plays directly in the scheme as the more you alienate yourself from your friends and family the more you rely on your MLM family and the harder it is for you to leave. Leaving usually means not only losing the money you put into the MLM and product you bought to sell, but also everyone who is still involved will simply forget you exist. This is not even to mention the guilt you may feel for “failing” at a business venture. Any friends you made while involved will simply drop you from their lives, as loyalty to the MLM company is paramount. This makes leaving even harder, as it’s not just losing the business opportunity, but removing yourself from a whole community.
A Special Note for Healthcare Professionals
Remember how I said that MLM’s who sell essential oils like DoTerra and Young Living like to target healthcare professionals? That’s because essential oils occupy this pseudo-science realm where they feel comfortable making claims such as their oils cure anxiety and even cancer. I’m not here to argue the validity of essential oils as a healing agent (they are not curative) but to explain why they love going after those in the medical profession. If you were being sold something that claimed it could cure you and provide amazing health benefits, would you trust someone who had never had a full time job or a nurse or NP? Obviously, if a nurse is selling you essential oils it carries far more weight. Many of the people I talked to lamented their clinic or hospital having someone on staff who was involved in one of these MLM’s and trying to get their colleagues to join them.
I have mentioned the immediate loss of community upon leaving the MLM, but what cannot be understated is devastation not only financially but interpersonally as well. There is an overwhelming number of people who lose significant chunks of money by working with MLM’s, by ordering product to sell that they cannot get rid of or by paying to maintain their level and status within the company. Given the immense financial impact, this can be a terrible setback for those families. Which leads us to the interpersonal ramifications. Because of the isolating forces in most MLM’s, many people I have talked to shared that friendships and family relationships were strained or in some cases irrevocably broken due to their involvement in the MLM. My job relies on people striving to make a better life for themselves, but it is truly heartbreaking to see people sucked into these schemes in the desperate attempt to better their lives.
Talking to those who have been a part of MLM companies or have been affected by those around them joining has certainly been tough. Of the people I talked to, only one had a mostly positive experience, and they participated in the early 90’s before many of the methods of control had been exercised by these companies. For those that are being approached by someone pitching a company that will allow you to make income on the side, please check this website to see if they are an MLM.
About the Author
Nathan Schorsch was raised by two doctors and this has helped give him a basic understanding as to how hectic life can be in the healthcare profession. Now, as the spouse of a nurse he has an even better understanding of what that means. Nathan started Head To Toe to serve young practitioners with a focus on their most relevant planning needs, such as student debt management, financial planning, and investments. By helping his clients organize, prioritize, and automate, their focus can remain on what matters most: their patients, their families, and their well-deserved recreational pursuits.
Did you know XYPN advisors provide virtual services? They can work with clients in any state! View our Find an Advisor portal.