Is Multilevel Marketing legal?

Multilevel Marketing (MLM) is legal. It is an absolutely stellar business model. It is not a scam.

Of note, however, is the often repeated (by MLM people) but untrue “fact” that the MLM model is taught at Harvard Business School.

MLM focuses on selling products or services. The organizations that can be joined are numerous. Virtually all of them provide training for the would-be recruit. There are often scripts can learn or even memorize. That makes working in the business very easy.

Multilevel Marketing businesses sell virtually every product and service imaginable. Vacation homes, vitamins, life insurance, clothing, coffee, legal services, toilet paper, and other household products are just a few among the many.

How does one earn money in a Multilevel Marketing business?

MLM reps earn money in two basic ways.

First, the individual actually selling the product or service gets a commission on the sale.

Then, there are “overrides” that are earned on the sales of “downline” recruits. When anyone recruited by the team member sells something, the team member makes a commission.

In other words, person “A” gets commissions on his or her sales. If person A recruit’s person “B,” person A gets commissions on B’s sales. If person B recruits’ person “C,” both person B and person A get commissions on C’s sales. Person A gets paid for the sales of all persons “below.”

To draw an analogy, the term “multilevel” thus works like a pyramid, where the person at the top gets overrides on the sales of all of those individuals he or she recruited and then on all of the sales of all of the individuals recruited by that individual’s recruits, and so on. This creates an ever-growing stream of revenue from recruits in an ever-growing and widening group of people who were recruited by someone already on the team.

The term “residual” income is one of the true benefits of being in a Multilevel Marketing business. Every time a consumer makes a monthly payment for the goods or services sold to him or her by a team member, that member and all of that member’s up-line (higher on the pyramid) get a commission payment. Residual income means getting paid over and over again for something that was done once.

Every MLM business also has perks and bonuses if individuals or teams reach certain sales levels. Those individuals who have recruited large teams can thus reap very real and very significant financial and non-financial prizes. Fully-paid vacations to exotic locales rank among the most desired perks.

Is Multilevel Marketing (MLM) a scam?

When considering whether or not to join a Multilevel Marketing business, a reasonably well-informed potential recruit is probably aware of the word “pyramid” to describe the MLM sales methodology. This is due to the popular belief that MLMs are considered to be scams by a great many individuals. Naturally, such individuals are leery of MLM as a result. They fear being scammed.

Legitimate Multilevel Marketing businesses are not scam.

Yet, the description of the model often involves the use of the word “pyramid.” That’s why the issue that an MLM is a “pyramid scheme” is almost always raised. Fuel is added to the pyramid-scheme fire in large part due to the “rah-rah” recruitment and retention method used by many MLM promoters. Meetings, conventions and other MLM get-togethers are full of self-empowerment language (you are great, you are loved, you can do it, you must persist, you have to believe, “xyz” company for life).

To emphasize the point further, MLM meetings always show videos of yachts, vacation homes and successful members living a life of leisure. These representations lend to the suspicions that MLM success simply cannot be true.

But again, keep in mind: Legitimate MLMs are legal. They can work.

On the other hand, a genuine pyramid scheme has one purpose, and only one: Recruit new members to get each new person’s money, and use that new person to recruit others who will be treated exactly the same way.

The Federal Trade Commission (FTC) distinguishes Multilevel Marketing businesses from pyramid schemes as follows:

If a consultant can make an income by only selling the company’s products or services to the public and does not have to recruit other consultants, it is a legitimate Multilevel Marketing business.

How can an individual tell the difference between a legitimate MLM business and a pyramid scheme?

Here are a few ways to determine if a business is a true MLM company or a scam:

Is a large up-front investment required? One ruse obscuring this tactic might to call that cash requirement an inventory charge. Legal MLM businesses do not require large start-up investments.

If inventory is to be purchased, will the company buy it back? Legal MLM companies will offer to take back unsold inventory and typically will pay at least 80% of the original purchase price.

What is the marketing plan of the business? If the company does not seem to have any interest in consumer demand for its products or services, it is highly likely a scam and not a legitimate MLM business.

Does the company offer money to sign up new recruits? If so, this is a scam business. Scams are concerned with the number of people signed up, not the products or services being offered.

MLM: Real Truths

Beyond determining if a Multilevel Marketing company is legitimate or a scam, there are essential truths involved for any individual considering joining a legitimate MLM business. Published on the Federal Trade Commission website, a business report that studied the business models of 350 MLMs concluded that 99% of people who join MLMs lose money.

The executives, owners, officers, and top “salesman” and those with very large teams make a significant amount of money. For the average person, however, the prospect that he or she will develop a very large team is highly unlikely.

If the FTC report’s numbers are wrong, and “only” 80% or 75% lose money, or if the report is wrong about the notion of losing money – i.e., if the loss statistics also include those who don’t lose but don’t make money – most individuals involved in MLM businesses still end up very unhappy financially speaking. That’s because they cannot recruit others to their team or because those, they do recruit do not produce.

In other words, selling the product or service on a regular basis will produce income. But considerably bigger income results from the efforts of successful “down-line” recruits. Without proper motivation, constant support and evidence of success, down-line individuals tend to drop out of MLM businesses.

Marketing is everything. Even for MLMs.

More truths about Multilevel Marketing businesses

Positive psychology is important in a Multilevel Marketing business. The allure of making big money eventually yields to the camaraderie that’s involved in associating with individuals in a like-minded group. For many individuals, the constant positive accolades and the “I believe in you” sentiments expressed in meetings and seminars provide very real, positive psychological value to members and new recruits.

Hope, too, is a strong motivator. Many MLM distributors describe that prior to joining they had no friends and no social life. Now, everyone loves them, and everyone wants to help them. This gives them hope.

But again, reality and statistics tell us that the overwhelming number of rank and file sales folks do not do well at all in an MLM business. They usually end up quitting after one or two years. But in the real world, the time needed to develop even a reasonable income is enormous – often several years. Most people cannot devote the time needed.

Multilevel Marketing is not for everyone. It requires an extraordinary commitment of time and a very strong and positive “never say die” personality.
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