This week I’ve been doing some investigations into MLM vs Pyramid Scheme ‘s, to see exactly what the deal is, and whether the two are the same, or very different from each other.
Why?
Well, since I’ve been self employed and working from home I’ve joined a number of business Facebook groups for networking and support, and one things I have found really alarming is the number of people desperately recruiting other people to join their Multilevel Marketing businesses.
The reason I find this alarming is not the fact that these people are recruiting for their business, but the claims they are making about how joining their business can change your life, make you thousands of pounds a month and probably get you a free car.
I have heard a lot recently about MLM companies battling lawsuits claiming they are Pyramid schemes, so of course I had to investigate the comparison between the two to see exactly what the deal is, WHY these companies are being accused of being pyramid schemes, and whether or not network marketing is a good business idea or not.
What is Multilevel Marketing?
Multilevel Marketing (MLM) is a marketing strategy used by direct sales companies to sell their products to as many people as possible. A participant joins the company as a self employed distributor, and receives a commission on all of the sales they make. As well as selling products, distributors are encouraged to recruit a team underneath them (a downline) from which they will earn a commission for every sale their team members make. The downline are also encouraged to recruit their own teams, so all participants make money from direct sales to their customers as well as commission from their downline.
What is a Pyramid Scheme?
A pyramid scheme is a scam which has a similar structure to an MLM business, except there is no product being sold, just a cash investment with the promise of high returns. Participants ‘buy in’ to the pyramid scheme, usually for a high investment, and are then promised that by recruiting new participants (investors) into the scheme, they will see a huge return on investment. New participants invest and continue to join the pyramid until no more people can be found who are willing to join, which is when the pyramid collapses, and the last people who joined lose their investment. The people at the top of the pyramid who joined early have made huge return on investment, and this filters down to the bottom of the pyramid where people have made a loss.
Why am I comparing MLM businesses to Pyramid Schemes?
Good question. There has been a lot in the news lately (have you seen Betting on Zero, the documentary about Herbalife?) about MLM businesses being accused of being thinly veiled Pyramid schemes. Although Pyramid schemes don’t usually have a product, the concern is that some Pyramid schemes are trying to disguise themselves as legitimate MLM companies by having a product to sell and requiring participants to invest in overpriced ‘stock’ when they sign up.
An example of this is LulaRoe, a clothing company which required distributors to pay an onboarding fee and invest in stock to join (which could be up to $9,000). Many distributors were burdened with huge amounts of stock that they couldn’t sell, and left in thousands of dollars of debt.
LulaRoe consultants were encouraged to recruit new members who also paid a large initial onboarding fee and invested in stock. Consultants received bonuses based on how many new recruits they brought to the company, which is why they were accused of being a pyramid scheme, as it violated anti pyramid scheme laws in certain states.
Another example is AdvoCare, which was proven to be a pyramid scheme by the FTC in a landmark case. People were scammed into paying thousands of dollars to join AdvoCare and pay upfront for inventory, but the FTC found that AdvoCare was rewarding distributors for the recruitment of new members rather than the sales of any products- a classic sign of a pyramid scheme.
The complaint against AdvoCare alleges that 72% of distributors either lost money or made no money at all during the time that they were with the company, and 18% of distributors made less than $250 per year. Advocare were ordered to pay out over $150 million in consumer refunds, and were banned from all forms of multilevel marketing.
Why the MLM Business Model is Dangerous
Overall the MLM business model is predatory and unsustainable. When recruiting, distributors are often told to target stay at home mums and people on low incomes who will be tempted to join by the high income claims of people further up the distribution chain, thinking that they too will get there one day.
It’s these misleading sales tactics that are so dangerous. If you have a look on Instagram at pretty much anyone in the MLM industry, you will see that they will spin a tale of how great their life is, how much freedom they have, and how well they are doing in their business, saying that you too can have this lifestyle, if you work hard enough.
New recruits can feel like they have failed if they have not reached these lofty goals soon enough, which can lead to depression, anxiety, and debt as they try to keep up with an unrealistic lifestyle. The reality is that with an MLM business it’s just not possible for everyone to be at the top, the market becomes saturated and someone has to lose, and sadly the number of people losing money here is high.
According to a report published on FTC website, 99% of people actually lose money after joining an MLM, and the only people who benefit from extraordinarily high incomes are the people at the top of the pyramid who got in early and recruited a huge downline.
Aside from the potential to lose money, there is another cost to being part of an MLM business: The social cost. Distributors are told to promote their products to their friends and family, as well as their wider network which can lead to awkwardness when someone does not want to make a purchase or be recruited to join the team, and even lead to them avoiding the distributor for fear of being sold to over and over again.
Still Thinking of Joining an MLM?
If you are still thinking of going an MLM business (I recommend that you DON’T), you need to know what to look for, and be aware of the compensation plan so you know in advance how everything works. You also need to understand and accept that there is a 99% chance that you will lose money, or only make a small sum of money each month.
It’s easy to see why people are tempted to join MLM businesses. There is no barrier to entry and the startup costs are usually low, so it seems like a great option for anyone with little to no money to spend, especially with the high income claims from people higher up in the business.
Overall, I would NOT recommend joining an MLM business, if you need to make money from home there are far easier ways for you to go about it, with no risk of losing money.
However, if you are going to insist on joining an MLM business, here’s what you should look out for…
How to Spot a Legitimate MLM Business
- Either no joining fee or a very low joining fee for your ‘Starter Kit’
- No monthly minimum order requirements
- No requirement to recruit a downline if you don’t want to
- Fairly priced products that lots of people want and need
- The company will refund any unsold stock you have purchased
How to Spot a Product Based Pyramid Scheme
If you have been thinking of joining a direct selling business or MLM, there are a few red flags to look out for to help you work out whether the business you are looking to join is legitimate or a product based pyramid scheme.
Red Flags:
- You are selling overpriced products that people don’t really want or need
- You are required to pay a sum of money to join the company, or invest in a large amount of stock
- You are required to order a minimum amount of products from the company each month
- Your uplines are selling stories of a lavish lifestyle with huge income claims, saying “you can have all this too” if you join the company
- You are required to buy products you don’t want or need (seasonal items, for example) to stay in good standing with the company
- You are pushed to recruit a downline of sellers underneath you rather than being targeted and incentivised for product sales
Is Monat a Pyramid Scheme?
One business I see a lot of on Instagram is Monat, this is partly because I used to follow a business coach, who suddenly stopped coaching and started selling Monat (and is now quite high up in the company I believe) and then suddenly I saw a lot more business coaches quitting coaching to join Monat, it was weird.
Monat is a hair care product MLM business, which was founded in 2014, so it’s relatively new.
Anyway, the question is: is Monat a Pyramid Scheme. Let’s take a look:
Please Note: this is based on Market partners, NOT VIP customers.
Joining fee: £99 or £199 initially, and after 7 days you are offered an upgrade to one of the success product packs: £299 and £499.
Monthly minimum order requirement: None
Fairly Priced Products: Hmmm this is debatable, but at £30 for a bottle of shampoo and £45 for a bottle of conditioner, I would not personally consider these products to be a fair price.
Will the company refund any unsold stock?: Yes, if it is unused and in salable condition
Trustpilot rating: 3 out of 5 stars = Average
The verdict? No, Monat is not a Pyramid scheme, however, the chances of you actually making any money are slim. I would advise staying clear of this company because of the overpriced products and the huge number of complaints on the BBB website.
Want to go deeper? Check out my in depth article discussing Monat: Is Monat a Pyramid Sceme?
Is Arbonne a Pyramid Scheme?
Arbonne is a cosmetics company which uses the MLM business model.
Joining fee: £30 registration fee for a 12 month registration term
Monthly minimum order requirement: Yes.
Fairly Priced Products: No. Arbonne products are expensive, you’re looking at £55 for a face serum, so not affordable to everyone.
Will the company refund any unsold stock?: Yes, as long as it’s within 45 days of purchase
Trustpilot rating: 3 out of 5 stars. Average.
The verdict? From researching Arbonne and reading the reviews, I would stay far far away from this company. The fact that you have to pay to join, and maintain a certain number of sales each month is a big red flag. Arbonne consultants are also given cash incentives to build a team underneath them.
Is it a pyramid scheme? I can’t say for sure, but it does look like it’s coming very close to that due to the sales requirements and emphasis on recruiting. Arbonne encourages it’s consultants to become ‘A product of the product’ basically stating that Arbonne consultants should only be using Arbonne products, which makes the consultant also the customer, another classic sign of a product based pyramid scheme. How many people use Arbonne products who are signed up as distributors??
Let’s take a look at the typical earnings:
We can see from this typical earnings statement that the average Independent consultant with Arbonne only makes £503 PER YEAR, and, as Arbonne themselves so kindly point out, that’s not even profit, and this statement doesn’t even include the 18,400 consultants who made no money at all. Only about 3% of consultants earned a full time income.
Conclusion
If you’ve been thinking about joining a Multilevel Marketing company, I would think again. A majority of people who join these companies sadly end up losing money, and even worse, they can lose friends along the way too. Yes, there are a few people out there who make money (they will be the ones you see parading about on social media) but the reason this handful of people are making money is that thousands of people near the bottom of the pyramid are losing money.