Understanding MLMs: Definitions and Examples
Instead of operating out of traditional stores, multilevel marketing companies utilize independent distributors to directly sell their products to consumers and recruit additional salespeople. Sales typically occur online or in customers' homes. These distributors are not employees but independent contractors who earn money solely through product sales. The company encourages distributors to bring in new participants to expand their downline, earning a percentage of their recruits' sales.
While many people equate MLMs with pyramid schemes, they are not the same. Some MLM companies may be pyramid schemes, which violate federal law. In an illegal pyramid scheme, participants make money by recruiting others to join rather than selling products or services. The Federal Trade Commission (FTC) works to shut down these schemes, such as the instant-coffee pyramid scheme "Success by Health" in January 2020.
How MLMs Operate
Legitimate MLMs differentiate themselves from pyramid schemes by offering legitimate products that distributors can profit from by selling. While MLMs also encourage recruiting new participants, it is not a requirement to earn money. However, many MLM companies mandate distributors to purchase inventory for resale and may charge monthly fees for marketing tools and websites.
MLMs depend on continual recruitment to enable higher-level participants to earn from newer members' sales. Participants may be required to pay upfront fees, meet sales quotas, and recruit individuals for their downline. With hundreds of MLM companies in the U.S., it can be challenging to discern a true job opportunity from an MLM disguise.
Common traits of MLMs include exclusively buying products from distributors, promotion of one company's products by influencers, promising job opportunities that require upfront payment, and the emphasis on recruiting new members to increase earnings within the organization.
Women in the MLM Industry
Women dominate the MLM industry, outnumbering male distributors nearly three to one. Despite widespread criticism, MLM companies like Amway and other popular brands have continued to grow in popularity. However, statistics show that only a small percentage of MLM participants actually make a profit, with many breaking even or losing money.
If you are hesitant about joining an MLM, consider starting your own business instead. While MLMs often promise financial freedom and entrepreneurship, the reality is that most participants end up working for someone else with minimal returns.
Considerations for MLM Participation
Before joining an MLM, it is crucial to understand the company, its products, and the financial obligations involved. Asking about upfront costs, refund policies for unsold products, and investing in sales and marketing skills can help set realistic expectations for potential earnings in an MLM.
Ultimately, MLMs rely on direct sales through distributors and recruiting new participants to drive earnings. To avoid falling into the trap of an illegal pyramid scheme, ensure you have a clear understanding of the payment structure and requirements before committing to an MLM opportunity.
