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Multi-Level Marketing Scams: Should You Ever Consider MLM as a Business Opportunity?

Written by Neal Frankle - 22 Comments

Multi-Level Marketing Scams

I have always thought there were better side jobs than MLM. I don’t know why exactly…but I just don’t like it. Two weeks ago, after a friend of my wife weaseled her way over to our house to discuss a “ground floor, once-in-a-lifetime opportunity,” I refused to come downstairs. I just stayed in my man-cave and watched Law and Order re-runs until she left.

But was I unfair? Is MLM really a business worth considering? My answer is “no” and I’ll tell you why:

The foundation

MLM marketing is typically a Ponzi scheme with a pretty product used to disguise the trickery. In reality, it’s little more than a scam.

The attraction is the money they dangle in front of you ñ not the quality of the product. They tempt you with all the things you’ll be able to do once that money starts pouring in. Travel the world. Buy that second home. Dream big. But any business that is founded on the profits and not the competitive edge of the product is a mirage.

MLM products are typically sold only through the MLM distribution channels, and this makes no sense. If the product was good enough to compete in the market, it would be sold through more conventional stores.
If it’s not sold through stores, then it means the product isn’t really what’s being sold – rather, it’s the process that’s being marketed. And that process is, as I’ve said, just a Ponzi scheme.

The foundation of MLM is to get other people to buy into the system. They buy in with the dream of having 10 people buy in beneath them and having that process continue ad infinitum. That is how they plan to build wealth – not on the strength of the product itself. And that is the core problem.

The dream

If you pick up any marketing literature for MLM systems, you’ll see some beautiful people jumping on private jets or ski boats. They’re usually dripping money and they have a second home in Maui – all made possible by the MLM program. Of course these stories are as synthetic as the people themselves.

And if anyone does profit from the MLM program it’s from the sale of distributorships, not from the product itself. I read recently that the founder of FUND AMERICA – a huge MLM system in the 90s – was arrested. 90% of the profits he made was from the distribution channels and not from product sales.

The products

And even if you believe in the product, you should not join an MLM program. If you do, you’re still going to promoting ideas that you probably don’t believe in. Remember, the way to make money here is to get all your friends to buy-in to the program. So even if you believe in the basic product, you’re not selling that. You’re selling the process.

And before you become a true-believer in that product, keep in mind that you may not really know what you are getting involved with. One reason grease ball business people create MLM systems is because they know they aren’t held up to the same scrutiny as producers that advertise main-stream.

An MLM manufacturer can say anything he or she wants about a product without regard to the wishes of the Federal Trade Commission. MLM creators frequently make up endorsements, fabricate studies, and misrepresent their products seven ways to Sunday – all with very little oversight. Indeed, the FTC states that “many of these [products] are unproven, fraudulently marketed and useless or even dangerous.”

So many of the products that are sold through MLM are things that just couldn’t be sold in any other way. But by relying on your friends, the manufacturer knows you sell with an implied personal recommendation. And that is worth it’s weight in gold – to the MLM creators.

Look before you leap

Even though the MLM program you might be considering offers a money back guarantee, you’ll never get it. The reason for this is that you’ll never ask for it. The MLM creators are masters at manipulation. They know that if you ask for a refund, you’re admitting defeat and you don’t want to do that. Instead, the “starter kit” that you bought sits in the corner of the garage and your money sits in the bank of the shyster who created the system.

I dislike MLM schemes because they are by nature a lie. They take advantage of people with the most to lose. People who are borrowing money to pay their bills shouldn’t be forking over that money to “invest” in these programs, but they are the prime targets. They are often out of work and uninformed. They end up more in debt than before they started.

People like Bernie Madoff, who fraudulently take advantage of people with Ponzi schemes go to jail. But people who do the same thing by draping a product on top of the scheme cash big checks. Don’t be part of it.
Before you get involved with a multi level marketing program ask yourself a few questions:

  • a. Do I know what I’m selling?
  • b. Do I want to get my friends involved in something they may not understand?
  • c. Do I want to sell something that can only be sold word of mouth rather than based on the product’s strengths?
  • Do I want to make money based on selling a system rather than a product that delivers benefits?

Have your experiences with MLM been different? Do you know anyone who got involved with such a program that really offered value? Please share your thoughts in the comments section.

Published on June 9th, 2011
Modified on June 11th, 2011 - 22 Comments
Filed under: Self Employment

About the author: is a Certified Financial Planner in Los Angeles whose goal is to help people improve their finances and find balance in life. He covers these topics at his personal blog Wealth Pilgrim.

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22 Responses to “Multi-Level Marketing Scams: Should You Ever Consider MLM as a Business Opportunity?”

  1. 1
    Darwin's Money Says:

    They’re virtually all scams. The people that join them embarrass themselves and alienate themselves from friends and family chasing the silly dream. After a year or so, the vast majority of members realize they’ve been scammed and drop out. This has been my experience with all the suckers I know who have signed up…and this is what the data shows. Get the word out!

    Save yourself some time, money and pride. And run.

  2. 2
    Ace Says:

    Excellent post. I live in one of the MLM/affinity marketing capitals of the world. I cannot tell you how many people waste thousands of dollars buying into someone’s marketing scheme, and end up with a garage full of worthless snake oil. Y

    ou are exactly right about the purpose of these organizations. They do not sign you up by telling you that you will get rich selling a product. They tell you you’ll get rich by signing up friends (other “distributors”) who will sell the product, allowing you to get rich off of someone else’s work. Eventually, nobody is even trying to sell the product (they’re just signing up others to do so) and the system collapses.

  3. 3
    SavingFreak Says:

    I will agree that many of them are scams but I have to cut the people off who say they are all scams. We should always mention the few that are good products.

    Avon, Tupperware, Mary Kay, All insurance products. They are all sold through MLM methods. What they have in common that the others do not is they are product focused instead of downline focused. If you want to focus on the product you can make money. If you want to focus on your downline you can make more money. Plain and simple.

  4. 4
    Evan Says:

    Was your wife sold on the product? lol

  5. 5
    Jo Says:

    Long ago I had the “opportunity” to build my business off a company using this methodology. It just wasn’t for me, made worse by the pressure to get people signed up to join and buy the products.

    Don’t get me wrong. I love the products this company sells but they’re not affordable due to the distribution of sales proceeds those above you receive. This keeps the cost artificially inflated, making it very difficult to “sell” someone on why they should buy the products.

    For me, the modis operandi is not for me. It’s also a very quick way to lose friends and family members.

  6. 6
    Ace Says:

    Excellent post. I live in one of the MLM/affinity marketing capitals of the world. I cannot tell you how many people waste thousands of dollars buying into someone’s marketing scheme, and end up with a garage full of worthless snake oil. Y

    You are exactly right about the purpose of these organizations. They do not sign you up by telling you that you will get rich selling a product. They tell you you’ll get rich by signing up friends (other “distributors”) who will sell the product, allowing you to get rich off of someone else’s work. Eventually, nobody is even trying to sell the product (they’re just signing up others to do so) and the system collapses.

  7. 7
    Kim Says:

    I once had a friend who tried to get me into this, and I flat out told him it was a pyramid scheme. He hasn’t talked to me since. Yet he also hasn’t quit his day job! My sister-in-law is also into this crap – and she’s always asking to borrow money.

  8. 8
    Kevin R. Says:

    I believe the correct term is a pyramid scheme instead of a Ponzi scheme.

    Middle-men are an inefficiency to business. The reason Walmart can starve mom & pop shops is that they cut out wholesale middleman taking factory orders directly. So how would going against the business model that lead to Walmart’s success ever be a good idea? I understand in drug trade or a fence of stolen goods, how pyramid is successful, but that’s because of being outside the legal trade system means those underground economies can tolerate inefficiency in their business model. However if everything is above board anything adds middlemen when all other in retail are looking to cut that overhead expense does not make sense in the days of Walmarts or the Internet.

    I’ve gone through three high pressure attempts to recruit me and while very defensive on the charge of pyramid scheme, none have satisfied my break-down of their business model, always focusing on how much money I “could” make by accepting their pre-packaged business plan but never how it was viable. In the end it usually is the end of the relationship and from the others avoiding me more than the other way around.

    If I want to make huge amounts of money, I think actual innovation is a better approach and if looking for just a money on the side, I think some service offered are better than try to compete with the efficiency in the markets today.

  9. 9
    John Says:

    I’ve asked before when I was getting pitched one of these things, “Can I support your involvement in this business by buying a product through you?” The answer was no. The only way anyone could be involved was to be a rep, and the only way to make money was to recruit other reps. If the system cannot be sustained and all parties make money with a steady or declining membership, the business model fails and somebody is getting stolen from.

  10. 10
    BG Says:

    John) yep, your example sounds like a pyramid scheme.

    However there are some legitimate types of MLM where reps sell products to people who don’t want to be reps themselves. Those types of businesses seem more legit. “Mary Kay” is an example that comes to mind.

    Now, whether anyone can make real money via an MLM ‘business’, without losing all their friends, remains to be seen :)

  11. 11
    Diana Says:

    My husband has gotten into this business. Its been 8 months since he has joined and the money that comes in is very little. Worse of all, he wants me to be involved and is not happy when I don’t find the time to work with him. Whilst he is at home on the computer all day, I go to work, then come home to take care of our 2 young kids and the house, but yet he expects me to sit down at a computer and work with him on MLM everynight. I sustain the family with my income and find it very unfair that I should have to put up with this. He says I am not supportive, however, he uses the money I make to invest and reinvest while I say nothing, and to make matters worse he keeps joining new ones everytime. He’s a very intelligent man and for the life of me I can’t see why he hasn’t seen through this scam as yet. I am so frustrated and dont look forward to going home from work on an afternoon just because I know he will be upset with me for not trying harder. I do the best I can, I am not a fan of MLM and he will not allow me to express myself. I think they are deceitful and I don’t like the idea of dragging family and friends into something I myself have no control of. He is convinced that he can make it work and I know he will, he’s very intelligent and ambitious, but the question for me is, is it worth it? This is just causing problems in my marriage and everyday I curse the person who introduced him to this business. Because of this he looks down at me and makes me feel worthless. I do well for myself, make a good salary but yet still his obsession with getting rich fast is costing us and he can’t see it.

  12. 12
    McBOV Says:

    Greetings to all!
    I’m so excited to have just joined Amway. My boyfriend has been doing it for the past 3 years and after helping him get customers I decided to join in the fun and make money for myself. My first month I received 301 orders from my own customers base that I managed to build from sourcing online for people looking for the product or health products. So, in short, I earned 3000 pv with a 18% bonus qualification. The month is not over yet, did I mention I just joined this month? Find out how you too can join my team and accomplish the same and even more. This is a legit testimony. My name is well know online, just search for me on Google under mcbov, mcbov.info, homebasedbusinessllc.com, youtube channel at mcbov2011, I also have a MBA degree. Again, consider joining my team by going to my website at http://www.amway.com/mcbov, read my bio, and click on starting a business. If you are going to join my team please make sure that you are a motivated, self-starter, and open-minded entrepreneur ready to take some risks.

  13. 13
    Ace Says:

    McBOV’s is everything that is wrong with MLM’s. I encourage anyone to visit her websites if you want to see a get-rich-quick scheme in action. “Learn to use the secrets from over 20 secret societies” to get rich quick! It’s funny until you realize that there are poor desperate people who buy into it.

  14. 14
    Jerry Says:

    There is nothing wrong with people who have an opinion and I understand how some people see MLMs as scams. I thought this was the case as well and found there were plenty out there that were scams. However, I found that not ALL are scams. Especially when we are talking about companies that are publicly traded, required to provide their financials and are widely recognized by financial gurus are legit business models.

    Side note…Someone better tell Warren Buffett that he’s involved in some MLM scams because he has quite a bit of MLM companies he operates under the Berkshire Hathaway conglomerate. Doah!

    Jerry

  15. 15
    shan Says:

    I have personally been involved in a few MLM’s. I have never succeeded in anyone of them. I would agree that most are ponzi schemes. There was one however that was a little different. I won’t give out the name of that company but the only difference was you don’t get paid on recruiting. You do get overrides and other perks that all MLM state. I was with them for about 2 years. Here is why I believe most people believe MLM’s are scams. Most people fail. Before you jump to conclusions compare the differences and similarities of an MLM and a franchise. If you have never have had a franchise business then do some legitimate research. You will find many similarities. I have a franchise now, and a successful one. What I found out is peoples mindset is why people fail at MLM’S. Let me give you a few reasons
    1. A person spending several hundreds of thousands or even millions of dollars on franchises are way more serious and determined to succeed then a person spending a few hundreds of dollars on a MLM. Your loss is much greater.
    2. All recruiters sell a dream of why to join a MLM. Majority of those people they recruit do not have a business owners mindset. How many people do you know have created a successful business on a part time “when I have time” work ethic. Its funny how people are. Everybody wants to be financially independent but most don’t want to put in the time or effort required to make it work. What happens if you treat your “Subway” franchise like a MLM and show up or do some work when you feel like it? You go out of business. If you don’t care, why would your employees who you pay a little over minimum wage care?
    3. Most people are motivated by fear. People work harder when they are threatened of being fired from their jobs or losing their home, not able to pay bills, exc.. MLMs do a lot of positive motivational speaking. MLM’S don’t threaten you in any way. They can’t take anything away from you like your jobs or a franchise will. In a franchise you may be your boss, but you still have to follow franchise agreements. So technically in a franchise the corporate company is your boss.
    4. MLM’S make you talk to friends and family to open your market. In franchises you spent so much money in franchise costs and fees. Part of that fee is advertisement costs. Franchise corporate company will charge you the franchise owner a fee so you have a steady flow of customers. Check out some franchise costs. they are extremely expensive. Mcdonald is around $500,000 not including the building. Hotels are around a full million not including the huge building. I know this because I own a comfort suites. The building cost me 2.3 million and all the fees and costs for the franchise added up to be around 1.0 million.
    5. Most people are impatient. You have to have whatever you want now. Most people can’t wait for their next paycheck. If you can’t wait 2 weeks for your small paycheck how can you wait 5 years of hard work to have your millions? You don’t think anybody made their millions over 2 weeks do you? its funny most people are willing to go into debt for 4 years making no money during college for a better future but they won’t wait and put the effort needed to make business work of any sort.

    Bottom line is be careful with MLM’S. I don’t believe they are scams but if you do get involved in one treat it as a million dollar business. Stay focused and stay determined. Otherwise go get a 3 million dollar morgage and you’ll understand why I say what I say. You will see your mindset and work ethic change once you stress making that morgage note. Oh and excuse my grammar I’m typing on a smart phone and having technical issues. If you were questioning the legality of the MLM I was referring to earlier, the company is a division of a bigger company that is publicly traded. it also is regulated by the security and exchange commission (SEC). They represent the biggest names in the financial services sector.

  16. 16
    Dickinson Eddy Says:

    To Diana.this is the main reason many home businesses don’t work.Your husband should never force you to join his business.While he is building his business,he should at least find a part-time job to support his family,especially if he doesn’t have a tangible result right away.don’t discourage him cause when he become successful,you will all benefit.Take Care.

  17. 17
    Build Downline Internet Mlm Says:

    I absolutely love your blog.. Great colors & theme. Did you create this site
    yourself? Please reply back as I’m trying to create my own site and would love to learn where you got this from or just what the theme is named. Cheers!

  18. 18
    Tex Says:

    A scam everyone should be aware of is the Amway Tool Scam. Go to stoptheamwaytoolscam.wordpress.com for more information, and forward this to every non-Distributor/IBO you know, so they don’t get scammed.

    By the way, anyone advertising their Amway business or products online is violating Amway’s rules.

  19. 19
    Kim Says:

    I am simply amazed at the ease of which these MLM’s recruit and brainwash people to sell their products. I have a sister and brother-in-law who refuse to believe Monavie is scam. They alienate themselves from family, have filed bankruptcy, and yet still believe that this company will ensure their retirement. I liken it to watching an alcoholic drown themselves. I salute you for setting up this Blog.

  20. 20
    Kristian Says:

    Do you mind if I quote a couple of your articles as long as I provide credit and sources
    back to your site? My blog is in the very same niche as yours
    and my visitors would definitely benefit from a lot of the information you provide here.
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  21. 21
    Internet Money Path Review Says:

    I’m not sure why but this web site is loading very slow for me. Is anyone else having this problem or is it a problem on my end? I’ll check back
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  22. 22
    Rafe Says:

    Amway is probably the worst of them all. 1,000’s of great people join them and work hard only to find out that the plan cannot succeed. It is an scam and designed to guilt people into not quitting on their upline. People stay in for years are always in the red. If they were really running a business it would die. Instead they keep working their job, drinking the kool aid, and spending their own money while driving away all their friends and family. What they dont know is the children and grandchildren of the founders are all greedy crooks. (straight from an ex triple Diamond!)

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