Multi-level marketing businesses (also known as MLMs) – a method that uses everyday people to sell and distribute products and services – have existed for decades. Instead of selling directly to consumers online or in a brick-and-mortar store, these companies grant opportunities for the average person to start their own business and make a commission. Think back to Avon, Arbonne, Mary Kay, Cutco Knives, and the many Tupperware parties of the ’90s. In fact, MLMs accounted for $35.2 billion in retail sales in 2019, according to the Direct Selling Association.
Based primarily on recruiting for profit, it was only recently that documentaries like “Betting on Zero” and “LuLa Rich,” or books like “Selling the Dream” and “Hey, Hun” shed a light on what really happens behind the scenes of a MLM. These exposés have prompted the social media rise of former MLM consultants – including Meredith Lynch, Not the Good Girl, and the subreddit r/antiMLM with more than 840,000 followers, to name a few – to share horror stories of debt, wasted years, and chasing the impossible dream they were promised.
Stories like these have prompted some MLM companies to adjust their business model. A rep for popular hair and skin-care brand Rodan + Fields, for example, recently announced it will move away from a multi-level direct selling model and into an affiliate program. After great success under this MLM approach since its 2000 inception, customers and former consultants were stunned by the news. Starting Sept. 1, commissions previously made through product sales via recruitment will no longer be a part of the brand’s business model (more on that later).
“We are confident these changes will enable us to meaningfully expand the lives we can impact and, importantly, allow us to continue to provide our passionate consultants with a modern and meaningful earning opportunity,” Dimitri Haloulos, CEO of Rodan + Fields, said in a statement regarding the changes.
With more and more former MLM consultants speaking out about their experiences and brands changing entire business models, it begs the question: how do MLM companies operate and are there any that aren’t scams?
Experts Featured in This Article
Jill Heinrich is a content creator and podcast host of Opportunity Cost, which focuses on MLM education.
Emily Lynn Paulson is the author of “Hey, Hun” and a former MLM salesperson.
Steven Hassan, PhD, is an author and director of The Freedom of Mind Resource Center.
How Do Multi-Level Marketing Businesses Work?
According to podcast host Jill Heinrich, MLM consultants can make money in two different ways: through product sales and recruitment. “[Consultants] can earn a small commission from product sales made to friends and family and by the percentage of sales from the people that convince you to join their team and sell under you,” she tells PS. Structured to continuously recruit as many consultants as you possibly can, MLMs make a cut of sales from potential recruits – incentivized by compensation plans that often include additional bonuses and perks (shopping trips, family vacations, and large-spend gift cards, to name a few).
Sales typically take place on the phone, at in-person demos at house parties, through social media, and other non-traditional retail locations. It’s important to note that these consultants are not employees and do not earn a salary. Instead, earnings are based on the sales and a commission based on the profits of the sellers in their “downline” – a term used to describe the network of recruits, plus any recruits those recruits bring in – hence, multi-level. (Those higher up in the chain are called “upline”).
Given this structure, it is much more lucrative (and to some, strategic) to add people to the network than actually sell the products. “The MLM model works for the corporations, not the majority of reps, and it works because it’s pay-to-play; you have to pay to join and pay (fee varies amongst companies) to stay enrolled,” says former MLM salesperson Emily Lynn Paulson.
MLM leaders and companies rave about the millions of potential earnings to draw in more recruits, but that’s not always the reality. In fact, according to a 2017 report by the Consumer Awareness Institute, 99 percent of MLM sellers actually lose money. “Team members down the line are not entitled to the bonuses their upline makes, even though they are the ones contributing to it,” Heinrich says. “The higher up you are, the more recruits you have, the better opportunity you have to get extra bonuses and money.” This system makes it harder for people to compete at the same financial earrings level. “It’s really difficult to make good money or make money at all. Really, [participants] spend more on products than they actually make selling anything.”
The Appeal of Multi-Level Marketing Businesses
Flexibility is a big appeal with MLMs. With promises to make your own schedule, work from anywhere, earn thousands of dollars, and have a life-long community, it’s easy to see the lure of these organizations. For stay-at-home moms, recent graduates, and military wives (a large percentage of MLM consultants) these benefits are often too hard to pass up. “MLM leaders and companies target people who have gaps in their social and financial safety nets,” Heinrich says. “Typically, recruits are in some sort of deficit that they aren’t getting in their day-to-day life – think: stay-at-home moms, low-income families, people with disabilities.”
Paulson adds that generally people are brought into these companies by a friend or family member, implying a certain level of trust and hope even when the results don’t pan out. It’s not hard to understand why people stay, either, especially when incentivized with vacations, cars, shopping sprees and other perks for hitting different sales goals. To be successful, though, you need to know the product well, develop sales goals, and attend company-wide coaching calls and seminars – requiring a large time and financial investment for new hires, with no guarantee of making money.
This doesn’t account for the mindset needed to go into this business. Cult expert Steven Hassan, PhD, explains that multi-level marketing businesses require members to internalize the group’s doctrine as true in order to be successful. “MLMs are structured in a way that they tell you you will make a fortune,” says Dr. Hassan. “They have this idea that you’re gonna be an independent business person and sell you on that, while also telling you that having a job is second class and if you don’t focus solely on this, you’ll be a failure.” There is also an emotional appeal, namely that if you miss out on this great opportunity, you’ll regret it for the rest of your life.
The Key Differences Between MLMs and Pyramid Schemes
Many consider multi-level marketing businesses to be a pyramid scheme, wherein the brand convinces members to enlist as many newcomers as possible. However, there is a big difference between the two. According to the Federal Trade Commission (FTC), “If a MLM is not a pyramid scheme, it will pay you based on your sales to retail customers, without having to recruit new distributors.” Pyramid schemes, on the other hand, rely on continuous recruitment of dues-paying members to stay afloat.
What to Consider Before Joining an MLM
If you’re thinking of joining an MLM, Dr. Hassan urges you to first think about the BITE Model – or Behavior, Information, Thought, and Emotional Control – of Authoritative Control, the approach he uses to describe cults’ specific methods to recruit and maintain control over people. He suggests using it to decipher a legitimate group from an illegitimate group. As it relates to BITE, healthy groups tell you who they are upfront and unhealthy groups lie or leave out vital information.
Heinrich believes that supporting MLMs could directly perpetuate the problem, namely that salespeople in the downline will be continually exploited and will lose money. Researching a company’s structure can be time consuming and difficult to process, which is why so many people remain in the dark about MLMs. But if you ever have doubts about a business’s ethics, experts suggest looking into who the founder is, who is at the top of the masthead, and reviewing potential compensation plans. The more educated you are as a consumer, the less likely it is that harmful MLMs will continue to thrive off the hard work of unsuspecting recruits.
Related: The Latest Investment Move: Buying Stock in Beauty Companies
Natasha Marsh is a freelance writer who writes about fashion, beauty, and lifestyle. Prior to freelancing, she held styling staff positions at The Wall Street Journal, Burberry, Cosmopolitan, British GQ, and Harper’s Bazaar.
