You just got a DM from a friend from high school you literally haven't seen or spoken to in a decade... and before they've even finished their schpiel, you're wondering, "Is this an MLM?" MLMs, short for multi-level marketing businesses, also known as network marketing or direct sales, and sometimes less favorably (and inaccurately) referred to as pyramid schemes, have seen a marked resurgence in the age of social media. And with that, comes much debate over the business model and its practices. With their targeting of women, and offering up money-making opportunities that seem too good to be true, this is a topic that has come up frequently on Family Finance Mom. So, here's a few MLM statistics and to be aware of before you join or buy from an MLM.
10 MLM Statistics, Facts, and Terms to Understand BEFORE You Join
If you've been around here a while, you already know that I don't believe in telling women what to do with their money. Instead, I believe in educating you and providing you with data and facts to empower you to make better decisions for yourselves. The same applies here.
I'm not going to tell you what business venture you personally should or shouldn't undertake, or what products you should or shouldn't buy. I will, however, help you answer "Is this an MLM?", explain what exactly that means and represents, and outline the facts around the likelihood of you turning a profit if you join one.
1. MLM is a Legal, Distribution Model
MLM stands for multi-level marketing. It is a distribution model characterized by independent, non-salaried, company representatives selling products or services to consumers. These representatives are then paid via two potential earnings streams: 1) commissions for products they sell directly to end, retail customers, and 2) commissions they make for products sold by other people they have recruited to sell for the company, referred to as their "down line."
This process of recruiting other sellers to earn additional income forms a pyramid shape, which is why MLMs are often referred to as pyramid selling. The first representative often has the most earnings potential because they earn commissions on sales from all the representatives recruited below them.
What do other product distribution models look like?
- Direct Sales: businesses sell directly to a consumer straight from their website or storefront. There are no middlemen, and no commissions paid to any intermediary or independent agent. There is the manufacturer directly delivering product to its end consumers. E-commerce makes this model more feasible than ever
- Distributors: product manufacturers can't easily reach all customers, so they leverage distributors, with warehouses and delivery capabilities. Examples might be in the food industry where restaurants order from food distributors who deliver to them from multiple manufacturers or farmers.
- Wholesalers / Retailers: this is often a preferred distribution channel for product manufacturers because they can process large orders and the risk for resale transfers entirely to the wholesaler or retailers. Examples would be the Big Box and Department Stores of the world. Amazon is an online retailer, and also provides a sales platform for other online retailers as well.
I would also be remiss if I didn't mention that social media has also created a boom in influencer and affiliate marketing. In these scenarios, bloggers and social media influencers receive compensation for posting about products to their audience or receive a commission when you shop via their affiliate links. And sometimes, these influencers pitch their MLM business links just as they do other affiliate offerings. By law, and the user terms from all major social media platforms, influencers MUST disclose any time they are receiving compensation for posting or directing you to use links through which they receive compensation.
2. MLMs have been around for over a century
MLMs are not new. The first MLM began in the 1880s and is still in operation today. Avon initially began when a traveling book salesman offered beauty products as a free gift with purchase. When he realized customers were more interested in the beauty products than the books, he started a beauty company and recruited a team of women to be sales representatives.
Today, the Direct Selling Association, the national trade association for MLMs has nearly 200 member firms, though it is estimated there are more than 1,000 firms selling via this model in the US alone.
In the age of social media, MLMs have made a resurgence. No longer do sales representatives have to call on customers and neighbors door to door or face to face. They can reach 100s of people through social media posts, and host product parties entirely online.
3. MLMs are BIG Business
More than ever, especially in the current economic environment, we all want to support small businesses. And we always want to support our friends. But when your friend asks you to host a party for their "new business" or recruits you join to help their small business grow, you should know that MLMs are far from small businesses.
Your friend is merely an independent, 1099 paid, extension of a multi-billion dollar company.
In 2019, according to the Direct Selling Association, Direct Retail Sales totaled more than $35.2 billion, with the largest MLM companies selling all around the world. They are most prevalent in beauty, personal care, health and wellness, home goods, and even financial services industries.
4. MLMs target women and moms
The flexible schedule network marketing provides - with the ability to set your own hours and work as much or as little as you like, often makes MLMs attractive to women, and especially stay at home moms. Many have left careers to care for their children, but still want to earn their own income or replace the income they left behind. Some see it as a social outlet too.
According to the 2018 AARP Study of Multilevel Marketing, MLM participants are more likely to be female than non-participants (60% vs. 51%), married (72% vs. 65% of non-participants), and the average age of a first-time MLM participant was 29 years old.
5. The majority of MLM participants make no money
Now, here's where the real MLM controversy lies. Women are presented joining MLM's as a business opportunity: a chance to make your own money, with little to no start-up or ongoing costs. But a business opportunity should make money. And whether you look at surveys or income disclosures straight from the MLMs themselves, the vast majority of participants do not.
Approximately 75% of you reported earning less than $1,000 a year (2 in 4) or losing money (1 in 4), which is roughly in line with the results of the larger 2018 AARP study. The AARP study also found that working more hours or investing more money isn't directly correlated to earnings either.
6. MLMs should provide clear compensation plans AND income disclosure statements
Every MLM by law has to provide a clear compensation plan. It should be presented to you before you join, and you should make sure you clearly understand how it works. You should especially make sure you understand how much is earned from selling products vs. recruiting and building out a team.
MLMs should also provide an income disclosure statement, though not all do publicly. These outline the earnings payouts made by the MLM to their direct sales representatives with varying degrees of transparency. What is abundantly clear? The vast majority of participants make little to no money, and that is before accounting for the expenses they personally incur to support their business: hosting events, promotional activities, product samples, internet and phone bills, travel, and more.
Here is a summary of the most recent income disclosure statements for DoTerra, Beautycounter, Color Street, and Rodan + Fields.
7. MLM compensation schemes and requirements vary
MLM compensation plans can vary dramatically. Most sell representatives product at a discount, which can be use for personal use or sold at a retail price mark-up for profit. They also offer commissions to you for online sales using your personal link. And finally, they offer you commissions, albeit typically at a smaller rate, for product sold by representatives you recruit to join your team as part of your downline.
The other key variable to be aware of: most MLMs require a minimum monthly, semi-annual or annual sales volume to earn a commission, offering higher commission rates for higher sales volume. Some may even require differentation between volume sold to existing customers and new customers, requiring you to actively sell to new customers to maintain your business.
Lastly, be sure you understand if you have to own inventory. I have seen contracts sent to friends that required them to buy a new kit every season, at a cost of upwards of $1,500, for trunk shows. Beware of channel stuffing - if you are forced to buy or sell more volume than you can ever personally use or distribute.
8. Some MLM companies use multiple distribution channels
Today, many MLM companies use multiple methods of distribution. As an example, Beautycounter touts itself as a "direct to consumer" brand. It is by and large distributed through independent consultants, but you can also buy directly from the brand website with no consultant. They have also had seasonal pop-up retail stores, and have had limited product lines offered in Target and Sephora.
Other MLMs are set up to allow you to sign up as a wholesaler for an annual fee, just to get the product discount, with no sales or volume requirements.
9. Some major MLMs have been fined by the FTC or sued for predatory or misleading business practices
In 2016, Herbalife, one of the largest MLMs in the United States, was forced to pay a $200 million fine and restructure its operations to settle Federal Trade Commission (FTC) charges for "misleading consumers about potential earnings." They had to reorganize their compensation plan to reward actual product sales more than the recruiting of downline members.
Throughout 2018, dozens of lawsuits were filed against Lularoe, as the MLM known for its crazy patterned leggings ballooned to 150,000 consultants in just a few years.
In 2019, Advocare, another US MLM, agreed to a $150 million fine from the FTC and being banned from multi-level marketing permanently because "the parties falsely claimed to offer a life-changing financial solution that would allow any ordinary person to earn unlimited income, attain financial freedom, and quit their regular job."
Just this last spring, in April 2020, at the height of the pandemic, the FTC sent 10 letters to MLMs for their participants making false earnings claims, false health claims with regards to coronavirus, or both. Among those receiving letters included DoTerra, Rodan + Fields, Arbonne and ItWorks.
Businesses may not make false claims about earnings or how earnings are generated. An MLM approaches more of a pyramid scheme and becomes subject to scrutiny and potential fines by the FTC if
- The company or its participants make outsized or extravagant claims about your earnings potential
- Recruiting down line distributors generates a disproportionate about of commissions vs. product you sell yourself and is pushed as the "way to make money"
- You are forced to buy product at regular intervals or more than you need or can sell to maintain your status, commission level, "stay active" or qualify for bonuses. This is known as "channel stuffing"
The general litmus test used by the FTC to determine whether an MLM is acting as a pyramid scheme dates back to a 1972 lawsuit against a beauty company, Koscot. The Koscot standard permits MLMs to pay for recruiting sellers, but cannot pay commission for inventory the recruits buy.
10. We Can't All Beat the Odds
The single biggest thing I hope you take away from this is that MLMs are marketed to women on potential that only a very select few - literally a fraction of a percent of participants - ever obtain.
We are masters at convincing ourselves that we are more than average, and that we will be the exceptions, not the rule. But the numbers don't lie. Join an MLM at your own risk, and know the odds of generating a return on your investment, of earning even a part-time income are not in your favor.
Is it an MLM?
Check out the summary of the rest of your survey responses, as well as your MLM stories below.
"I felt guilty trying to get friends or family to sign up. I had a hard time getting anyone to host parties. It’s hard to make money off of. I am technically still a consultant but that’s because I like their makeup and protein powder and find the annual fee worth it for the product discount."
"It was a total flop for me. I’m not a salesperson and hated reaching out to people I haven’t talked to in yrs just to try and sell something. Felt really false and crappy. I still have it open bc I have one friend who orders almost every month without fail bc she honestly loves the products."
"I liked getting the discount and never planned to make a lot of money at it. The company ended up getting rid of its MLM structure and that was a tough thing for many reps."
"I’ve bought from a lot of MLM mostly to support friends and have liked some things that I’ve continued to support. I joined this insurance brokerage to help get licensed as a life insurance agent quicker and be guided through the process. I paid $125 for some online tools, and I pretty much just sell independently and don’t actively try to recruit. I share if someone asks but don’t pressure. I like my friends and family more than the extra money from “recruiting." I don’t mind MLM I think it’s a good business model IF explained properly and have realistic expectations."
"The person who signed me up ghosted me almost immediately and I realized I didn’t want to ask my friends to buy things from me. I feel overall that’s it a lot of social capital, even just to host a party, and I don’t like using my relationships that way."
"Always been invited and always feel incredibly awkward saying no! Initially I would accept the invitation because I felt so bad but realized it was way more uncomfortable being at an event and saying no rather than just saying no from the start. I feel like it's never really good pricing and even "specials" or "bundles" are just ways to get you to spend more money. I absolutely hate it."
"I generally think they are terrible. They take advantage of women and are predatory. However, when a friend asks me to buy something, I often do because I want to support that person."
"It felt too much like I was tricking my friends and family into spending their money so I could make money."
"I find them uncomfortable. I feel obligated to buy something and overspend. The thought of seeing my friends and family as an income source makes me cringe.."
Hopefully, armed with information, you can make more informed decisions about MLMs, whether you are considering joining one, supporting a friend or just buying a product offering. And the next time you're approached to host a party or join your friends new "business venture", feel free to share this information with them instead.