How to Avoid Multilevel Marketing and Pyramid Schemes

What Is a Multilevel Marketing Business?

An MLM business uses "consultants" to sell products or services to friends, relatives and acquaintances, and recruits other people to sell the same products or services. Among the best-known MLM companies are Amway—which sells home care, personal care, nutrition and beauty products—and Mary Kay Cosmetics. MLM is also known as direct marketing, network marketing or direct sales.

In 2021, 44.6 million U.S. consumers bought $42.7 billion worth of MLM products, according to the Direct Sales Association, which represents the MLM industry. Those products were sold by 7.3 million MLM participants, with the average MLM seller ringing up $5,849 in retail sales.

MLM participants receive commissions on what they sell. They also can earn money in the form of a percentage of sales made by the new recruits, as well as bonuses for meeting sales goals.

Can You Make Money in Multilevel Marketing?

Although the Direct Sales Association boasts that the average MLM participant made nearly $5,900 in retail sales in 2021, researchers and consumer advocates warn that most MLM participants don't earn a profit. In fact, an estimated 99% of MLM consultants end up losing money, according to the Federal Trade Commission-endorsed book "The Case (for and) Against Multilevel Marketing."

What Is a Pyramid Scheme?

Some programs advertised as MLMs are actually illegal scams called pyramid schemes. While a pyramid scheme may appear to be a legitimate MLM arrangement, it's actually not.

A pyramid scheme is an illegal, fraudulent plan that relies on continually recruiting new members, instead of depending on retail sales, to make money.

Scammers involved in pyramid schemes often don't sell products or services. Rather, they make money only through commissions collected by recruiting an ever-growing number of paying participants. Scammers lure people into pyramid schemes with the promise of fat profits that might never materialize. The pyramid of participants grows as recruits sign up more recruits.

All pyramid schemes end up falling apart at some point, though, usually leading to monetary gains only for the few people toward the top of the pyramid. The rest of the participants typically lose the money they invested.

"Pyramid schemes are doomed to fail because their success depends on the ability to recruit more and more investors," says the New York State Attorney General's Office.

Warning Signs of an MLM Scam or Pyramid Scheme

If you're looking into joining an MLM program, watch out for these eight warning signs that it could be a scam or pyramid scheme:

1. The program doesn't offer a legitimate product or service.
2. The program can't provide proof of revenue from retail sales.
3. The program charges an upfront fee in order to participate.
4. The program's commission structure is confusing, or a promoter claims the company doesn't have an income disclosure statement.
5. Promoters make unrealistic claims about the money-making potential.
6. Promoters apply pressure, urging you to act quickly so you don't miss out on the opportunity. This may be presented as "limited spots" or a "one-time sale" that isn't actually limited.
7. Promoters overemphasize the need to recruit new participants instead of stressing the need to sell products or services. They sell the opportunity more than they sell the products themselves.
8. Promoters encourage participants to purchase excess inventory in order to remain in the program. This may be presented as "having stock" in case a customer wants something immediately, claiming participants will lose a sale if the products have to be shipped.

Best Practices for Avoiding MLM Scams and Pyramid Schemes

Here are some of the best practices for steering clear of MLM scams and pyramid schemes.

• Research thoroughly. Search online for details about the MLM program, such as background information about the company, reviews and evidence of lawsuits.
• Watch out for outlandish income claims. Be suspicious of MLM programs that promote "too good to be true" profit-making opportunities.
• Avoid poor products. Keep an eye out for MLM operators whose products are low-quality, outdated or cheap.
• Beware sparse contact details. Think twice before doing business with an MLM operator that has a website or phone number but that won't provide its address and similar information.
• Demand straight answers. Be cautious of MLM operators who dodge your questions about things like the program's annual sales and compensation structure.
• Check references. Chat with people who already participate in the MLM program, but be wary of folks who've been referred to you by the program. "Decoy" references might be paid to describe their fictional success with the MLM operator.
• Collect feedback. Discuss the program with people you trust, such as a friend, relative, attorney or accountant. Their feedback might prevent you from getting wrapped up in a pyramid scheme.
• Seek valid endorsements. Beware of MLM programs that claim they've been endorsed by a government agency, such as a state attorney general's office. Government agencies don't give their stamp of approval to MLM programs. However, government agencies like the Federal Trade Commission do regulate these programs.
• Check complaints. Contact the attorney general's office in your state to inquire about any complaints lodged against a MLM program that you're considering.
• Review the contract carefully. Carefully read through all contracts and other paperwork you're asked to sign before joining an MLM program.
• Don't rely on credit lines or loans. Be wary of any MLM promoters who encourage you to open up new lines of credit or take out loans to pay for start-up fees or purchase inventory.

The Bottom Line

In some cases, an MLM program may be a source of supplemental income. Unfortunately, however, a lot of MLM participants don't make a profit. Furthermore, MLM participants can fall victim to scams in the form of pyramid schemes. These illegal schemes are extremely risky and frequently leave you with less money than you had before. Before signing up for an MLM program, be sure to do your homework so you can avoid becoming yet another casualty of fraudsters.

If you do decide to join, check your credit report and credit score frequently to ensure you're on the right path financially. And, consider working with an accountant experienced in helping MLM consultants; they can guide you in keeping track of your income and expenses to make life easier come tax time.