A Quick Guide to MLM

What you need to know about this controversial business model.

A Quick Guide to MLM

Employees of MLM businesses are independent contractors.

If you’re eyeing a sales career, you may be considering taking a job at an MLM (meaning multi-level marketing) company. But before you do, there are some important things you need to know about this business model, how it works, and its controversies before you can determine if it’s the right career choice for you.

What is MLM?

MLM, also called network marketing or referral marketing, is a business strategy that entails a person selling a company’s products or services through person-to-person sales, which is also known as direct selling. (Picture a person peddling Tupperware, beauty products, or dietary supplements to consumers.)

Employees of MLM businesses are hired as independent contractors (read: no health benefits or salary) that act as “distributors” who make money two ways:

1. By selling the product or service directly to other consumers. Example: Jane is a distributor for ABC Cosmetics Company. She purchases the cosmetics at a discount from the company and sells them for full price to friends, family, and her larger network of customers.

2. By recruiting new distributors into their “downline,” allowing them to receive a portion of the sales that their recruits make. Example: Jane recruits Pam to become a fellow distributor for ABC Cosmetics Company, and Jane receives a portion of Pam’s sales.

The controversy over direct sales

To put it plainly: Direct sales is rife with controversy. Some multi-level marketing jobs have earned a bad reputation for their high failure rate. Indeed, only one-quarter of participants said they made a profit, an AARP study found—and of those who did, 53% made less than $5,000.​

According to one MLM company’s income disclosure statement, the vast majority of sellers (42.8%) earned between $100 and $999 in 2019. Only .1% earned $100,000 or more, and the top 1% of sellers with the highest annual income had been selling for the company for an average of seven and a half years.

Moreover, nearly half (47%) of MLM workers in the AARP study reported that they lost money, which may explain why more than four in 10 (44%) of participants quit the industry in less than a year.

The three most common reasons for leaving:

  • workers said they found it awkward to pitch friends and family (39%)
  • they didn’t make as much money as they expected (36%)
  • they didn’t like to sell all the time (35%)

Difference between multi-level marketing and pyramid schemes

While many direct sales businesses are legal, the Federal Trade Commission (FTC) actively polices the industry for pyramid schemes—fraudulent scams that resemble the MLM business model.

In a pyramid scheme, a salesperson’s income is based solely on how many people they recruit to join their downline, not how much product they sell. Furthermore, pyramid schemes can cost contractors and their recruits—often family and friends—substantial time and money.

Schemes often operate in plain sight, but you can spot them by watching out for these warning signs:

  • Promises of “fast money.” Don’t fall victim to extravagant promises about your earning potential.
  • Glossy images of entrepreneurship.
  • Sign-up fees. Have your guard up if you’re told that you need to invest money to start making money.
  • Low-quality products or services. Also, be skeptical of companies that claim their products contain “miracle ingredients.”
  • The company has been sued for deceptive business practices.
  • Training sessions are expensive.
  • Greater emphasis on recruitment than on product sales.

Women and network marketing

According to the Direct Sellers Association's (DSA) Growth and Outlook report, there are 6.8 million direct sellers across the country, and approximately 74% of sellers and buyers are women.

Direct sales is a popular side-job for moms looking to earn some money. Think about it: work-life balance and child care are less of an obstacle when you can make your own schedule. Plus, the traditional model of direct sales is one that takes place in a social setting—think Tupperware parties, but with modernized products like cookware, essential oils, jewelry, etc.—not an office.

In their book Paid to Party: Working Time and Emotion in Direct Home Sales, sociologists Jamie L. Mullaney and Janet Hinson Shope write of the emotional fulfillment and all-around fun home-party sales brings to participants, but warn of the problems that can arise when you rely on friendships to generate income.

You’re less likely to burn out when your work environment is more or less girls’ night out, and having friends over is a lot more appealing than cold calling strangers, but there’s no denying that the expectation of a financial exchange is, well, awkward to say the least.

The social media blowback

Home-party sales are not a new phenomenon, but the advent of social media is, and it’s exponentially expanded a seller’s reach, which is its own problem. There have been enough instances of distributors fabricating their success on social media pages as a way to lure and recruit sellers that one mega-popular platform, TikTok, banned MLM.

Elsewhere online, watchdogs and whistleblowers are united against fraudulent MLM companies: YouTube and Reddit have their own subcategories of anti-MLMers.

That being said, every business venture poses risks, and some distributors are able to turn multi-level marketing into a career. 

Is an MLM business right for you?

This type of careerl is primed for people who have an entrepreneurial streak and who are seeking a flexible work arrangement. According to the DSA, 89% of direct sellers work part-time. You get to make your own hours, devise your own sales and marketing strategies, and build relationships with customers the way you see fit, whether that’s face to face or over social media.

To determine whether network marketing is a good fit for your interests and lifestyle, ask yourself these questions:

  • Do I want to run my own business?
  • Do I enjoy working in sales?
  • Can I afford to risk the money and time? Expenses may include training, travel costs, starter kits, and promotional materials.
  • How long can I go without making money? This job is 100% based on commission.
  • Am I comfortable approach friends and family members as potential customers and prospective recruits? Personal relations are frequently used as sources of income or viewed as potential recruits.

Questions to ask MLM companies

Vetting an MLM business before you join it can help you avoid a pyramid scheme. Check your employment contract and ask prospective employers these smart questions:

  • What’s your rep churn rate? Churn rate shows how many representatives leave a company every year.
  • Can you provide your company’s income disclosure statement? This document will specify how much money each employee earned last year.
  • What’s your refund policy for products that I don’t sell? Inventory should be fully or partially refundable.
  • Who are your competitors? Market saturation can hinder your earning potential.
  • Will I make more money selling products or recruiting new salespeople?

Also, see if the MLM company has any complaints filed against it through the Better Business Bureau or the FTC.

Not sure MLM is a good fit for you? Get a job that is

Network marketing poses both risks and rewards, so if you’re looking for a job that comes with more stability, it behooves you to look elsewhere. Need more help finding the right job? We’ve got you covered. Recruiters and companies search Monster every day looking for top talent—upload your resume for free so they can find you and hook you up with a job that fits your needs.