Multi-level marketing vs. pyramid schemes

What you need to know to determine whether a sales business is legitimate.

Multi-level marketing vs. pyramid schemes

Employees of MLM businesses are independent contractors.

If you’re eyeing a sales career, you may be considering taking a job at a multi-level marketing (MLM) company. But before you do, there are some important things you need to know about this controversial business model—and what the difference is between a legitimate MLM business and an illegal pyramid scheme.

Multi-level marketing vs. pyramid schemes

MLM, also called network or referral marketing, is a business strategy that entails selling products or services through person-to-person sales. (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”—meaning, they make money by selling the product or service directly to other consumers. Another way MLM workers get paid is by recruiting new distributors into their “downline,” allowing them to receive a portion of the sales that their recruits make.

While many MLM businesses are legal, the Federal Trade Commission (FTC) actively polices the industry for MLM schemes.

Pyramid schemes are fraudulent scams that resemble the MLM business model. The key difference: 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.

Telltale signs of a pyramid scheme

MLM 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.

Is an MLM job right for you?

More than 20 million adults across the country are current or former participants in multi-level marketing businesses, representing a $36 billion industry. But MLM jobs have earned a bad rap for their high failure rate. Indeed, only one-quarter of participants said they made a profit, a recent AARP study found—and of those who did, 53% made less than $5,000.​

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

The three most common reasons for leaving MLM:

  • 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%)

That being said, every business venture poses risks—yet some MLM workers build lucrative careers. To determine whether an MLM job 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, and promotional materials.
  • How long can I go without making money? MLM jobs are 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 an MLM company

Vetting an MLM business before you join it can help you avoid a pyramid scheme. Here are smart questions to ask prospective employers:

  • 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 company has any complaints filed against it through the Better Business Bureau or the FTC.

A smart job search

Multi-level marketing poses both risks and rewards, so do you due diligence before jumping in. Need more help finding the right job for you? Join Monster for free today. As a member, you can upload up to five versions of your resume—each tailored to the types of jobs that interest you. Recruiters search Monster every day looking to fill top jobs with qualified candidates, just like you. Additionally, you can sign up for job alerts so you get notified whenever a new position becomes available at your desired companies. Those are two quick and easy ways Monster has your back. Let's get you an awesome new job today.