Money Myths: Is Multi-Level Marketing a Legitimate Way to Make Money?

Amy was looking to make some extra cash when she came across a cosmetics company that offered a personal discount to those willing to sell their products as a distributor. But what started as a casual endeavor quickly turned sour. "I was tracking my expenses and realized I was spending way more than I was making," she said. Amy’s experience is a common one in the world of multi-level marketing (MLM). While some MLMs are legitimate business opportunities, others can be illegal scams designed to take your money.

What is Multi-Level Marketing?

Multi-level marketing (MLM) allows individuals to join as contract workers, buying products or services at a discount and reselling them for a profit. But the real money, as MLM companies often emphasize, comes from recruiting new members. Participants earn bonuses for each person they recruit and for the sales those recruits make.

"There’s a very fine legal line between a perfectly legal MLM and a pyramid scheme," says Amy, now a member of the Anti-MLM Coalition.

MLMs are legal in the U.S., but pyramid schemes — which may look similar but focus primarily on recruiting rather than selling legitimate products or services — are not.

How to Spot the Difference Between MLMs and Pyramid Schemes

The main difference between MLMs and pyramid schemes is that MLMs sell actual products or services, while pyramid schemes do not. A pyramid scheme's main purpose is to get you to pay money upfront and then recruit others to do the same, with little or no emphasis on actual product sales.

"If there are promises of certain levels of earnings and rewards like trips and cars that are nearly impossible to achieve, that’s a scam," warns Amy.

To protect yourself, be wary of companies that:

• Require you to "invest" a large sum of money upfront.
• Emphasize recruiting new members over selling products.
• Promise quick and easy money with minimal effort.

Are MLMs Worth the Risk?

MLMs can be enticing, especially for those looking to work from home or be their own boss. However, the reality is often far from the dream. Many participants end up spending more on products and recruitment efforts than they ever make back in profits. The growing wealth gap, deteriorating job security, and rising living costs contribute to the popularity of MLMs, but they also leave many participants worse off than before.

"People are often desperate for work or more money to make ends meet," Amy explains. "The American dream of ‘be your own boss’ and get rich also play into it."

How to Protect Yourself from MLM Scams

If you’re approached by an MLM and aren’t sure if it’s legitimate, here are some steps you can take:

• Do your research. Look up reviews of the company online, talk to others who have worked for the company, and check with the Better Business Bureau for complaints.
• Ask questions. Are you required to pay a large sum upfront? Do you have to buy inventory? Is there more emphasis on recruiting new members than on selling the product?
• Be skeptical. If it sounds too good to be true, it probably is. A legitimate job opportunity should require experience and an interview, not instant sign-ups and payments.

Want to learn more about avoiding financial scams? Check out our finance blogs.

Description: A person reviewing information about a multi-level marketing opportunity, considering the risks and legitimacy of the business model.