When I was a sophomore in college, I was wandering through the food court prior to a Student Association meeting. This was right before winter break and I had just started to get involved in extracurricular activities.
While biding my time before reporting to duty, a man in a suit approached me. He asked me why I was in formal attire and if it had to do with my major. Young, naive, and afraid to be impolite, I told him that I was in the Student Association and was studying marketing.
"Awe, awesome! You know, it's pretty crazy that I bump into you. I was just looking for someone to market my business. And I then I meet you, a professionally dressed marketing student."
As a college student, marketing opportunities weren't easy to come by, let alone paid marketing opportunities. Wanting to know more, I agreed to meet with him after winter break.
When we sat down again, he was working from a notepad while explaining his business model to me. I buy some product upfront, sell a little bit, and break even. Simple enough.
But if I sell a little more, you're telling me I'll actually profit off this? Not just make a profit, but earn six figures? Alternatively, I could just recruit other people to sell for me and have them do all the work while I can profit?
At this point, my Spidey Senses were tingling, even for my idiotic 20-year-old brain. After a little more pomp and circumstance, I thanked him for his time, told him I'd think about it, and get back to him soon. But, man, was I angry that I wasted my time on something that was obviously sketchy. While I've heard about multi-level marketing companies, I never thought that they'd try to court Sophomore Marketing Major Rick Young.
What is Multi-Level Marketing?
For years, multi-level marketing companies, sometimes referred to as MLM's or even pyramid schemes, have been a source of controversy. While there are conflicting reports, multi-level marketing companies has been said to date as far back as the 1920's with the formation of the California Vitamin Company (now Nutrilite) [RY1].
Nowadays, some of them, such as Herbalife, have even gone public. But that doesn't mean they're a force for good. So, what are multi-level marketing companies and why are they a scam?
Multi-level marketing companies sell products through their non-salaried workforce. Representatives are recruited by other internal members and then act as subordinates for the recruiter.
To officially join a multi-level marketing, you typically must commit to purchasing a monthly supply of their product. The issue with this is that multi-level marketing companies tend to earn the majority of their revenue from their own employees as opposed to one-off customer purchases.
While those who are higher up with the organization can still sell products, they generally make the vast majority of their income from products purchased by their subordinates, forming a pyramid-shape organizational chart.
Are MLM's Always a Scam?
Pretty much. The only way they couldn't be considered a scam is if they earned most of their income through actual customers in a direct selling model. This is in opposition to how many are set up, relying on their reps to buy inventory. This backs the reps into a corner, where they have to continually buy product, even if they didn't sell their last batch. Some companies even establish reoccurring monthly credit card charges.
But even if this wasn't the case, there are still numerous other issues with multi-level marketing companies. Some of them include:
- Exaggerating the income potential.
- Exaggerating the size of the market.
- Denying the involvement of a pyramid scheme.
- Claiming the plan is brand-new.
- Making claims that no selling is involved.
- Making verbal statements that conflict with what's in writing.
- Fabricated approval (FDA) or endorsement claims [RY2].
As a business professional, ensure that you're properly vetting any organization before establishing a working relationship. While it may not seem like a big deal, the business world is very small, and it takes years to repair a damaged reputation.
Some states now require multi-level marketing companies to buy back any unsold inventory. Oregon is a good example of this [RY3].
Just last year, the Federal Trade Commission reached a $200 million settlement with $4.5 billion, multi-level marketing company, Herbalife. While the money went to Herbalife victims and the company agreed to a restructuring, they did exit legal action without having to declare themselves a "pyramid scheme" [RY4].
While these steps just mark the beginning of official action against multi-level marketing companies, it's a long road to putting an end to them.
Long removed from college, I've still had multi-level marketers reach out to me. Most recently, this was done with the idea being that I use my digital agency to help them recruit others.
Two months ago, someone replied to one of my digital advertising campaigns. Initially, this sounded like a business owner legitimately interested in launching a long-term operation and helping hundreds of clients.
We talked, I gave him a proposal, and I thought we'd be good to go. Then I learned he actually was a "distributor" for a publicly traded company. Naturally, I did some quick research and I realized that I had nearly been lured into the multi-level marketing game twice; this time as someone who would actually promote the "marketer".
So I did what I should've done a long time ago, and called a spade a spade. But that was just one of thousands of worldwide reps. The sad truth is that business owners have enough trouble trusting digital marketing agencies. Adding multi-level marketing companies into the mix only muddies the waters further.
RY1: MLM News Report, "What is Multi-Level Marketing?", https://www.mlmnewsreport.com/multi-level-marketing/
RY2: IllinoisAttorneyGeneral.gov, Multilevel Marketing, http://www.illinoisattorneygeneral.gov/consumers/multilevelmktg.html
RY3: Jeffrey A. Babener, New Protection for MLM Distributors, http://mlmlegal.com/protection.html
RY4: Federal Trade Commission, "FTC Sends Checks to Nearly 350,000 Victims of Herbalife’s Multi-Level Marketing Scheme", https://www.ftc.gov/news-events/press-releases/2017/01/ftc-sends-checks-nearly-350000-victims-herbalifes-multi-level