Multi-Level Marketing Companies 101

Investments, Business Opportunities, or Ponzi Schemes?

Multi-Level Marketing Companies 101
October 22, 2014

At some point in their lives, many people will be asked to come to a “business opportunity meeting” where they can learn about how to start their own successful home-based business. These invitations usually come from family members, friends or even co-workers.

When they arrive, there is a good chance they will be presented with an opportunity to join a multi-level marketing (or MLM) organization. Sometimes referred to as network marketing, MLM businesses allow ordinary individuals to sign-up to become distributors of the products the business sells.

There are typically costs associated with such a distributorship — ranging from required marketing tools (such as a personalized sales page on the company website) to obtaining a minimum product inventory. These requirements and costs vary by company.

Amway is probably the company most closely associated with multi-level marketing. There are hundreds of multi-level marketing businesses currently in operation — a few other well-known MLM companies are Tupperware, Herbalife, Avon, Mary Kay, Pampered Chef and Nu Skin.

The key distinguishing feature of a multi-level marketing company is its emphasis on the importance of existing distributors recruiting new distributors to work underneath them in selling products. In most MLMs, this recruiting takes on a missionary fervor, as existing distributors are paid a percentage of the sales made by new distributors they recruit, as well as distributors that their recruits recruit — this is referred to as a “downline.” So MLM distributors have the opportunity to earn money in two ways: through the products they sell themselves, and by building a large downline from which they can pocket a percentage of sales distributors below them make and also earn bonuses.

Legit Business — or Ponzi Scheme?

When discussing multi-level marketing businesses, it is important to distinguish between a legitimate MLM business and a pyramid or Ponzi scheme, because they are often lumped together. Sometimes it can be hard to tell one from the other, but a legitimate MLM business is not a pyramid scheme.

The main distinguishing characteristic between the two is whether or not a real product is actually being sold. In a pyramid scheme, the money paid in by new recruits is simply used to pay off existing recruits — not to buy actual products to sell. This money is often referred to as a sign-up or initiation fee.

If the person trying to recruit you promises high returns quickly simply by recruiting others — or is very vague about what products the business sells, instead stressing the importance of recruiting — there’s a good chance it is a pyramid scheme. Pyramid schemes are unsustainable over the long term, because nothing is being sold to generate revenue.

They eventually collapse, with only the people at the top of the pyramid actually receiving money (often lots of it) and everyone else losing their entire investment. Pyramid schemes are also illegal, so if you sense this is what a supposed business opportunity really is, you should not walk, but run the other way.

A legitimate multi-level marketing business, on the other hand, sells real products that you can touch and feel. The money (at least some of it) you initially pay to join the organization will usually go toward buying inventory for you to sell, and you can earn income just by selling product, without ever having to recruit another distributor.

Right for You?

Let’s assume you have found an MLM business that interests you, and you are confident that it is not a pyramid scheme. You have always dreamed of starting your own business, working from home and being your own boss. Could this be the opportunity you have been waiting for?

Perhaps. But it is important to go into it with your eyes wide open. The first thing to realize is that success probably will not be as easy as it seems to be. The person (or people) recruiting you may have tried to convince you that this represents a once-in-a-lifetime opportunity for you to start your own business, get rich and make all of your dreams come true. While there are certainly some people who have gotten very rich in multi-level marketing businesses, only a tiny fraction of MLM business owners ever strike it rich, and about half drop out of the business after just one year.

You should also realize that MLM success will require hard work — and lots of it. It probably won’t be as easy as simply hosting a few recruiting meetings, signing up a bunch of new distributors, and selling some products here and there. In general, those who enjoy the most success in multi-level marketing are people who devote most of their time, energy and attention to the business.

Another thing to consider is that MLM success usually requires very strong sales and recruiting skills. Not only do you need to be able to sell the products, but you also need to be able to sell other people — often family members and friends — on the idea of becoming distributors if you want to build a strong downline, which is the key to big MLM success. If you are not comfortable in the role of a salesperson, or if you do not strongly believe in the product you are selling, then MLM probably is not the right business opportunity for you.

With all of this in mind, if you still think a particular MLM business opportunity is right for you, perform some research and due diligence on the MLM company. Here are a few questions you should ask about the company and the business opportunity:

  • Is it possible to earn a reasonable, sustainable profit just by selling the product and not having to recruit other distributors?

  • What percentage of the product is bought by retail customers vs. bought and consumed by distributors?

  • How long does it typically take distributors to start earning a profit?

  • What is the average compensation for distributors working full-time and those working part-time?
Other Options

If you believe strongly in an MLM company’s product and intend to use it yourself, one option is to join as a distributor and work part-time selling the product, but not spend time recruiting and building a downline. This way, you could possibly earn enough money to essentially use the product for free yourself if you are able to sell enough.

Another option if you believe strongly in an MLM company is to invest in the company by buying its stock. Many MLM companies are traded on public stock exchanges, including most of those listed earlier in this article. Before purchasing the stock of an MLM company, you should perform the same research on it that you would before buying the stock of any company. Start by going to the company’s website and requesting or downloading a copy of its annual report. You might also obtain a copy of the business’ 10-K report for more detailed information about the company’s finances, operations and other critical aspects of the business.

Whether or not multi-level marketing represents a good business or investment opportunity for you depends on many different factors, including those discussed here. Be sure to investigate any MLM business you are considering very carefully before signing any papers or investing any money with them.

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