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Multi-Level Marketing - Why it IS a Scam, 99.9999% of the time!

Multi-Level Marketing programs or MLM's, are a constant source of debate. They have their fanatical devotees, and often appear to behave in a manner much like a cult religion. How many times have you been approached by a neighbor, colleague, friend, or worse yet, a family member, who said "Let me tell you about an incredible ground-level business opportunity" and you are then invited to a house or to lunch for "a discussion."

Most people immediately have a bad feeling that there is probably a hidden agenda or deception.

"Is it a multi-level marketing organization?" you think or even ask. And what if they're honest enough to admit that it is? Should you trust your instincts? Is there anything wrong with MLM's?

Perhaps you know someone who, at one point in their life, sold Amway, Herbalife , Mary Kay or some other health or diet supplement or cosmetic. Typically, they tell you how much money they spent, how little they made, how the meetings were like fundamentalist tent revivals, and how they were pressured to sign up new "distributors".

How does an MLM work?

Multilevel marketing plans, also known as "network" or "matrix" marketing, are a way of selling goods or services through distributors. These plans typically promise that if you sign up as a distributor, you will receive commissions -- for both your sales of the plan's goods or services and those of other people you recruit to join the distributors. Multilevel marketing plans usually promise to pay commissions through two or more levels of recruits, known as the distributor's "downline."

In a typical multi-level marketing or network marketing arrangement, individuals associate with a parent company as an independent contractor or franchisee and are compensated based on their sales of products or service, as well as the sales achieved by those they bring into the business. This is like many franchise companies where royalties are paid from the sales of individual franchise operations to the franchisor as well as to an area or region manager.

In a legitimate MLM company, commissions are earned only on sales of the company's products or services. No money may be earned from recruiting alone ("sign-up fees"). One must analyze the compensation plan to determine whether participants are paid from actual sales to customers and not from money received from new recruits. If participants are paid primarily from money received from new recruits, then the company is an illegal pyramid or Ponzi scheme.

Some less legitimate companies produce revenues primarily by attracting new participants with the hope of reward and selling them products or services of dubious value at inflated prices, as opposed to selling products or services consumers would purchase at the given price without regard to the opportunity attached. One must evaluate the products or services and determine if a significant percentage of consumers would continue to purchase them if the participants do not make money from the underlying opportunity. If the products or services have dubious value or if the participants must purchase excessive quantities without reasonable intent to use or resell said items, then the company is likely a thinly veiled illegal pyramid scheme.

Multi-level marketing has a recognized image problem due to the fact that it is often difficult to distinguish legitimate MLMs from illegal scams. MLM businesses operate legitimately in the United States in all 50 states and in more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid schemes try to present themselves as legitimate MLM businesses.

Ultimately, you will hear 4 major themes emerge as problems - see these pages for a detailed discussion:

  1. Market Saturation,
  2. Pyramid Structure,
  3. Morality and Ethics,
  4. Relationship Issues

Compensation plans

Companies have devised various MLM compensation plans over the decades.

  • Unilevel or Stairstep Breakaway plans are the oldest and most popular. They feature two types of distributors -- managers and non-managers -- and three types of pay:
    • Baseshop overrides are overrides of managers from their subordinate non-managers, collectively called a baseshop. This is the same as any other sales organisation.
    • Generational overrides are overrides of managers from the baseshop of managers who were previously their subordinate. Most plans compensate at least three generations of such managers.
    • Executive bonuses are commissions for managers who exceed a sales quota. For example, 2% of the total company sales revenue may go to a bonus pool that is shared monthly pro rata to managers who exceed $10,000 in that month.
  • Matrix Plans limit the width of each level in a distributor's group, forcing strong distributors to pile ("spillover") their recruits over people who did not sponsor them.
  • Binary plans limit the width of each level to two legs. Commissions are based on "cycles," where a distributor is paid a fixed amount whenever both legs achieve a certain number of sales units each. Commissions are paid incrementally when the sales volume in each leg matches.
  • Elevator or Matrix schemes feature a game board or a list on which each distributor pays in one or more product units to participate. When a certain number of units have been paid in, the structure splits and the earlier participant receives consideration. The Matrix scheme article discusses the legality of this plan. You must do your own research as with any other investment.

Criticism of MLM

The FTC issued a decision, In re. Amway Corp. in 1979, which indicated that multi-level marketing was not illegal. In this case Amway was however found guilty of price-fixing (by requiring "independent" distributors to sell at the same price) and making exaggerated income claims.

Amway has been a target for critics because some high-level Independent Business Owners (IBOs) have setup separate companies for selling instructional and motivational materials to Amway IBOs. In some cases this generates more revenue for them than their Amway distributorships.

Fraudulent MLM schemes can usually be identified by high entrance fees or requirements to purchase expensive inventories. They often collapse quickly when the merchandise cannot be resold, leaving all but those at the top of the pyramid with financial losses.

The Federal Trade Commission advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. In April 2006, it proposed a Business Opportunity Rule intended to require all sellers of business opportunities—including MLMs—to provide enough information to enable prospective buyers to make an informed decision about their probability of earning money. FTC trade regulation rules usually take 1-1/2 to 3 years before a final rule is established.

Yes, money can be made with MLM. The question is whether the money being made is legitimate or "made" via a sophisticated con scheme. And if MLM is doomed by design to fail, then the answer is, unfortunately, the latter.


If you already have joined an MLM or still plan to join an MLM...

If you're thinking about joining what appears to be a legitimate multilevel marketing plan, take time to learn about the plan before signing anything.  Here's what you need to know... and remember, you cannot trust the company's representatives to give you accurate, honest nor objective information - you want information from independent, objective sources:

  1. What's the company's track record?
  2. What products does it sell?
  3. How does it back up claims it makes about its product?
  4. Is the product competitively priced?
  5. Is it likely to appeal to a large customer base?
  6. What up-front investment do you have to make to join the plan?
  7. Are you committed to making a minimum level of sales each month?
  8. Will you be required to recruit new distributors to be successful in the plan?

Beware if a distributor tells you that for the price of a "start-up kit" of inventory and sales literature (and sometimes a commitment to sell a specific amount of the product or service each month) you'll be on the road to riches.

No matter how good a product and how solid a multilevel marketing plan may be, expect to invest sweat equity as well as dollars for your investment to pay off. There is no such thing as "passive residual income" - that phrase alone is a tipoff to a scam!


FTC links

For More Information and Filing a Complaint

The Federal Trade Commission (FTC) works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or to get free information on consumer issues, visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261.


Links to Further MLM Research & Information

Governmental and large NGO's

Newspaper and Magazines

MLM Watchgroups and Websites

  • The Pyramid-Scheme-Alert (PSA) organization offers consumer information on MLMs, news of legal cases, analytical tools, insightful articles, and an opportunity to effect new laws and social change by membership and contribution. You can do your own evaluation of any MLM program or suspected pyramid scheme.
  • "MLM Survivor.com" has some up-to-date headlines on the latest MLM lawsuits and legal actions by State and Federal law enforcement.

Specific MLM Companies

Books and Other Experiences


Copyright CFR 2005, 2006, 2007, 2008, 2009  - Definition of scam, fraud, etc.Legal disclaimer / corrections / complaints  -  Privacy Policy
Names used by scammers in the examples on this page and others often belong to real people and businesses who often have no knowledge of nor connection to the scammer's use of their name and information.  Sample scam emails and other documents are copies of the scam to help potential victims recognize and avoid it.  You should presume that any names used and presented here in a scam are either fictitious or used without their legitimate owner's permission.
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