Is Multi-Level Marketing a Scam? Or a Business Opportunity?

by Jessica Sommerfield · 8 comments

At one point or another, most of us have sat through a multi-level marketing business opportunity presentation — whether we knew it or not. These types of businesses, otherwise referred to as network marketing — or, with a negative connotation, pyramid schemes — have been around for years, but have been on the rise recently.

Many of them promise financial freedom and the ability to work from home, a concept that’s becoming more desirable in a weak job market and sluggish economy.

Unfortunately, many of them are also scams, and even if they’re legitimate, don’t follow through on their promises to make you financially independent.

Here’s a brief overview of what multi-level marketing is all about and how to tell the difference between legitimate businesses and frauds.

What is a Multi-Level Marketing Company?

Multi-level marking (MLM) is a system in which members are compensated for the sale of  particular products, as well as the sales of members personally recruited into the company. This is the opposite of single-level marketing, in which the seller receives income only from the direct sale of products. In theory, the more people you recruit into your downline, the more commissions and other compensations you’ll receive.

MLM companies have received plenty of criticism and suspicion over the years because of the shady “get-rich-quick” sound of their structure, as well as their often obnoxious or misleading recruitment techniques. While some companies are more like pyramid schemes (where members at the top benefit unduly from everyone else at the bottom) that burn people who get involved with them, there are plenty of legitimate and potentially profitable MLM companies.

How to Discern Legitimate MLMs from Scams

Research the company’s history.

The longer a MLM company has been operating, the better the chances it has a good reputation and is a legitimate business. Check out the company with the Better Business Bureau and the U.S. Federal Trade Commission. If you’re being recruited by an acquaintance or friend, don’t be hesitant to ask detailed questions about what they’ve put into the company and also how they’ve been compensated.

Watch for vagueness or manipulation in business opportunity presentations.

Companies that are legitimate shouldn’t be hesitant to tell you exactly what product(s) they sell, what’s required to get started, and how the compensation plan works. Many questionable MLM companies tend to use high-pressure sales tactics or manipulation to get you to sign up. Any company that won’t give you at least 24 hours to think over your decision isn’t worth your involvement.

Be wary of too-good-to-be true promises.

Check out the company’s business plan thoroughly and look for anything that seems fishy or unrealistic. Make sure there are testimonies of ordinary people who have found success with the business. If possible, get in touch with them, as company-sponsored testimonials could be exaggerated.  Beware of companies that allude to you receiving compensation without putting time or effort into building your business. And don’t forget that, like any other self-employed person, you’ll need to file a 1099 and pay tax for any income you receive.

The world of business is moving beyond traditional brick-and-mortar based companies to include an increasing number of online-based companies, many of which are home-based. The opportunities for finding your niche and becoming self-employed are numerous, but there are plenty of reasons to also exercise caution so you don’t fall victim to a scam. Don’t be afraid to look into the emerging opportunities available through MLM; just be sure to do your homework.

Have you ever participated in MLM? How did it go? 

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{ 8 comments… read them below or add one }

Grayson @ Debt Roundup July 21, 2013 at 9:20 pm

I got sucked into one in college. It was terrible, but I learned quickly what was going on and got out with little damage. I won’t make that mistake again.

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Kay Cee Dee July 25, 2013 at 8:53 am

I have been in a few and most recently joined a well documented, well established Inc. 500 company that has an A+ rating with the BBB and am fortunate to be part of a very fast moving, dedicated team that has PLENTY of documented success stories of people from every walk of life. We are very up front about what it takes to make it in this industry in terms of time, investment, and commitment. I have not achieved my goals, but I am seeing results. If you have the right mindset (or are willing to develop it) and are willing to make certain sacrifices for 3 to 5 years, you can enjoy immense time and financial freedom in this industry. I believe this is one of the most misunderstood, underestimated opportunities available to everyday people and I am fascinated by those who demonize it while they invests THOUSANDS into getting one degree after another to make average income and work 40+ hours a week for 40+ years. It’s not for everyone, but for those who can work it – it definitely works.

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Mike July 26, 2013 at 5:02 am

I guess this guy skipped the parts above about “being wary of too good to be true promises” and “watching out for vagueness…”

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fredjohnson July 28, 2013 at 9:53 am

I’ve sat through a few presentations from MLM sales people. Glad I never got too heavily involved with them. Everyone I knew who got into them at the time are now out. There is enthusiasm at first and them it drops off after they have badgered all their relatives and have finally talked to every friend they know to sell the product to. Finally, they have no one left to listen to their sales pitch. The vast majority of these MLM’s are just scams to get the few people at the top rich. Stay away. Instead, I spent my time starting my own small business years ago(non-MLM) and built that up over time. I’m able to draw a salary of $70,000 a month from it now—-yes, that’s right “a month”–almost $1 million a year. You only get one long shot at this in life so spend your time wisely.

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Dale Kepel July 30, 2013 at 7:32 am

I agree, we should be wary of too-good-to-be true promises. It is a part of sales talk which can really enticed us to be part of it. There are many scams today, but still it is our own decision if we let ourselves take part, but we should do some research first for us not to suffer at the end. Great tips.

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Teresa August 5, 2013 at 7:29 pm

I joined a mlm last fall, simply to try it out. If I was a lot more entrepreneurial, I could probably do better. But I really just want to continue rouse the product. Several of my friends are doing well with it, so I’m happy for them.

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