Multi-Level Marketing (MLM) is a wildly popular way to try to generate more income. Everywhere you look, a friend (or just a Facebook friend) is selling the next best product, throwing a virtual party, and giving you the best pitch to convince you to sign up on their “team.” These types of MLM companies look attractive because of their well-marketed products and seemingly simple “join our team” employment opportunities.
While the products vary greatly, the MLM business model is consistent. To become a consultant or a distributor, you purchase inventory, sell the product, then keep a percentage of the profit. To earn even more money, you sign people up to be on your team, who are then encouraged to recruit others, and so on. These people become your “downline” distributors and make you commission based on their sales.
The main problem with deciding to work for an MLM is the startup cost. Many companies require an initial purchase of inventory that can cost at least several thousand dollars.
MLM companies will oftentimes suggest that you put that initial expense on a credit card because you’ll pay it off in “X weeks time!” But all too often, consumers end up relying on credit cards to fund their new business venture and find they’ve accumulated new debt on top of the old.
What is an MLM?
But what is the difference between an MLM and a pyramid scheme? Really, multi-level marketing companies are not much different than pyramid schemes but are actually considered legal.
Pyramid schemes are, according to Google Dictionary, “a form of investment (illegal in the US and elsewhere) in which each paying participant recruits two further participants, with returns being given to early participants using money contributed by later ones.”
They recruit members by promising payments and/or services for enrolling others into the scheme, rather than requiring the sale of merchandise. Recruiting can become out of control and impossible very quickly, which leads to a lack of profit.
Pyramid schemes have existed for at least a century in different guises. The difference between a pyramid scheme and multi-level marketing is that multi-level marketing provides an actual product or service whereas pyramid schemes do not and only funnel the money up from recruitment costs.
Selling the dream
There’s no cause for self-loathing, though, says Stephen Barrett, retired psychologist and founder of MLM Watch, a guide to combat fraudulent multilevel marketing companies. Multi-level marketing appeals to people who want to do the right thing with their finances. And it’s natural to trust loved ones who’ve come out ahead.
MLM’s offer false promises and testimonials of being able to pay off debt \u2014- when they actually can put you further in debt. Only 10% of people usually succeed in paying off debt, buying a new car, etc., with the money that they earn from these businesses.
The reality is that most people fail. A large majority of these MLM schemes start you on a credit card to buy inventory to start your “business.” The motto tends to be “buy more, sell more.” This can lead to buying to fulfill quotas within a company and the debt can build quickly without making much profit.
MLM’s can seem like a great option for a work-from-home, flexible hours, and guaranteed profit job. These jobs tend to target specific demographics like moms (and dad’s) who want to make some extra money with stay at home job in order to be with their kids, and they also target low-income minority groups who are looking for easy ways to make money in order to pay off debt and help with financial struggles.
There has been a large influx of multi-level marketing communities that target women. Makeup, skincare, essential oils, clothing, these type of MLM’s typically have female consultants who sell to other women. We all have friends on Facebook who send messages about how they are selling these items and telling you it’s the next best thing, that it changed their lives, and that you should get involved.
Because of this, women’s friendships are being targeted. Not knowing whether a lunch or coffee date is out of genuine friendship or just for a potential profit is hurting social relationships according to this The Washington Post article.
Can it work? Maybe
There is a difference between legitimate multi-level marketing (direct selling) and MLM schemes. You can be successful and go far in a company that sells legitimate products and makes the majority of their commission from product sales.
Recruiting other distributors is not a real way to earn income. Instead, commission-based jobs are more secure and more rewarding. Effort = rewards. These types of jobs, where selling a great product is the goal of the company (I.e. insurance, paper, grills, etc), makes it easier to build a career and be truly successful.
For example, Jason Lee’s website, which claims to help “network marketing professionals unleash their potential” and offers tools for network marketers, is peppered with accounts of insolvent yet motivated people who made their American dream come true. However, according to research published by the Federal Trade Commission, the median income from multilevel marketing endeavors ranges from about $200 to $400 a month.
Does it usually work? No
As CreditCards.com writer Erica Sandberg described, as compelling as life-changing testimonials on many multi-level marketing sites can be, they’re dramatically uncommon. According to a 1999 paper written by Jon M. Taylor, of the Consumer Awareness Institute, and published by the Federal Trade Commission, 99 percent of those who participate in multilevel marketing lose money.
With such abysmal success rates, why would anyone take the chance on an MLM? Not being aware of the reality is a reason since multi-level marketing companies don’t publicize their failure rates.
Regina Lopez, from Salinas, California, joined the nutritional supplement company Herbalife expecting to support her three young children and her unemployed husband who is sick with diabetes. The family was in a bind. She couldn’t secure a flexible job, their credit card balances were in the $15,000 range, and bills were piling up.
“My cousin said I could make a lot of money and took me to his meeting,” says Lopez. “It was so exciting I signed up that night. I definitely thought it was going to be great, the answer to my prayers.”
Lopez immediately bought $700 worth of product with her credit card. As with many MLMs, the more inventory you purchase, the greater the profit margin you’ll earn on those items. Consequently, buying in bulk can seem like a sensible decision. Unless the demand for it isn’t there, as was the case for Lopez.
“I tried, but could not sell it because, honestly, people did not want to buy it,” says Lopez. “It’s too expensive. Nobody wanted to be my distributor either, so that didn’t work for me.”
After a year, she wanted to stop and return the remaining product, but the value had eroded because the company deducted fees.
“They would not let me give back what I paid, so I got even more behind with my credit cards,” says Lopez.
Upfront costs can lead to debt spiral
The amount you’ll need to spend on the initial inventory of the product can range from a few hundred dollars to several thousand. According to Sandberg, those costs can turn into debt and increase existing liabilities. Multi-level marketing companies offer no guarantee you’ll turn even a meager profit, and you may even be encouraged to invest even more into the venture.
Young Living is an essential oil company who, after the first round of inventory, requires that distributors buy at least 50 points (PV) worth of inventory per month to keep their status. If you aren’t making a profit and just keep waiting for “one day,” you could go into a large amount of debt that will be hard to escape from. That can also be said about LuLaRoe, who requires a minimum order of 30 items in order to stay active.
Never take a MLM’s advice to take on more debt. The upfront and continuation costs of working for a multilevel marketing company are often beyond the means of many hopeful distributors. Absent of sufficient savings, you’ll have to fund your initial outlay for products, which is often with credit cards.
In fact, LuLaRoe’s website openly encourages cash-strapped consultants to get and use credit cards for inventory on its FAQ page, with wild assurances of swift repayment from earned revenue:
“Eric and I paid back our initial investment in sales within about 2 weeks….but instead of actually using that money to pay it off, we reinvested it back into inventory.”
Getting out of an MLM:
It can be difficult to decide to leave your MLM company. Conflicting emotions can arise but you have to remember to be kind to yourself. Ninety-nine percent of people fail when they join a multi-level marketing opportunity because it is not set up for success. You have to decide what is ultimately the best decision for yourself.
Assessing your debt can be one of the hardest parts of deciding to leave, and it can even convince you to hold on a bit longer to catch your “big break.” The better option is to get out while you can and go find a more stable job or career elsewhere.
Rebuilding your finances
Dealing with the debt from MLM’s can be overwhelming. It is important to break down the information and accomplish what you can, day by day. A plan of action is vital. Large amounts of debt and late payments can have a negative effect on your credit score. Your credit score is important because it can determine your approval for a mortgage, car loan, new credit card or any other type of loan, and also how much you’ll pay in interest. Renters and landlords may also use your credit score as a way to evaluate your payment trustworthiness.
There are three critical steps to take to improve your credit score:
- Minimize debt
- Don’t apply for unnecessary loans or credit cards
- Make sure your income covers and/or exceeds your spending
There are a few additional ways you can increase your credit score:
- Become an authorized user. If you can be added to a friend or family member’s card account as an authorized user, this can help increase your credit score.
- Automate payments. Making your payments on time is a vital factor affecting your credit score. Set up auto-pay can ensure you never miss a payment.
- Open new accounts. Opening a new credit card will help your credit score down the road but it is important to keep in mind that applying for new cards can lower your current score. While it’s important to reduce your outstanding debt as you try to improve your finances, certain credit cards offer features that may help with this, or provide rewards that can help offset the cost of bills. A balance transfer card can be a great option if you’re looking to consolidate your credit card debt and quickly pay off balances.
MLM’s are a risky business and 99 percent of people who attempt to be successful, fail. These types of companies require a high upfront startup cost and can require you to spend significantly more money than you make on inventory in order to continue being a distributor. Multi-level marketing companies do not guarantee that you will make any profit from your efforts, either. Both of these factors can make you spiral into debt (or maybe even further).