MLMs are marketed as a quick and easy way to make cash, but they could be riskier than they seem.
With the coronavirus pandemic putting the pinch on Americans financially, many households are feeling the pressure to make extra money. And with social distancing requirements in place, side hustles and part-time jobs that allow you to earn money from home are looking more attractive than ever.
If you’ve searched online for a work-at-home opportunity, you’ve likely come across a Multi-Level Marketing (MLM) company. MLMs often promote themselves as being an easy way to make money, but there are some important things to keep in mind before signing up.
What is an MLM?
Multilevel marketing is a business model that involves selling products on behalf of a company. Joining an MLM usually means making an investment upfront to purchase the inventory you plan to sell, plus marketing materials to help you sell it.
When you join an MLM, you’re not an employee. Instead, you might be called an independent contractor, distributor or participant. And you might make money in one of two ways:
- Selling the MLM company’s products and earning a commission on each sale.
- Recruiting new distributors or participants and earning a commission based on their sales.
The first option essentially makes multilevel marketing akin to direct sales. You’re connecting with customers and putting the company’s products in their hands, earning a percentage of each sale in the process.
The second method of making money with an MLM involves creating what the Federal Trade Commission calls a “downline”. You recruit people to the MLM, who in turn recruit people to the MLM and so on. As your downline expands, you can earn money by taking a percentage of their sales.
If you’re not well-versed in how multilevel marketing works, that might sound a lot like a pyramid scheme. But there are some differences between the two.
“Pyramid schemes work by recruiting individuals and piling them up in a pyramid-structured organization with founders at the top and new recruits at the bottom,” says Allan Borch, founder of Dot-com Dollar.
Borch says members are asked to invest in the company’s products, similar to an MLM. But there’s more emphasis on recruiting new members versus actually selling those products. New members are vital for keeping new money coming into the pyramid scheme.
“The entire organization’s income depends on the investment of individuals that are being recruited,” says Borch. “When the flow of recruits depletes, so does the flow of money for the organization.”
MLMs can be legal, legitimate businesses just like other direct sales operations, but some are considered pyramid schemes. Pyramid schemes are illegal because people at the bottom of the pyramid are more likely to lose money rather than make it.
Some of the key warning signs of a pyramid scheme include:
- Promises of returns that seem too good to be true.
- Heavy emphasis on recruiting new members rather than selling a product or service.
- Complicated commission structure.
- Guarantees of how much you can earn.
The most important thing to know about pyramid schemes is that they eventually collapse. And once they do, all the money you’ve poured into it disappears.
What are the dangers of MLMs?
While pyramid schemes are problematic, even legal MLMs can have their own challenges. One of the biggest is sustainability.
“The main danger with MLMs from a profitability standpoint is that new sales agents can often end up recruiting more salespeople from the ranks of their customers, says Melissa Johnson, a financial analyst with Merchant Maverick. “Suddenly a circle of friends who would’ve been customers are also sales reps, offering the same products to the same group of people.”
Johnson says making money with an MLM can be difficult if you don’t have a large social network or the drive and desire to build one. When you can’t keep your downline going, you could easily find your MLM income fizzling out.
Aside from that, there’s also the upfront investment to consider. While some MLMs may have a low minimum to get started, others may expect you to invest several thousand dollars right off the bat.
For someone who’s recently lost a job or is a stay at home parent managing the family budget as a one-income household, coming up with that kind of money may be difficult. And since there’s no guarantee that the MLM will generate income, you’re taking a gamble on earning that money back.
MLMs can target women disproportionately
MLM participants are overwhelmingly female. According to the Direct Selling Association, 74% of MLM sellers were women in 2019. The majority of sellers, both men and women, are in the 36 to 44-year-old age range.
So why are there so many women joining MLMs? Johnson says it has to do largely with flexibility.
“Women, especially homemakers, mothers or other caregivers, are more likely to be seeking sources of income that don’t rely on set work schedules,” she says.
MLMs and direct sales appealing because this work can be done completely from home. The coronavirus pandemic has exacerbated the issue, Johnson says, as more people are looking for ways to work at home or supplement their household income.
One way MLMs often target women is by marketing products that women are more likely to use.
“Many MLMs are in the health, beauty and weight loss niches whose market is proportionally women,” says Steffa Mantilla, personal finance expert and founder of Money Tamer.
A look at some of the biggest MLMs by revenue bears that out. Many of the largest and most successful MLMs revolve around beauty and wellness. And under normal circumstances, many MLMs have a social component in which participants are encouraged to sell via in-person parties, something Mantilla says women are more likely to participate in than men.
Can you make money with an MLM?
The short answer is that if an MLM is legitimate, then yes, you can make money. Mantilla, for instance, says she earns $1,000+ every month with an MLM she belongs to. But it pays to do your homework before joining a multilevel marketing company.
Borch says it’s important to understand the compensation structure and business plan to get an idea of how you’ll earn money. It’s also helpful to carefully read over the MLM’s income disclosure statement to gauge how much other participants typically earn.
Johnson says other red flags include:
- More emphasis on recruiting more members versus supporting existing salespeople.
- Requirements to buy large amounts of inventory upfront.
- Expensive mandatory training sessions.
If you’re considering joining an MLM, ask yourself some key questions. For example, consider how comfortable you are making a sales pitch to begin with. If you’re not at ease with talking to people or trying to sell them on a product or the idea of joining the MLM, this may not be the right side gig for you.
Even more importantly, consider whether you can afford to put in the money and time required for an MLM. For instance, if you’re a stay-at-home mom who’s trying to balance helping your kids with distance learning and making money, an MLM could be too time-intensive. And if your household income has taken a hit, dropping thousands of dollars into an MLM could do more harm than good to your family finances.
Dealing with debt from an MLM
Though it is possible to make money with an MLM, the vast majority of independent contractors don’t. In fact, a 1999 study by the Federal Trade Commission found that 99% of MLM participants did not make money. If you don’t make money, the upfront cost of an MLM can easily create debt. And the answer is probably not to keep purchasing products, especially if it means racking up credit card debt or taking out costly cash advances.
If you’re in this position, here are some steps you can take to minimize your debt and get your finances back on track:
Make a plan to tackle debt. Debt can be intimidating. But it’s easier to manage if you have a payoff plan. These strategies can help you pay off your debt as quickly as possible.
Create a budget. Once you have a plan to lower your debt, take a look at your monthly spending to ensure you don’t take on more debt in the future. How you budget is up to you – just make sure you’re spending less than you’re earning.
Focus on your credit score. Strong credit could give you access to more generous loan offers and interest rates, which will give you even more options to pay down your debt. There are multiple ways you can improve your credit, but the most important thing is to pay all of your bills on time.
If you’re a stay-at-home mom, working mom or anyone else who’s seeking to make extra income, it’s important to remember that MLMs aren’t the only option. There are plenty of other ways to earn a legitimate income in your spare time, many of which you can do without leaving home.
Here are some examples:
- Freelance writing
- Online proofreading and editing jobs
- Online transcription jobs
- Tutoring or teaching kids online
- Making and selling crafts
- Making and selling printables online
- Knitting and selling patterns on Etsy
- Starting a blog
- Selling photos to bloggers and online businesses
- Offering child care services in your home
- Taking surveys
- Earning cash back with apps or a cash back rewards credit card
If you’re interested in earning an income without leaving home during the pandemic or any other time, try to keep it simple. The best way to make money online is to harness the skills you already have, says Mantilla.
“By taking up something you already know how to do, it’s less costly and you’re more likely to make money.”