Social media is bursting at the seams with claims of people making BIG MONEY by working at home on their own schedule, pushing products that sell themselves. Sound too good to be true?
Yeah, it definitely is.
Multi-level marketing, or MLM, is a business structure based on the direct sale of products by distributors, usually on social media. You may have seen them: Arbonne, Herbalife, Mary Kay, and LuLaRoe are just a few examples of predatory businesses that make their money by encouraging recruiting on top of sales and pressuring distributors to keep large product inventories on hand, even if they are unlikely to be able to sell it. In this model, the customer is not the target buyer—distributors are. Based on the many lawsuits popping up around these companies, becoming involved in what is essentially a pyramid scheme can be a recipe for disaster.
There are particular demographics that often fall victim to these types of schemes, largely because of the emphasis on being able to ‘run your own business’ and ‘be your own boss.’ For people who are not working a full-time job, like retirees, the temptation to rack in some extra money in your free time is extremely attractive. But for many people, working for an MLM company is like circling the drain while desperately trying to keep your head above water. Here are some of the most important things to consider if multi-level marketing is calling your name.
You have to pay to play – One of the main reasons recruitment is such a big element of MLM is the pay to play aspect. Companies spin it more like a finder’s fee—pull in fresh blood, and you’ll get a cut of their commission. The trouble is, there is unlikely to be much commission made. The company, however, is still getting paid via the new recruits startup costs which can be as low as $99 or, in the case of LuLaRoe, upwards of $5,000.
It’s a vicious cycle – Once you’re in, it’s time to sell. And the best way to sell products is to have products on hand to sell. Many MLM’s encourage sellers to keep an inventory, even if it is not a formal requirement. Most companies also have minimum sale requirements to remain an active distributor, so some people simply buy their own inventory to meet those numbers. Inventory doesn’t just take money, it takes space, and many sellers end up with large stockpiles of products they can’t sell, thanks to our next issue.
Oversaturation is a major problem – MLM products tend to have a higher price point than retail items, with the attraction being that you can’t get them in stores, they are only available through your local rep. But with thousands of sellers hawking all of the same products it’s very hard to be the only distributor in a given area, and that means burning through customers pretty quickly. Unless you have a core group of diehard customers, who are willing to return to you, again and again, hitting your sales goals can be a crapshoot.
In short? Be very wary of anything that sounds too good to be true. Most MLM distributors leave the company within a year, and the average income is often around $2,500 a year. That’s a lot of work for a very small reward.