“Isn’t that a pyramid scheme?”
You can imagine how enraged a coworker was, after I naively asked this question about his wife’s new business. He gave me a rundown on multi-level marketing which, frankly, left me a little confused about the difference between the two, but gave me the verbiage I needed to not offend other MLMers.
My personal opinion has wavered. Initially I was wary, and maybe a little frustrated at the explosion of advertising in my Facebook newsfeed by family and friends. Then it started to seem like a good opportunity to get into entrepreneurship for people who might not have the initiative or capital to strike out on their own.
Well, let’s just say I’ve read a lot about MLMs. And I’m running across new and alarming stories like the $1 billion lawsuit against LulaRoe, accusing the company of operating as a… you guessed it, pyramid scheme.
Pyramid Schemes vs Multi-Level Marketing
I went to the BBB (Better Business Bureau) to get a reliable definition. After reading the two, the only real difference I could discern was that pyramid schemes focus more on recruiting new salespeople than on making sales. Whereas MLMs supposedly put more emphasis on selling products, and recruiting additional sellers is just a bonus.
In my mind, that’s a very fine line and one that would be difficult to police. Yet one of these business models is illegal and the other is perfectly legal. So that concerns me a bit, but let’s get into the other issues with multi-level marketing.
Objection #1: Quick, Easy Money
MLMs might disavow responsibility for this, BUT I have seen so many salespeople recruiting others using this tactic. They gush about how easy it is, how fun, how much money you can make, and so on. I’ve seen the more gullible among my friends fall for this.
A shy, quiet friend urged to sell sex toys. An immigrant with poor language skills encouraged to go door-to-door selling insurance. Another friend whom I love dearly, but will admit has an organization problem and a houseful of kids and pets who destroy everything – told she’d make a killing on products. Products that wouldn’t make it longer than a week or two in that house.
Even if these salespeople weren’t specifically recruiting my friends and family to positions they’re uniquely unsuited for, I’m highly skeptical of anyone suggesting you can make money without effort. It just doesn’t work that way. The BBB helpfully mentions red flags, and that’s one of them. “Promises of high earnings, especially with little effort, time or serious commitment.”
If it sounds too good to be true, it probably is.
Objection #2: Buy-In Costs
Not all MLMs require money to get started, but I’ve heard of enough. That insurance company? The buy-in fee was $500. Even without a buy-in fee it can be expensive. For LulaRoe, consultants must purchase the clothing and, according to Quartz, the $5,000+ starter package is required.
At that point, it’s not even about LulaRoe selling to customers, it’s LulaRoe selling to their own consultants. What do they care if you manage to sell of all your inventory? They’ve already made a profit.
I’ve also seen MLMs that sell products online, and you can purchase it through your consultant’s sales page. This seems much less scammy to me, personally, but I also have to wonder, what’s stopping me and other consumers from just buying from the company directly?
Objection #3: Making Money for Other People’s Work
Multi-level marketing is supposed to be about the sales, not the recruiting, BUT the truth is that many of the vocal MLMers you see on Facebook or Instagram are making their money off the salespeople under them. I spoke to one woman not that long ago who said she wasn’t really selling anymore, but she had a “passive income” from her consultants.
Sounds great, if you don’t mind making money while other people struggle and potentially don’t make money themselves (A study of 11 different companies showed that 99% of consultants LOSE money). To me, this attitude seems like one that encourages dishonesty, and the cult-like attitude Quartz describes. Again, using LulaRoe for an example, many unhealthy practices are suggested to consultants in order to keep their inventory purchases high enough for their “team leaders” to keep their bonuses. Credit card debt, anyone?
I guess there are 2 parts to my objection on this one. 1) The people who get screwed over so others can profit and 2) The idea that people would rather recruit other people to work than do the work themselves.
I have an employee, yes, and plan to have more as my business grows. But I will never not be doing the bulk of the work. That’s important to me and if I didn’t like the work I’d get out and find something else.
While those 3 things are my biggest reasons for making my opinion public, I’ve never liked the salesy-ness of MLMs. At one point I got invited to 3+ sales parties a month on Facebook, before I started point-blank telling people I don’t do them. And I’ve seen several Facebook friends promoting their products by asking friends and family to help support their business. It’s a strange mix of passion (real or fake), guilting personal acquaintances, and constant selling. I’m just not a fan.
I’ve already discussed soft selling as my preferred tactic, and this is part of the reason. We are inundated with ads and marketing and sales talk EVERY. DAY. I don’t want to add to it.
I’m here, you know what I do, and if you’re curious about something I do, I’ll tell you. But I’m not going to push services people may not actually need, give false promises about how they’ll change your life or business, or use any kind of psychological trickery or manipulation tactics.
And I’m not going to work with people who do. Consider this part of my Ethics Manifesto.
What’s your take on multi-level marketing? Any pros or cons I didn’t think of?