The Truth About Multi-Level Marketing Scams and How To Avoid Them

The Truth About Multi-Level Marketing Scams and How To Avoid Them

Scams are all too common nowadays, and knowing what they look like can be difficult. As a community-led organisation, Patchwork Hub looks not only at accessible employment but also at helping our community with wider issues. With Multi-Level Marketing scams on the rise, we have put together a centralised article to give you all the information you need. Raising awareness of what they are, this blog also highlights the risks associated with them. This will help you avoid being sucked into a scam scheme as a sales representative.


What is Multi-Level Marketing?

The term Multi-Level Marketing (MLM) refers to a strategy used by some businesses to sell their products and services through sales representatives, rather than directly to customers.

Multi-Level Marketing is a legal strategy used by some direct sales businesses. However, scams and illegal ‘pyramid schemes’ based on a hierarchical model of network marketing are also widespread. Relatively simple for individuals to set up, scams are all too easy to fall victim to.

Advertised as a legal and easy way to make money, it’s all too tempting to be drawn into an MLM as a sales representative. This form of enterprise is made even riskier when scammers are trying to take advantage of those willing to join an MLM.

How does a ‘sales rep’ make money?

Individuals representing a company as a ‘sales rep’ are not technically classed as employees, and therefore do not receive a salary. Instead, they earn a commission for each product they sell. Therefore, the seller only makes a return on their investment when they make sales.

Representatives can also make money from referring or recruiting other individuals to their network (or ‘downline’).

How it Works

Triangle cut in three sections

Like pyramid schemes, MLM strategies can have several layers.

At the highest tier are the owners and distributors of a company. This group of individuals are usually the ones who founded the business and created the MLM in the first place. Owning the products that their downline sells, these individuals are often ultra-wealthy, enjoying the benefits that their scheme brings for them. Depending on the size of the scheme, this group can potentially have thousands of representatives in their downline.

Beneath this topmost layer, is usually an intermediary layer of distributors and representatives. This group bridges the gap between the product owners and distributors, and bottom-layer sales representatives directly selling products. This layer often pressures new representatives to invest in more products so they can maximise their own income.

At the bottom of the ladder, are the majority of sales representatives. This group buys the products from the company in an attempt to resell them to the public to make money. Buying into the programme, these individuals only benefit from the scheme when they sell products. This group is impacted the hardest when they do not achieve sales. This often results in reps leaving within 1-2 years of joining an MLM, with heavy losses and debt common.

5 Warning Signs

I’m sure at some point in your life you’ve been offered an opportunity to join an MLM, even if it wasn’t advertised as such. Here are a few things to consider when determining whether an MLM is a scam:

1. The offer seems too good to be true

If something seems too good to be true, then it probably is. Ask yourself, if anyone can sign up and make six-figures selling products on Facebook, why isn’t everyone doing it? The reality is that MLMs are designed to suck people in through deceptive marketing.

2. They promise that their products are revolutionary

Are the products or services that a company offers questionable? Miracle weight-loss pills, oils that will cure your anxiety, cream that will make you look 10 years younger? If you don’t buy it, then don’t buy it.

3. They try to manipulate you

Sales reps will often target your vulnerabilities or pain points. New parent? They’ll tell you that you can work from home, earn huge amounts of money and look after your kids at the same time. Student? They’ll advertise it as a legitimate side hustle to get rich quick so you can live your best university life.

If you are approached to join an MLM, it is important to consider how you are being targeted.

4. Nothing shows up when you Google them, or the reviews are terrible

When a company doesn’t appear on any search results or social media, it’s important to question its legitimacy. Not appearing on search engine results can mean that a ‘business’ is a scam, and has been set up deliberately to con people out of their money.

When a company does come up but has bad or questionable reviews, this is also a red flag. Sales reps may tell you that the bad reviews are from bitter ex-reps who weren’t willing to work hard and so didn’t make money. If the reviews are overwhelmingly bad, this is a sign to stay well away from a company and its schemes.

5. They pressure you into paying a large upfront cost

£500 for a starter kit? No, thank you! A legitimate business won’t ask you to do this. Scam MLMs will often persuade you to buy masses of stock, most of which you will never sell.

Reading the fine print is also important. For some schemes, sales reps are required to buy a minimum amount of stock monthly. This forces you to buy more and more from the distributor in order to continue in the scheme. Are you really going to sell everything? This is highly unlikely!

How to avoid MLM Scams

Stop and Think

Although someone may be offering you an opportunity too good to pass up, stop and think. Even if the sales representative trying to recruit you is a friend, be wary of the job and product that they offer. If something seems too good to be true, then it’s likely to be a scam or false advertising.

It is important to keep in mind that sales representatives will directly benefit from recruiting more people into their downline.

Research

Like many things in life, preparation and research can help prevent mistakes and misjudgements. Diving into an MLM without doing any research can be disastrous too.

Thankfully we are fortunate to have search engines such as Google to research the legitimacy of businesses. Here it is important to look at the reviews a company has, to determine whether it’s even legitimate in the first place. Secondly, you can find out whether the opportunity you’ve been offered is in fact MLM or a scam. This can be determined by the reviews the company receives and exploring other people’s experiences with them.

Be suspicious if they do not appear on any Google search results, lack social media presence or have very conflicting reviews. Sometimes scammers might also make up businesses to trick you into paying fake starter fees or stock. Research is key!

Turn them down

If you are unsure of the legitimacy of a company or scheme, the safest option is to turn them down. It’s not worth not risking your hard-earned money on an offer that seems too good to be true.

If you are being cold-called, this can be as simple as hanging up the phone, ignoring or blocking streams of correspondence. If friends or family are approaching you with a business venture, then this can naturally be harder to decline. However, you can tell them “I support you, but I can’t support your business right now”. Alternatively, “that’s very kind of you, but I’m not looking for this opportunity at the moment” would work too.

It’s always better to decline than be sucked into a scheme that is likely to lose you money and cause more problems for you.

Summary

The term Multi-Level Marketing (MLM) refers to a strategy used by some businesses to sell their products and services through sales representatives, rather than directly to customers.

Although MLM is a legal business strategy, scams and illegal pyramid schemes are commonplace. Because of this, it’s important to stay wary of MLMs and questionable companies who push products through sales representatives.

The reality is that the vast majority of sales representatives will make very little money, or lose the funds they invested into the company they represent. Trapped by the need to sell the product they bought from their distributors, sales reps are likely to leave a scheme within a year or two. This result of these quick schemes to make money ultimately results in financial loss and the consequences that this brings.

 

Extra resources

How to support a friend who is part of an MLM

Share your bad MLM experiences on this subreddit

An Analysis of MLM income statements proving how most members lose money

How to make your own financial plan

 

Published: March 2022

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