By: Rowan Hetzer
Being recruited into the world of multi-level marketing, also known as MLM, is shockingly easy; just one click and you can be recruited into a financial endeavor that may change your life— but not necessarily in the way you expect. I responded to a LinkedIn message request from someone who was offering part-time and full-time positions in a growing office environment. As the opportunistic college student I am, especially one looking to jump into the corporate world, I agreed to an interview. I soon realized, however, that my swift interview process and the company’s promises of quick and easy money were too good to be true — they soon attempted to tap into my contact list for sales and recruitment.
In the midst of some of the highest levels of inflation the US has seen in decades, and after a recession scare in 2022, people are highly financially motivated and are seeking alternatives to the traditional nine-to-five. A multi-level marketing operation is a style of business where employees sell products from an overarching company to their network.
MLMs seem like the perfect solution for those who are looking for new options to achieve their financial goals, however, not all MLM opportunities are legitimate. Some are more focused on making money from their distributors rather than selling products or services. These are considered pyramid schemes. Multiple large-scale pyramid scheme operations use unsettling, even illegal practices to profit off of those at the bottom of the hierarchy.
Research identifies three critical red flags that should raise concern for anyone considering joining an MLM venture: 1. If the company has a heavy emphasis on recruitment, 2. requires new members to pay money or purchase products, and 3. promises of large paychecks. Understanding the warning signs will leave you better informed when determining which opportunities are genuine and which ones may be potentially detrimental.
While most legal MLMs revolve around the sale of products or services, pyramid schemes prioritize a different agenda altogether: recruitment. Typically, MLMs with an overemphasis on recruitment will ask their current members not only to sell to individuals in their lives but also to recruit their friends and family onto their team. This recruitment style creates a business model around constructing extensive hierarchical networks. Pyramid schemes often pressure their members to recruit high numbers of people and promise that after recruiting their team, also called a downline, they will make money from their downline’s sales.
One company, Vemma Nutrition Company, had recruiting practices so intense that the Federal Trade Commission brought a federal court action against them. Vemma’s campaign “Young People Revolution” targeted college students and encouraged them to recruit other distributors from their network. They would visit college campuses and give presentations that allegedly told the students that college was a waste of time and money. Their alleged manipulative recruitment speech content found its way to the FTC, which deemed Vemma an illegal pyramid scheme. This was done on the basis that the company rewards members for recruiting participants rather than for selling products.
Vemma even visited the University of Cincinnati’s campus in 2012 and 2013 and convinced multiple students to sell their products on campus. The Enquirer interviewed local college students about the organization, and their investigative reporting greatly assisted in the FTC’s case. Since then, Vemma and the FTC reached an agreement to alter the suspected pyramid scheme business practices.
Pyramid schemes are not afraid of charging new recruits for expensive, required starter packs or initial investments. Legitimate MLMs might offer starter kits or product samples for purchase, but these are usually optional. MLMs that require significant upfront fees or mandatory product purchases as a condition of joining should raise concerns.
Membership fees, administration fees, and other hidden fees are one-way pyramid schemes that pull money out of their new recruit’s pockets. Some fees, like background checks and licensing, can be necessary depending on the type of work. However, these fees should not be excessively expensive. Some pyramid schemes charge high initial membership fees to get the recruit involved with the business financially, and then spring hidden fees on them once committed. This is an easy way for the scheme to earn money without selling products, instead directly taking it from their new recruits’ pockets.
In product-based investment ploys, distributors are encouraged to buy a large amount of product upfront with the promise of being able to sell the products quickly. If the distributor cannot sell these products at a fast enough rate, this expensive investment can ultimately lose them money. This is also true with starter kits. Although starter kits are common even in legitimate MLM organizations, illegal pyramid schemes often charge exorbitant prices for them, placing a financial burden on new recruits.
Popular clothing MLM LuLaRoe was sued by Washington State Attorney General Bob Ferguson in 2019 for their alleged pyramid scheme-like practices. He specifically cited the product purchasing and changing refund policies as suspicious and stated that they allegedly violated the Anti-Pyramid Promotional Scheme Act and the Washington Consumer Protection Act.
“LuLaRoe required minimum inventory purchases — forcing consultants to buy large amounts of clothing that they could not sell within a reasonable time frame, if at all. The company taught consultants to ‘buy more, sell more,’ convincing many consultants that the key to profitability was to put all of their revenue toward purchasing more inventory,” a press release on the attorney general website stated.
On their website, LuLaRoe has starter kit levels available for purchase, with the required LuLaRoe Retailer Business Pack priced at $499.
Illegal pyramid schemes often tell recruits about easy money-making opportunities and grand rewards for their work. Achieving significant financial success in an MLM typically requires a combination of factors, including substantial effort, sales skills, recruitment abilities, and often, a substantial network of downline distributors. Success is not guaranteed, and the vast majority of participants in MLMs may not earn substantial income, if any. However, some companies purposely present the income possibilities as a guaranteed way to make quick and easy money. They mislead distributors to get them interested and play with their emotions surrounding financial goals.
Herbalife, a global operation that sells dietary supplements and skincare products, had to completely restructure its business and pay a staggering $200 million after settling a complaint from the FTC. According to the FTC’s complaint, Herbalife allegedly promoted a high enough income guarantee that the company implied distributors would be making upwards of thousands of dollars a month and that recruits could comfortably quit their jobs and sell Herbalife full-time. However, the FTC complaint alleged that the overwhelming majority of distributors earn little or no money and leave the business within the year. The FTC analysis found that Herbalife distributors earned on average less than $5 a month from product sales.
After significant restructuring, Herbalife is still operational, and products may only be purchased through distributors. The company, although they have since financially recovered since the complaint in 2016, is experiencing a decline in revenue. In the year 2022, Herbalife Nutrition had an annual revenue of $5.20 billion, which is a decrease of -10.31%.
In a world of promises and quick riches, it’s crucial to research before joining MLM companies. Recognizing warning signs is vital. Pyramid schemes thrive on predatory practices, often leaving recruits financially burdened. Always research MLMs thoroughly before committing. Don’t fall for the promise of quick riches. Instead, consider the warning signs of a pyramid scheme, and approach MLM opportunities with caution and informed decision-making. Your financial well-being depends on it.