Scam or Slam Dunk? The Pros and Cons of Multi-Level Marketing

Multi-Level Marketing
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I recently accepted a friend’s invite for an evening get-together. As soon as I arrived, I realized I wasn’t coming over for the usual conversation and cocktails.

“I have this amazing opportunity to share with you!” she said enthusiastically.

The opportunity turned out to be a multi-level marketing presentation for a company that provides satellite services and utilities.

I could earn money by simply signing up friends and relatives for services they used anyway. But if I really wanted to make money, I could recruit them to become company representatives underneath me and earn a percentage of their sales, on top what I’d earn from mine.

Not surprisingly, the presentation ignited a firestorm within our circle of friends between those who saw it as an opportunity and those who didn’t.

This debate isn’t a new one. Here are the arguments for and against multi-level marketing.

What is Multi-Level Marketing?

Contrary to what some people think, multi-level marketing is not a pyramid scheme.

In a pyramid scheme, you earn money money by bringing in people underneath you, not by selling a product.

As long as a company has a product available for sale to the general public, it’s a legitimate business, according to the Federal Trade Commission’s 1979 ruling on Amway. (Here’s more information on what the FTC considers multi-level marketing.)

Multi-level marketing, sometimes referred to as network marketing, companies typically give you several ways to earn.

First, you can profit by marketing the company’s products to others. You can also use the products yourself and essentially become your own customer.

Finally, you can recruit others. Most multi-level marketing companies give you a percentage of whatever sales those underneath you make. With each level that comes in underneath you, you earn a higher percentage of the sale’s profit.

Again, it is not a pyramid scheme, because your earnings are based on the sale of actual products.

The Argument For Multi-level Marketing

According to its proponents, if you want to ditch your 9-to-5 job, start your own business or become your own boss, multi-level marketing is one of the cheapest and easiest ways to do so.

You may have to invest money in products to show to potential customers, or pay a sign-up fee (my friend’s company required a $500 fee to get started).

However, when you consider what it costs to open other types of businesses, a few hundred dollars isn’t much.

“If you were purchasing a small business like a Subway franchise, the initial outlay would be over $100,000, and you would need a networth of $500,000 to be approved,” says Garrett Sanders, who operates his own network marketing business in North Carolina.

“How long would it take to recoup that investment?”

Multi-level marketing also has a built-in mentorship program. The people who recruit you have a vested (financial) interest in seeing you succeed.

Not only will those above you help you with presentations and answer questions, but most companies offer regular meetings with your peers to discuss strategies, motivational programs and additional training resources.

With hard work, you can make money, but how much depends on the company you work with and the product. It’s extremely unlikely you’ll make an extraordinary amount of money overnight.

Surprisingly, money isn’t the only reason people become involved with multi-level marketing businesses. Many people, especially stay-at-home parents and retirees, use their businesses to get out of the house, meet new people, learn new skills and do something that gives them a sense of accomplishment.

The Argument Against Multi-level Marketing

Jon M. Taylor knows firsthand how multi-level marketing works. After a successful sales career, first selling encyclopedias and then insurance, he decided to give multi-level marketing a try.

He threw himself into a multi-level marketing program, rose to the “level of about the top 1% of distributors”… and still didn’t turn a profit.

Taylor, an industry expert who runs the website, says multi-level marketing is designed so profits flow up. More than 99% of people who get involved with multi-level marketing programs don’t earn a profit, according to his research.

In addition, many don’t even make enough money to cover their expenses, which can include purchasing products, paying membership dues and traveling to events.

But there are other, non-financial reasons to avoid multi-level marketing programs, he says.

One is the toll they can take on personal relationships. When she realized their friends and family were avoiding them, Taylor’s wife told him it was her or the program.

Another is the emotional challenge. Recruits are often told if they follow the program, they’ll turn a profit, Taylor says.

When they don’t succeed, they’re told it’s because they’re doing something wrong, even though he contends the products are usually overpriced and inferior to what is available elsewhere.

The Bottom Line

If you’re a considering signing up for a multi-level marketing program, ask questions. Find out about the product and get the company’s refund policy in writing.

The FTC provides guidance on how to steer clear of pyramid schemes and fraudulent businesses.

Your Turn: What do you think about multi-level marketing? If you’ve tried it, we’d love to hear your stories in the comments.

Teresa Bitler is a freelance writer who writes about personal finance, investing and travel. She lives in the Phoenix area with her husband and two children.