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What to Know Before Getting Involved in an MLM Company | Family Finance

When Nancy Cramer was a young mother, she wanted to stay at home with her kids. It wasn’t long, she says, before the multilevel marketing community found her and got her on board to start selling a line of vitamins and skincare products. She was intrigued by the sales pitch: She could be at home with her kids, make extra income on the side, and all she had to do was call 10 people per day.

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She soon found that there were major downsides. The company billed itself as something that could be done on a part-time work schedule with very little money down, but Cramer was working around-the-clock and racking up costs, including fees to travel to company meetings and buy new inventory. Earning money required bringing on new recruits, and Cramer felt guilty when an unemployed woman fighting bankruptcy was willing to invest her meager savings in getting started, even though Cramer knew the woman didn’t have the skills or temperament to succeed. Cramer eventually soured on the experience and quit. “It cost me about $10,000 by the time I got out of it,” she says.

Multilevel marketing companies, which may also be called network marketing companies, direct selling companies or other names, are not a new phenomenon. Avon, Mary Kay, Herbalife and other MLMs have been around for decades. But experts say they’ve earned a renewed vigor and profile in the digital age.

The coronvairus pandemic has also impacted the multilevel marketing landscape. In June, the Federal Trade Commission announced that it sent warning letters to six MLMs telling them to stop their distributors from claiming that recruits were likely to make lots of money if they join the company and that their products could treat or prevent COVID-19. The companies with participants that made one or both of these claims included Isagenix, Juice Plus+, Melaleuca, Plexus, Vivri and Youngevity.

Interested in getting involved in an MLM but want to understand your potential for making real money and how to avoid the bad apples? Here’s what to know before getting involved in an MLM.

What Is an MLM?

A multilevel marketing company, or MLM, is generally a business that sells its products through a network of independent contractors, with sales activities taking place on social media, at house parties and other nontraditional retail locations.

The nonemployee salespeople typically don’t earn a salary or regular wages. Instead, earnings are often based on the sales (minus expenses) of the salesperson and sometimes a commission based on the profits of the sellers in their “downline,” which is their network of recruited salespeople.

“Multilevel marketing companies are defined by their business model,” Janet Lamwatthananon, former career advisor for ZipRecruiter, an online employment marketplace, wrote in an email. “Rather than having a traditional storefront or a website, MLMs sell their goods through consultants who are paid on commission. One way to think about MLMs is as collections of small businesses sharing a name and product line.”

The nonsalaried distributors of an MLM’s products may be stay-at-home parents, college students or part-time workers hoping to make money by selling goods such as vitamins and makeup to their friends and family.

But experts note that just selling products is typically not enough to make a profit, and workers are encouraged to recruit a downline, a team of underlings from whose sales they also earn a commission, creating a pyramid-shaped compensation structure.

How Many People Are Involved in Multilevel Marketing?

Some 6.8 million people were considered direct sellers in the U.S. in 2019, according to the Direct Selling Association, the national trade association for companies that market products and services directly to consumers through an independent sales force. (While many direct selling companies use an MLM model, not all do, according to the DSA.) Another 9.6 million are called “discount buyers” by the DSA. That means they are eligible to sell products through a direct sales company but are instead purchasing the products or services themselves.

How Do I Join an MLM?

Distributors are often recruited by friends, families or online contacts to learn more about a company or product.

They may need to register with the MLM, study materials to learn about the products and purchase inventory.

Multilevel marketing companies have their own lingo, and understanding what they’re referring to can be helpful. Here are some terms to know.

  • Distributor. The term is sometimes used to designate sellers in an MLM. They may also be called “participants” or “contractors,” according to the Federal Trade Commission.
  • Sponsor. The person who recruits a distributor to an MLM.
  • Downline. In an MLM, a sponsor’s downline is made up of his recruits who sell products to their own networks. The recruiter may receive a cut of their sales. Be wary of companies that place a massive emphasis on recruiting new sellers. “If the MLM is not a pyramid scheme, it will pay you based on your sales to retail customers, without having to recruit new distributors,” says the FTC.
  • Upline. The person who recruited a seller and everyone above that recruiter is sometimes referred to as an “upline.” In a multilevel marketing company, the upline will each receive a commission based on that seller’s profits.

MLM recruits pound the pavement hawking everything from candles to essential oils and weight-loss drinks. Some popular, newer companies include Rodan + Fields (skincare products), Scentsy (scented products) and Younique (makeup).

Proponents of MLMs tout them as a way to make money while working from home. Critics point out that the vast majority of MLM participants make no money at all, and some may even spend more than they earn. Plus, the constant push to sell, sell, sell may alienate friends and family who are sick of hearing sales pitches.

Can You Make Money in an MLM?

If you’re considering joining an MLM, experts recommend that you ignore any promises of vast riches, quit-your-job levels of wealth and the ability to purchase new yachts and summer homes.

An analysis of 32 income disclosure statements from direct selling companies by TruthInAdvertising.org found that 80% of distributors, or people selling their products, grossed less than $1,200 per year before expenses.

At about half of those companies, the majority of distributors made no money at all. “Given that context, any income claim that expressly states or implies that this is a way for someone to gain financial freedom, to become wealthy, travel the world, become a stay-at-home parent is just false and deceptive,” says Bonnie Patten, executive director for TruthInAdvertising.org.

Representatives for direct selling companies affirm that most participants in their companies aren’t making much. “Earnings are typically quite small,” says Joe Mariano, president and CEO of the Direct Selling Association.

How Do I Know if an MLM Is a Scam?

To identify a scam, look out for an MLM making overblown claims about earning money for little or no work, requirements to purchase large inventories and requests for payments via cash, wire transfer or money order, according to the Better Business Bureau.

“I always recommend checking the Better Business Bureau website … before agreeing to work for any company,” Lamwatthananon says. “It gives you a sense of public perception of the brand, which you will probably want to consider in your decision.”

If an MLM isn’t making money from product sales and solely relies on recruiting people to the company, you may be dealing with a pyramid scheme. “You have to look at where the compensation is coming from,” Mariano says.

But even companies that operate legally can be a bad financial bet for the people who sign up to sell their goods, some experts say.

“From a consumer standpoint, this is a gigantic siphoning machine just sucking dollars out of people,” says Robert FitzPatrick, author of the upcoming book “Ponzinomics, the Untold Story of Multi-Level Marketing” and president of Pyramid Scheme Alert, a nonprofit consumer education resource. “The bottom line is: It’s a scam. It’s a pyramid scam, it’s a recruiting scam, and you’ll lose your money,” he adds.

  • How long have you been involved in this MLM?
  • How much money did you make last year after expenses?
  • Have you borrowed money or used your credit card to fund your business?
  • Do you need to recruit sellers to make money?

“At the most basic level, the law requires that an MLM pay compensation that is based on actual sales to real customers, rather than based on mere wholesale purchases or other payments by its participants,” the FTC says.

You May Alienate Friends and Family

Selling through a network marketing company means hitting up your friends, family, neighbors and former classmates to buy your products or work for you. For some, the sales pitch gets old fast.

“You could wind up alienating your family and friends to the point they won’t talk to you anymore because they know the minute they talk to you, you’ll launch into your whole business scheme,” Cramer says.

In fact, bad MLM pitches have spawned an entire page on the social media site Reddit called antiMLM, where participants share some of the worst and most offensive pitches from friends, family and online acquaintances.

An MLM May Not Look Great on a Resume

If you think working for an MLM company is a way to build your resume or patch a hole in your work experience, think twice about that idea, experts say. Does direct selling look good on a resume? “Probably not,” Mariano says. “And the reason I say that is the reputation of direct selling in the marketplace is not typically that great.”

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