Have you noticed that more and more of your social media friends seem to be selling stuff? Essential oils, hair products, nutritional shakes, makeup, press-on nails, candles, leggings ... the list goes on. And you've probably noticed that your friends don't just want to sell you their product, they also want you to join them in selling the product as part of their “team."
Welcome to the world of MLM.
MLM refers to the multi-level marketing business structure, and in the era of the side-hustle, it is a trend that has taken social media by storm.
Essentially, MLM, or network marketing, involves a sales system with multiple levels (hence the name) where products are sold by individual salespeople or distributors, who get paid based on how much they sell. They also get a percentage of the sales completed by salespeople or distributors who they recruit to sell “under" them, known as “downlines."
In theory, an individual salesperson or distributor has both direct profit from their own sales as well as recruitment profit from the sales made by the salespeople under them. Now you may be thinking: Yeah, I get that, but is it legal?
The good news for your social media friends is that MLMs can be perfectly legal and legitimate, as long as they are not crossing over into illegal pyramid scheme territory, and they follow state and federal trade laws. The bad news is that most people don't make money on them (more on that later).
Pyramid schemes are nothing new – they have been around for hundreds of years. But few people understand what they actually are and how lawful MLMs are different from illegal pyramid schemes.
Indeed, the business and recruiting structures of MLMs and illegal pyramid schemes are very similar, and pyramid schemes technically are MLMs. The main difference is that illegal pyramid schemes focus on recruitment while legal MLMs focus on the sale of products. Other important differences include:
Since most MLMs today focus on actually selling products and meeting the demand for those products, they are usually legal. But, like all businesses, MLMs cannot provide information that is false or misleading to consumers, including on their distributors' social media pages.
Even if an MLM is not organized as an illegal pyramid scheme, there are other reasons these businesses can get into trouble with the Federal Trade Commission, such as by being misleading or untruthful when representing:
There are also FTC rules regarding endorsements and testimonials, and even participants whose major success is real cannot make it seem as if their results are normal and expected.
Okay, but what about those posts saying you can "fire your boss" or "become a stay-at-home mom"? The FTC says that if those results are not common, then the statements would likely be considered false or misleading.
There's Still Reason to Be Skeptical
Unfortunately, few people end up bringing in enough income from MLMs to significantly change their lives. In fact, many participants don't make any money at all. According to a 2018 study by the AARP Foundation:
Extensive research compiled in 2011 by the founder of the Consumer Awareness Institute and endorsed by the FTC found that, after subtracting expenses, only one in 545 MLM participants is likely to profit, and 997 out of 1,000 individuals involved with an MLM lose money.
Herbalife is an example of an MLM that was fined by the FTC for deceiving customers. After an investigation, the FTC reached a settlement with the weight-loss and skin care company, which agreed to pay $200 million for misleading distributors about how much money they could make. The FTC did not go so far as to shut down Herbalife for being an illegal pyramid scheme, though.
If you are considering joining a MLM company, there are a couple of things you should ask yourself before sliding into a recruiter's DMs, including:
If you answered "yes" to any of these questions, it is probably best to pass on the opportunity.
If you are concerned that an MLM you or someone you know is involved with is breaking the law, you can file a complaint with the FTC.