By Dr. Z.
At some point in life, most people will have been invited to a multi-level marketing (MLM) opportunity. In a nutshell, the MLM business model is a pyramidal marketing strategy that involves the recruitment of independent distributors to sell products or services, and ultimately to recruit other independent distributors to sell products or services. MLMs are sometimes referred to as Network Marketing, direct selling, and more commonly referred to as pyramid schemes. While some MLMs may be legitimate businesses that provide opportunities for independent distributors who are seeking additional income, others are scams that gain capital through the monetized recruitment of new members on a pyramid-like structure. Within these pyramidal MLM structures, most of the wealth is at the top of the ladder, while those at the bottom fish for new paying members. In this article, 10 red flags are presented to help start-up entrepreneurs identify MLM scams and make informed choices before entering one of these organizations. This article may save your time, hard-earned money, and resources. MLM scams may typically involve the following:
- The Promise of Untold Wealth
- The Aggressive Deceptive Recruitment Trap
- Fees on top of Fees
- Secretive Operations
- Phony Flashy Titles
- Expensive Products and Services
- Slow Earnings/ No Earnings
- The Pipe-Dreaming Poor
- The People at the Top Started at the Top
- Extensive Use of Propaganda
These 10 red flags are explored below.
Red Flag 1: The Promise of Untold Wealth:
Most MLMs promise untold wealth through either a passive or residual Income. A passive income refers to income that is generated even when you are not working. Residual income refers to income that is left over after all bills and living expenses are paid. This is an important red flag as people are attracted to these business opportunities for 2 reasons. First, their circumstances demand more income. Second, they are convinced that the opportunities will provide an infinite amount of wealth and passive income, with minimal effort, over time. These 2 reasons work together as the second reason offers an enticing solution to the first. MLM recruiters are aware of these dynamics, and use them as a powerful tool for recruiting potential members.
Red Flag 2: The Aggressive Deceptive Recruitment Cycle
The driving force in all MLM businesses is recruitment. As more people join the MLM organization, it grows in membership and revenue. You are Required to Recruit other distributors who are required to recruit other distributors. Given the push to recruit, most MLM businesses have a specific set of scripts designed to bring in potential distributors. Maybe you have heard this pitch:
“Hey friend / loved-one, are you tired of your boss, tired of your lame 9-to-5 job, and tired of paying bills or living from hand to mouth? I have an incredible business opportunity that will allow you to become an entrepreneur and fire your boss. I can’t give you specific details now, but I am going to invite you to a free seminar with an awesome industry leader who will be speaking about this special opportunity. Are you free this Wednesday?”
This is a classic recruitment script for most multi-level marketing scams. The problem with most MLMs is that most distributors will never make the profits that they are promised, despite their best efforts. An MLM member may successfully recruit a few friends and loved-ones, but the recruitment well dries up very quickly, making it difficult to continue the recruitment cycle. Moreover, new MLM members are pressured by questions from their up-line, such as: How many people did you reach out to? How many business receptions do you have scheduled? How many levels are in your down-line? Are you staying on top of your people? As a result, many MLM members may never make it past the 2nd level in their down-line because people withdraw under the pressure to recruit.
Red Flag 3: The “Venus Fee Trap”
MLMs are like the predatory Venus Fly trap, but only you drown in fees. They lure you in using your thirst for success, then charge you continuous exorbitant fees to join and sustain the opportunity. First there is a fee to join the organization. There may even be a free seminar that is used to advertise the real seminar for the business opportunity, which has a fee. Then there are independent distributor fees, marketing fees, a fee to buy products, fees to remain in the business, and deluxe fees to claim a certain status level in the organization. In the most despicable organizations, there is even a fee to quit and terminate the business contract. The dirty secret about fees is this: Membership fees are the real revenue source of the MLM business. This is why pyramidal recruitment is so important for the MLMs. Buyer beware!
Red Flag 4: Secretive Operations
Within MLM scams, almost everything is secretive, from the time you are recruited to the time you decide to quit. For one, the recruiter from your up-line is forbidden to tell you the name of the opportunity. You are invited to secretive private information sessions and orientations about a little-known business opportunity, which usually takes place at an undisclosed Location. At the initial orientation, you are only given a very exciting and persuasive presentation on the potential of the MLM business to change your life financially. Little do you know that you need to pay a registration fee and sign fine print disclosures and agreements to join the business in order to get the real information and training sessions. Also, you end up recruiting people with the same secretive script, thereby perpetuating the deceptive cycle of secrecy. Furthermore, as a distributor, you are usually not allowed to use the company logo or name on letterhead on your communications to others outside of the business. Finally, the some MLMs are secretive to the point of never going public on stock markets recognized by the Securities Exchange Commission (SEC).
Red Flag 5: The “Clash of the Titles”
One of the most fascinating aspects of the MLM scams is their ability to create attractive titles for distributors and members. MLMs strategically use flashy titles that reflect wealth-related status symbols, which become more elaborate for higher level members. Let’s consider a fictitious example, upon paying your membership fee, you may be given an enticing title such as “Consulting Distributor.” Upon recruiting your first 3 members in your down-line, you may now be referred to as a “Coordinating Agent.” At the next level you may become a Golden Tree Leader; after that you may become a Platinum Star Leader; after that you may be a Distribution Director, and so on until you potentially reach a highly elusive Vice Presidential Rank. This is nothing more than a monkey trap with shining objects used to keep independent distributors engaged. In reality, you are likely to get promoted, and perhaps earn some money if you are very lucky, but the titles are just a ploy to keep you dreaming, keep you paying, keep you recruiting, and ultimately, to keep you providing money to people at the top of the MLM. Walk away when you see this sign.
Red Flag 6: Expensive Products and Services
Most MLM scams involve the distribution of expensive products and/or Services. For example, you may be responsible for purchasing and reselling health and hygiene products, nutritional snacks, glossy informational packets and DVDs, or utility services and accessories. The problem is that these are not competitive products. Instead, they are usually substandard products that are difficult to sell to average consumers who are able to purchase more popular brands of these products and services at a much a much less expensive rate. Because of this, MLM distributors end up selling these the MLM products and services to relatives and friends. More innovative distributors may actually have some success selling these products and services online, and that is usually with some marketing experience. However, the end result is the same for many distributors. They have difficulty selling enough of the products to make a living, which leads to our next point.
Red Flag 7: Slow Earnings / No Earnings
The Earnings for MLM scams are likely to be extremely slow or non-existent. As mentioned above, recruitment in an MLM is likely to grind to a halt. In addition, products and services will be increasingly difficult to move. On top of this, there are more fees, more deluxe business packages to purchase, more levels to buy into, and more nonsense created to get more money from you and other distributors. As a result, little to no money is made by distributors. In fact, they end up with more product than profit. Eventually, the independent distributor becomes the “No Profit Prophet” who foresees future financial success and wealth that will never materialize
Red Flag 8: “Broke Brokers” and “No-Profit-Prophets”
MLMs are common for selling delusions of untold wealth. However, the reality is a million miles from the promise. The truth is, other rank-and-file members of the business opportunity are usually common folks, ranging from very poor to working class, who are hoping to get rich. You’ll notice that the other MLM distributors are usually in the same predicament as you. They are the No-Profit-Prophets that were described above. They are Broke-Brokers who are still using their full-time 9-to-5 income to survive. They are still having difficulty unloading enough products to sustain their livelihoods. The recruitment pool quickly dries out, and they end up spending money investing in booths and online platforms to try to boost recruitment efforts. In fact, if you pay close attention to members of your up-line, they are still struggling to make it. Do not believe the lie of quick and easy passive residual wealth. If you do, the MLM membership will be the most expensive lottery ticket you have ever purchased.
Red Flag 9: The People at the Top Started at the Top
MLM scams are good at convincing bottom distributors that they will reach the executive and vice presidential status if they work hard enough. They may even weave compelling stories of an accomplished wealthy MLM leader who reportedly began selling products out of the trunk of a car or out of a studio apartment. The truth is that the MLM elites never actually started at the bottom as distributors. Many began at the top as co-founders who used millions of dollars in venture capital and investment money to start the MLM business and build the organization. They then hire teams of upper-level executives to develop and run the company. Very few, if any, of these individuals were ever distributors with recruitment up-lines and down-lines. Also, in many cases, the MLM elites serve as co-founders, board members, and executives at the top of a number of other MLM Networks. Do not believe the rags-to-riches lie.
Red Flag 10: Extensive Use of Propaganda
MLM scams use a well-oiled propaganda machine to drive blind devotion, continued engagement and belief in the business opportunity. To this end, there are always extravaganzas, conventions, award ceremonies, boat rides, and black tie events. At these events, high-statused individuals, such as professional speakers, celebrities, or athletes are used to promote the business opportunity. These extravagant events are really just marketing ploys disguised as celebrations of distributor success. The real message to distributors is to keep working, keep hoping, and to keep buying into the business. If you spot an MLM scam, run as quickly as you can. There are many other independent opportunities that you can start without being scammed out of your hard-earned cash. You can truly be your own boss without unrealistic promises and recruitment tricks. And, as always, stay tuned to our channel for content that will help you to build your identity as a business owner.