If you’ve never heard the term multilevel marketing before, you’ve still probably heard of an MLM company. Have a friend selling essential oils? Ever bought Mary Kay? Do you have a drawerful of LuLaRoe leggings? Yep, those are multilevel marketing companies. They’re also sometimes referred to as referral marketing, pyramid selling or network marketing.
Here’s the basic way they work: A company is formed. They usually have a product, like the aforementioned essential oils, makeup or leggings. Rather than put their product on store shelves, they instead hire “distributors” to do direct selling. Those distributors make money in two ways. One, distributors sell a product and make money off the top. Two, distributors recruit other people to be distributors and make a cut of what these new distributors sell.
Unlike other selling positions, you don’t make a salary or minimum wage, and you almost always have to pay up front for product that you can sell. There has been plenty of blowback about the legitimacy of multilevel marketing. The Atlantic did a feature on the topic and found that at one company, 94 percent of sellers made an average of $1 a month. A Quartz article investigated the psychological and financial toll of joining another popular MLM. John Oliver did a 30-minute segment on the topic, concluding that “MLMs are hurting people and we need to spread the word about their dangers.”
If the above hasn’t made you wary about the value of multilevel marketing — maybe you have a friend who is doing really well with one, maybe you love a product and wouldn’t mind selling it, whatever the reason — here are a few things to consider before joining one yourself.
1. Find out what you’re selling
The Federal Trade Commission recommends evaluating the product you’re going to be selling, as many of them promise unsubstantiated “miracle” cures and could even be dangerous. See if there’s good, solid research to back up any claims made.
“I recommend only doing it if you really love a product,” said Ashley Feinstein Gerstley, life coach and owner of The Fiscal Femme, who has had several clients who did multilevel marketing on the side.
2. Research the company
The FTC recommends learning how long the company has been in business, searching the name with keywords like “scam” or “complaint” tacked onto the term and going several pages back in results. Has the company been sued for bad business practice? Does it have a positive or negative reputation?
“When you’re selling something, your reputation is on the line too. Make sure it’s a company that you’re happy to be the face of,” Gerstley said.
3. Take time to evaluate the offer
Do not sign a contract or pay money up front in an “opportunity meeting,” the FTC advises. The meeting is also your chance to ask questions about the compensation structure, expenses you can anticipate and documentation supporting any claims about how much money you can expect to make.
“It’s important to understand the financials,” Gerstley said. “If you have to put in a really high up-front investment, it could be a red flag or really important to look at.”
The FTC also has an excellent list of questions to ask the person recruiting you, including how many people they’ve recruited and how long they’ve been in the business. It’s also a good idea to have a friend read over the contract too.
“I wouldn’t recommend putting yourself in financial distress in any way to join on,” Gerstley added.
4. Get the refund policy in writing
Many MLM companies say that they allow you to return unused product, but the details of the return policy can be difficult to parse and leave you with a garage filled with unused product and money you won’t see again. Get their refund policy in writing, the FTC recommends, including whether you’ll receive a full refund.
5. Ask about training requirements
Training can be another cost MLMs require you to shoulder, so ask up front about what kind of training and training materials are required, how much time they take and what happens if you don’t attend, the FTC suggests.
6. How do you make money?
Per the FTC, a valid multilevel marketing plan will mean that distributors — what you would be signing up to be — make most of their money through direct sales of a product or service. So, if you’re a distributor selling athletic wear, for example, you’ll earn most of your money through selling running shorts and synthetic shirts.
But if most of the money you’re making is by recruiting more distributors — signing people up to do the same job you do, just a step on the ladder below you — then, as the FTC says plainly, “It could be a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”
Good luck on your side-hustle quest, and dodge the scammers as best you can.