How MLMs Actually Work - And Why You Should Never Get Involved With One

Those who have never heard of an MLM are likely the most at risk of falling victim to its manipulative systems and practices. MLM stands for multi-level marketing and works by creating a network of salespeople promoting a particular product. The idea is that each person who joins this network will purchase the product to use themselves each month and promote it naturally by talking about it with friends, family members, or through social media.

Oftentimes, new members are even encouraged to buy a lot of extra products to give away as samples or to use for their very own sales parties, where they encourage their friends and family to start buying from them. Prompting this product becomes so important because there are often sales quotas that each person must meet to remain active in the network.

On top of that, the person that brought you onto their marketing team gets a percentage of every sale you make. Usually, they will have multiple people "below them" on their team, which they call a downline, and they'll collect a percentage of the sales from every one of them. If this wasn't enough, once you join an MLM, you will also need to start recruiting people to sell the products so that you can collect a percentage of their sales, which is where you get the "multi-level" aspect of this marketing strategy.

Many people refer to MLMs as pyramid schemes because they follow a very similar framework. The main difference is that pyramid schemes are illegal because they aren't selling an actual product, while most MLMs put small parameters in place to increase their legitimacy. However, the basic structure of both involves a commitment to sales based on the idea that you can earn large amounts of money through commission.

Unfortunately, what ends up happening is that the vast majority of those who sign up for this endeavor end up losing money and never recouping their initial investment, while those at the very top continue to earn commission on everyone below them. This is what creates that pyramid shape because commission from every sale gets funneled through the bottom of the pyramid up to the top few success stories.

While the structures are similarly organized, MLMs usually have limits on how far down in your team you can continue to collect commission. Instead of it being neverending, some MLMs will stop the commission you earn from your recruits and their recruits, and their recruits once it reaches a certain distance away.

There are many popular companies, that have garnered mainstream recognition, that take part in a multi-level marketing strategy. Young Living essential oil is a well-known MLM and if you ever questioned if the skin care company Rodan and Fields was an MLM, it is. Other MLM brands you may have heard of include Herbalife with their dietary supplements and Mary Kay's makeup and cosmetics.

If you ever find yourself wondering if a company like Herbalife is an MLM, there are a few key ways to tell. If the model rewards you monetarily for finding new recruits as opposed to just selling the products, that's a sign. By earning commission off of those you bring on board, you are incentivized to find even more distributors for the product. The other red flag is that there is usually a large initial purchase that is sold to new recruits as an "investment." However, the vast majority of participants will never make money.

Unfortunately, a typical occurrence with MLMs is that the products themselves aren't very good. This is why it's hard to sell them, and may be one of the many reasons why Mary Kay makeup products aren't worth the money.

Companies that rely on multi-level marketing as their sales approach often attract controversy because they manipulate people in vulnerable positions. Many of the sites that give tips on "network marketing recruitment" center the sales pitch around the idea of achieving your dream life. The business opportunity is sold as their path to financial freedom, business ownership, and the ideal work-life balance.

What they care about is expanding their "downline" because more recruits equal more money for them. Therefore, getting people to join, go "all in," and make that large investment is the goal. Once you're on board, the promise of quitting your 9-5 or being able to stay home with your kids while earning passive income that pays all the bills is your responsibility. You won't be the priority of those in your "upline."

Major MLM companies also host massive events that feature rare success stories of people who were able to get rich or win a car because they took advantage of this business opportunity. People who are unfulfilled in life or already strapped for cash feel a surge of adrenaline thinking they can do that too if they work hard enough.

If you go into multi-level marketing with the mindset that it has to work and you won't stop grinding until it does, you'll be more inclined to view your early spending as a worthy investment. Later down the road, this can lead to a sunken-cost fallacy, where you feel like you've put too much into the business opportunity to quit, even though it's not financially realistic to keep going.

The frustrating part about MLMs is that they are not designed for the people at the bottom to make the kind of money that's promised. When Business Insider spoke with a former multi-level marketing success story, Emily Lynn Paulson, she recounted the experience with caution, referring to everyone who joins an MLM as "a victim."

Paulson spent four years working for the MLM she was a part of and earned $1 million during that time. However, despite her success, she warns against joining this predatory business model in her book "Hey Hun: Sales, Sisterhood, Supremacy, and the Other Lies Behind Multi-level Marketing." Paulson believes MLMs are "pyramid schemes with products." What started out as cringy social media posts marketing the $1,000 worth of product she just bought turned into selling a life of luxury and encouraging others to reach out if that's what they wanted as well. Of course, these types of posts are great ways to tell if your friend is caught up in an MLM scheme. Unfortunately, she knew her success was built on the "exploitative" recruiting of others who would eventually lose money.

One of the biggest misleading aspects of joining an MLM is the idea that it's going to be easy. Any time there is a get-rich-quick scheme or a system of building passive income, it's inevitably much more work behind the scenes. Oftentimes, it's work that those who are convinced to join simply don't have time for.

Most people who join an MLM have no experience in marketing or sales. Therefore, it's hard for them to "sell" products to friends and family in person or online. Hosting parties to showcase their garage full of unsold products is a lot of work for a side hustle. Plus, according to research from the Federal Trade Commission, 99% of those who join an MLM end up losing money. The ones who end up making a profit with this business venture are those at the top of the pyramid because the structure of recruiting allows them to collect from their sales and the sales of those below them. 

Ultimately, MLMs prey primarily on inexperienced women. Despite being sold as a "side hustle" that can create extra income, this needs to be a full-time investment if you want to make money, and most people don't earn much. Plus, it's less about the products being sold and more about continuing to recruit. At the end of the day, if you love sales, love the product, and have the extra time and money to spend, you may not suffer like most, but it's a risky move that many wish they never took.