Many Americans have turned to the informal economy to make ends meet. What’s the difference between legit multi-level marketing and pyramid schemes?
After the economy went bust in 2007, and despite what some have called a recovery, people have been increasingly on their own as far as patching together a living. Offshoring, automation, persistent unemployment, and even underpaid prison labor in slavelike conditions have worked together to create a desperate situation for American workers. The security of working for one company for an entire career and knowing that company would take care of you for your years of service is gone, and it has been for some time. Instead, people are turning to less formal work arrangements, such as driving for Uber or multi-level marketing. If you’re considering selling as a side hustle, though, it’s best to go in with both eyes open and your bullshit filter turned on.
While it’s true that some people have made a lot of money from multi-level marketing schemes, it might be you, not the company’s products, that they’re milking for profits.
Direct marketing and affiliate programs are pretty straightforward. A company may want to sell its products without the costs associated with maintaining brick and mortar stores or warehousing a lot of inventory. For them, it makes sense to work with individuals who sell their products directly to customers. It also makes sense for the affiliates who sell their products, because they can make money selling without the hassle of a time clock, building up a brand’s reputation from scratch, or having to deal with the manufacturing logistics. If you’re outgoing and social, these partnerships can be win-win.
However, the potential for piles of money also draws scammers like roadkill draws flies, so of course the income-generating potential of an independent sales force attracted two-legged predators.
Instead of earning profits chiefly through selling high quality products directly to outside customers, the potential of multi-level marketing depends upon recruiting people lower down on the totem pole and taking a cut of the money from their sales. Since this strategy can (and should!) stink from a mile away, multi-level marketing hucksters rely on other techniques to reel in their prey.
One way is to seek out the desperate and those who are looking to get rich quick for minimal work. The allure of passive income from your own team of minions is hard for some people to resist. That’s why it’s important to remember that honest value comes from honest effort. There are a few for whom multi-level marketing has worked (like the family of Betsy DeVos), enough that holding out the possibility of riches isn’t immediately dismissible, but the odds are against it ever happening for you.
Another way that multi-level marketing schemes succeed is via the application of social and psychological pressure. Messages to try harder or to sink unaffordable levels of money into maintaining a large inventory can be tied to religion and guilt, especially over not “being positive” or insufficient belief in the mission of the company. If your business depends heavily on pep rallies or tent revival meetings to succeed, it’s probably a scam.
In 1979, a landmark ruling by the Federal Trade Commission (93 F.T.C. 618) found that Amway, a multi-level marketing company, was not a pyramid scheme. The criteria established by the ruling are a useful (although not comprehensive) metric for distinguishing between a legitimate business and a scam. Does most of the potential income come from recruiting underlings instead of selling products? Does the company require you to buy expensive starter kits or impose monthly order minimums? Do five or more levels of salespeople earn commissions from an individual sale? If so, the opportunity you’re considering may be more sh!t than Shinola.
And, as always, if it seems too good to be true, it probably is.