Last weekend my wife and I decided to nerd out by watching a fascinating and insightful documentary on Netflix called Betting on Zero. To summarize it, the film addresses a well-known multi-level marketing nutritional company and how an investor is making the case that such company is a pyramid scheme and therefore should be banned and dissolved by the government.

So this got me thinking because at some point or another this debt free journey of ours gets us thinking about different ways to make money. Like many of you, at one moment or another, I thought about joining a multi-level marketing company. You have seen or heard of beauty products, dietary supplements, or jewelry companies that recruit people looking for a part-time gig and help sell the product or recruit others to sell it. A multi-level marketing company.

Well, here I want to explain a little about how those companies operate, the difference between multi-level companies (totally legal) and pyramid schemes (illegal) and what I got from this awesome documentary. Keep in mind that this is just what I got out of the film and have no experience working for a multi-level marketing company. So if any of you can enlighten us a bit more then please comment on this post!

Pyramid Scheme vs. Multi-Level Marketing Company (MLM)

The Federal Trade Commission (FDC) is one of the many institutions set in place by the government. The FDC is in charge of making sure companies are operating ethically and legally. The FDC determines the difference between a pyramid scheme and a multi-level marketing operation by some of the following characteristics:

MLM Pyramid Scheme
  • Pays commission if you sell the company’s product (physical item, course, training, knowledge, etc.)
  • Has enrollment fees and you can make money from both enrolling other people or sell the product
  • No real product exists
  • Money is made from registration fees without ever seeing, purchasing or selling a product

For More info click here!

So, given the fact how murky the differences and similarities between the two can get, I would assume that many companies can be operating as multi-level marketing firms and end up becoming pyramid schemes due to how you interpret the law if an investigation begins. 

This ambiguity can be pretty tricky. Let’s look at this (totally fictitious) example:

There’s a company that sells studying strategies proven to help you achieve a 4.0 GPA in college. They guarantee that with their methods, anyone can be on Dean’s List within six months of purchasing their course. You decide that this company’s mission resembles your desire to create more intelligent humans! So you sign up to be part of it.

However, the FDC gets an alert because people that have purchased the course are unsatisfied with the results. Now most of us would just stop buying the product and let the gears of supply and demand do their job and put the company out of business.

On top of customer complaints, employees, marketers, and distributors have also complained that the firm’s compensation system does not work. Some of these people say that they tried sticking to just selling the course. But that didn’t work because the commission rules said that to reach the minimum payment one must have at least 50 new people per month sign up to become recruiters for the company. 

The Debate

A pure capitalist would say “well, that’s just capitalism at its finest.” Believing that the top sellers earn their keeps because they hustle and that they will have any excuse not to meet the compensation goals.

The limited capitalism supporter (some of these people get erroneously labeled as socialists) will make a point that everyone needs to have an opportunity to make a significant commission. Therefore, the payout system must allow everyone to get paid fairly.

Of course, I am only scratching the surface of the debate. You can get into the whole topic of what is “fair,” etc.

One thing is true, however, in a pyramid scheme, fraud is evident since only one person or a tiny amount of individuals at the very top of the pyramid benefit. 

Then what if you decide to become a member of a multi-level marketing firm? You’ve done all the research and are confident that this company is legal and can attest to its legality since you read or know someone who works for them. Here are a couple of things you should consider.

Become an expert on how compensation works

Many of us become so enamored with the success stories from others that have managed to make it big. However, people’s journeys are so different and variant, and you cannot compare yourself. You might have to do some math to determine if you can even reach the minimum amount to get paid and whether it’s even worth your time. 

Ask yourself the following questions:

  • Can I make money by just selling the product?
  • Is it worth the time?
  • How much should I sell for me to consider it worth it?
  • How many people do I need to recruit?
  • Is that feasible?

You are a Recruiter

Here’s the biggest difference between a regular sales person and someone that works for a multi-level marketing firm. An MLM is a recruiting gig! Yes, you are trying to sign up as many people as possible and have those same individuals sign other people up so you can get some commission. If the sign-up process was not present, then that just makes you a salesperson, which takes the “multi-level marketing” aspect out of the whole equation right?

Now, a good product automatically builds loyalty from the consumer. So given the fact that I’m limited on my knowledge about multi-level marketing companies, perhaps you can get a commission every month if the person or persons you recruited decided to renew their membership. Or is the commission is a one time pay out? 

Either way, that’s why it’s important for you to understand how you get paid! Just from the research I have done, most multi-level marketing companies pay the most from the recruiting part and not the actual selling of the shake, or jewelry, or whatever it is you are selling. 

Personal Preference

I think you are more capable than you think you are! By that, I mean that if you want to start a business, do it with things you envision and a product you love. I understand the goal of many of these companies. Some of them claim that they want to make it easier for people to achieve their dreams by selling their product and having financial independence.

I could not agree more with that message, and some people do make it big. However, you can accomplish success through your means. It’s going to take longer to build your brand and your loyal costumers, but I think it you can do it. Otherwise, I wouldn’t be a wannabe personal finance blogger.  Start your own business!


What do you say? What relevant info did I miss? Know of

anyone doing multi-level marketing?

 

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