Here’s how to know when multi-level marketing is a pyramid scheme

Dedham,  Massachusetts — The websites advertise you can “be your own boss” and “work from anywhere” because it’s the “perfect side hustle…to build a rock-solid residual income.” Multi-level marketing is a billion dollar industry and one of its selling points is that it’s easy to make money.

“It’s not easy. It should be simple but not easy. It requires work,” said Jody Chase, a network marketer at the Rhode Island-based MLM company Pure Haven.

Chase said she can earn $15,000 to $20,000 a month from the sale of Pure Haven’s health and body products, largely because she has around 2,500 people working “downline” from her in a sales network. Of those 2,500 people, Chase estimates only around 10 earn a livable income.

“My goal isn’t to create ‘6 figure earners,’ Chase said. “It’s literally to create ‘thousand-aires,’ because that’s the goal for most people, [earning] $300 to $1000 a month,” Chase said. “It’s not that the compensation plan doesn’t work, it’s that they aren’t consistently working at it.”

The Federal Trade Commission warns most people who join legitimate MLMs make little or no money, and in some cases, lose money. An FTC spokesperson said there has been a spike in complaints about MLMs and illegal pyramid schemes since the pandemic started two years ago.

“In a legitimate multi-level marketing company you will make money from sales to real customers and you don’t need to recruit to make money,” said Melissa Dickey, an attorney in the FTC’s Division of Marketing Practices.

Jessica Hickson, a former multi-level marketer for a Midwest company, now posts commentaries on YouTube warning others about her bad experience in the industry.

“I kind of saw it as an opportunity to help as many people make money as possible,” Hickson said. “At the time I didn’t realize most of those people weren’t making money.”

Hickson said she was also successful in MLM, earning $5,000 to $7,000 a month with around 800-1,200 distributors working downline from her.

“The problem isn’t the people making all the money. The problem is the hundreds of thousands of people underneath of them who are making nothing,” Hickson said. “What MLMs make it look like on the outside is not at all what it’s like on the inside.”

According to the FTC’s website, pyramid schemes “can look remarkably like legitimate MLM business opportunities.” Hickson said anyone interested in working for an MLM should ask for an income disclosure statement to see how workers are paid.

“Looking at it in detail and actually breaking down the numbers would tell you everything that you need to know,” Hickson said.

Chase also recommends doing as much homework about a company as you can.

“There are companies out there that require you to buy inventory and that to me is personally a huge red flag,” Chase said. “Not all companies are equal and you need to know what you’re looking for.”

The FTC says there are ways to spot an MLM that is really just an illegal pyramid scheme:

• Your income is based mostly on how many people you recruit, not how much product you sell

• You’re encouraged or even required to buy a certain amount of product at regular intervals, even if you already have more inventory than you can use or sell

• You have to buy products before you’re eligible to be paid or get certain bonuses

• You have to pay repeated fees for other items, like training sessions or expensive marketing material

• Promoters make extravagant promises about your earning potential

• Promoters emphasize recruiting new distributors for your sales network as the real way to make money

• Promoters play on your emotions or use high-pressure sales tactics, maybe saying you’ll lose the opportunity if you don’t act now and discouraging you from taking time to study the company

The FTC also has a list of questions you can ask current and past sales people about their experiences:

• How long have you been in the MLM?

• How much money did you make last year, after expenses?

• What were your expenses last year?

• Have you borrowed money or used your credit card to fund your business? How much did you borrow? How much do you owe?

• Do you need to have recruits to make money?

• How many people have you recruited? How many did you recruit last year?

• How many of your recruits have left the business?

• What percentage of the money you made came from selling the product to customers outside the MLM?

• What percentage of the money you made — income and bonuses less your expenses — came from recruiting other distributors and selling them inventory or other items to get started?

• How much time do you spend on the business?

• How much inventory did you buy from the MLM last year? Did you sell all of your inventory?