How to Recognize and Avoid Multilevel Marketing Scams

Credit: Edmond Dantès

I am not a salesperson. It’s at the very bottom of my list of skills, and I know it.

But one night, way back in the 2000s, a friend almost had me convinced.

She was a salesperson for a very well-known multilevel marketing company. I knew for a fact she wasn’t making all that much money doing it, and she was amazing at selling it. She was constantly having cosmetics makeup parties at her house, where she sold a few items at each event.

One Friday night, she asked me to go with her to a recruiting session. We were hanging out anyway, so what was an hour or two? It might be a fun adventure, I figured.

The sales pitch was SO convincing. The presenter showed us slides of all she’d achieved through her work as a consultant. She’d not only quit her day job and found financial freedom, but she’d bought a new car and a nice house. And there were plenty of stories like hers, she said.

“Now, who wants to join?”

One by one, women headed to the front of the room, writing checks for $100 and handing them over. “My husband’s going to kill me,” one of them said. No problem. Once she had her first five-figure month, her husband would get over it.

I left there without handing over a $100 check, and I never looked back. Deep down, I knew most of the people who’d handed over $100 would struggle to earn it back. I’d watched my friend work hard to make money at it, and if she couldn’t do it, no way could I.

What Are Multi-Level Marketing Scams?

Don’t get me wrong. Not all multi-level marketing (MLM) companies are scams, but before you hand over your own $100 startup fee, pay attention to this statistic:

The Consumer Awareness Institute reports that only 1 percent of multilevel marketing participants make a profit. Yes, 1 percent.

That means 99 percent lose money.

For reference, about half of small businesses with employees survive the first five years. And, a small business will give you independence as well.

So, are they all scams? No. Is an MLM an automatic road to riches? Also, no.

But not all multi-level marketing schemes are good. 

Some qualify as “pyramid schemes,” and those are illegal. 

The Federal Trade Commission (FTC) works to squash them when they cross the line, but sometimes new ventures pop up under the radar, and it takes time for them to go through the investigation process.

If you’re thinking about jumping in, it’s important to make sure you’re going with an MLM that’s on the up and up. But first, it can help to know how a (legitimate) multi-level marketing scheme operates. So, let’s dive in!

How Multi-Level Schemes Work?

Multi-level marketing (MLM) goes by a couple of alternate names:

• Direct marketing
• Network Marketing

The concept behind the name is that you’re selling directly to the consumers instead of going to a store to buy makeup cookware or weight loss products. A person can buy directly from you, a trusted friend.

On its surface, multi-level marketing sounds great. I can buy from friends and family. Instead of the money going into some corporate bank account, that money goes directly to someone who’s trying to build a business. Or, maybe it’s a side hustle. Either way, I’m getting something I want and someone else is making money.

That’s the concept, anyway.

But multi-level marketing is like any other business. The “consultants” buy inventory and resale it, usually following terms outlined in a rulebook. Those terms state what the pricing of the products should be and what the consultant will make on each sale.

So, yes, someone at the top is still getting a cut.

But with a legitimate multi-level marketing setup, the consultant makes money off each sale. Hopefully, that will be enough money to offset what that consultant spent to buy the products being sold. That, of course, relies on a variety of factors, including:

• The consultant’s sales skills
• The consultant’s current social media reach
• The consultant’s business savvy

In most cases, multi-level marketing businesses are legal. It can get tricky, though, when companies branding themselves as “multi-level marketing” are actually operating what the FTC considers a pyramid scheme.

Multi-Level Marketing vs. Pyramid

Credit: Andrea Piacquadio

In most businesses, the money flows to the top. The CEO or president takes home the biggest salaries, while those on the bottom tier earn the least. Over time, you hopefully work your way up to the top so you’re earning more and employees sit beneath you on your company’s organizational chart.

In a legitimate multi-level marketing setup, that’s how it works. Yes, those at the top of the company make the most and probably take a cut of sales beneath them, but the money is coming from outside customers.

Where things go sideways is when those sitting at the top are earning money from those beneath them. Members are encouraged to recruit, with each new consultant paying buy-in fees and buying products or services. The money is circulating within the organization rather than coming from outside buyers.

See how that line can get a little blurry?

The problem is, that many multi-level marketing schemes will encourage consultants to recruit. 

Remember the one my friend dragged me to back in the 2000s? That one is considered legitimate. If she’d been successful in recruiting me, she would have made a percentage of my sales, and her team leader would have made a portion off both of us. 

That’s what is known as the “upline.” The upline in an MLM refers to that person who recruits you and, in effect, serves as your sponsor. The people above that person are also in your upline. You are in the “downline.”

Let’s say that a friend had taken my $100, added me as a team member, and then continued to have me buy products. As my basement started to overflow, each month I’d be pressured to buy more and more.

To be clear, that didn’t happen, but there are “multi-level marketing” companies that operate this way. They may get away with it for a while before they’re SHUT DOWN. Since the money circulates within the organization, those are what are known as pyramid schemes.

8 Signs It’s A Multi-Level Marketing Scam

There’s a lot to lose with a pyramid scheme, but even within the multi-level marketing world, you’ll need to protect your pocketbook. 

Yes, it can take a few thousand dollars to start any new small business, but it’s important to realize that with your own business, you’re keeping most of the profit. That means you can recoup those losses faster than if you’d taken a cut.

Even if you just have to pay a small fee for your initial inventory, make sure you’re giving that money to a legitimate company. 

Here are some red flags to watch for when you’re presented with a multilevel marketing opportunity.

1. Pressure to Sign Up Now

I’ve spent a lot of time in the Clubhouse. A little too much time, actually!

When I can’t get a word in (which is often), I’ll hang out in chat – and chat is where the scammers come into play. 

Every morning, someone pops up in chat to tell us about a “great opportunity to get rich.” It’s easy to roll your eyes when it’s a stranger.

But what if it’s a friend or relative you know and trust? 

How about that high school friend who never steered you wrong back in the day?

Maybe they’ve lost a lot of weight and kicked a bunch of health issues. Or, maybe they simply have a fun new product, and you want to know more.

It seems like every time they reach out, there’s an urgency that makes little sense. “Act now or you’ll miss out.” Where’s the opportunity going? Why is it only available NOW?

These high-pressure tactics act on our primal fear of missing out. Yes, FOMO. If we don’t act now and our high school BFF shows up for the reunion in her new BMW, we’ll regret it, right?

But chances are when you hear the words “multi-level marketing,” certain companies come to mind. Those are the tried and true. They’re the ones you’ve heard of for a while now. Your parents and grandparents may have even had some of their products around the house when you were a kid.

Are those companies still around? I can name a couple that are. Those are the tried and true. Your grandmother didn’t have to “act quickly” when she sold for them back in the day, and a solid multi-level marketing business won’t be in a hurry today.

2. Pressure to Recruit

There are some other companies we’ve seen on social media for a while now. We all have that friend who invites us to parties for stick-on nail polish or drink powders that change our lives.

I’m fine with attending those parties, but the pressure to sell the products myself makes me a little squirmy. And that pressure can be intense.

The wording usually goes something like this:

“Would you like to host a party?”

Sounds fun, right? “No commitment.” That’s how they rope you in. And, most of the time, it’s okay. 

I’ve known plenty of people who hosted parties and never became a consultant. I’ve also stood by as the consultant tried to talk the hostess into becoming a consultant herself.

All of that is fine and dandy, but with a pyramid scheme, the pressure to recruit can be intense. In fact, the focus is on recruiting, not selling. Unfortunately, you often can’t see the difference until you’ve already signed on, started selling, and noticed how hard you’re being pushed to bring in more people.

3. Large Up-Front Investment Required

I mentioned earlier that people were paying $100 to get in on a legitimate MLM. Was that a scam? Not really. $100 was a reasonable fee to buy the “starter kit” necessary to become a consultant.

Here’s where it starts to get scammy, though:

“I have a great opportunity to make hundreds of thousands of dollars this year alone. All we need from you is a $1,000 investment.”

What is this investment? What are you buying? Is this a Ponzi scheme, where someone collects money as an “investment” in some business that never materializes? With Ponzi schemes, you’re promised little to no risk in exchange for huge rewards.

If it sounds too good to be true, it probably is.

With pyramid schemes, only a few people get in early and make a bunch of money. The scam comes from bringing in more people, who pay money to those earlier people. You then rope in a few of your friends, who rope in a few of their friends, and so on.

Nobody’s buying anything they actually need. And nobody’s selling products to outside customers. Your money goes up the line to someone else.

This shows why the pressure to recruit can be intense with pyramid schemes. All the moneymaking opportunity comes from the people who join this “opportunity,” not from product sales.

When you’re being asked to put money in to get started, make sure you understand exactly what that money buys. If the answers are sketchy, you might be facing a scam.

4. Poor Product Quality or Service

Even with a legitimate multi-level marketing opportunity, your success relies on whether you can sell it or not. Your first move should be to look into what, exactly, you’ll be selling.

Often, MLMs reach out to people who already buy the product. Those nail polish stickers I mentioned earlier? At one time, I loved them. I probably could’ve been talked into selling them based solely on the ability to get a discount on them.

Before you sign up for an MLM of any kind, be a customer yourself. Attend a party (even if it’s hosted virtually through social media). See what it’s all about. If you’re excited about it, chances are, you can get others excited about it, too.

What if you can’t see the product? Maybe it’s not ready, or someone sends photos, but you can’t get your hands on the item.

That’s a bad sign.

Another bad sign? BOLD, unrealistic claims. The Food and Drug Administration regulates medical and health labeling. 

If a product promises to cure disease or improve health but it hasn’t been FDA approved, be suspicious.

5. Unusual Pressure to Make Quota

With a multi-level marketing scheme, you may have monthly goals. The achiever in you may even work hard to meet it.

In a multi-level marketing scam, your upline is unusually invested in your sales. You’re dealing with intense stress at the end of each sales cycle. You may even feel pressured to buy the inventory you don’t need just to make your quota.

This is where you start a slide down a slippery slope.

I don’t want to “out” anyone, but I’ve seen this in action. Friends who went a little more in debt to keep their consultant gigs afloat. They’d catch up next month, they said. But the next month, they sank deeper and deeper into debt.

If you’re in a quality MLM, you’ll be able to sell at your own pace. You might not bring in six figures this year, but you’ll at least cover the cost of the products. Nobody should pressure you to spend your own money to make a sales quota.

6. Complicated Pay Structure

How will you be paid?

It’s a simple question, and it should come with a fairly simple answer. If you can’t understand what you’re being presented with, it might be a sign to move on.

Multi Level Marketing operates with three major types of compensation plans:

• Binary: This is the most common type of plan within MLMs. it limits the number of people below each participant to two. You will receive money based on the number of sales, known as “sales volume,” of the weaker of those two participants.
• Unilevel: In this setup, there’s only one level. As people are added, the organizational chart widens. This allows everyone to be compensated equally.
• Matrix: This compensation structure is a little more complicated. A matrix limits the number of people beneath each participant based on rules set up at the outset. If you have a 3 x 3 matrix, for instance, you’ll only be allowed to have three people directly beneath you. Each of those people will be limited to three recruits, and so on.

It’s important that your earnings are based on sales to OUTSIDE parties, not purchases directly within the organization. The latter puts it in the “pyramid scheme” category.

7. Shady Communications

You need to be able to get a straight answer to your questions. From the start, the person recruiting you should be able to tell you about the company, the products or services it sells, and what’s involved in signing up.

When a multi-level marketing situation is a scam, often the language will be vague. The person recruiting you might be reluctant to give you a business name, instead pushing hyperbole about the opportunity to distract you.

You have every right to ask questions and get straight answers. If you don’t, take your wallet and your business savvy elsewhere.

8. Unrealistic Promises

Success stories exist in every industry. They’re often the exception, not the rule.

Even if someone has made six or seven figures selling something, there’s no guarantee you will. If someone is selling you that dream, it’s likely just that.

Watch out for someone promising unlikely results. Again, if it sounds too good to be true, it likely is.

Avoiding Multi-Level Marketing Scams

Yes, multi-level marketing scams exist, but that doesn’t mean you can’t participate in legitimate ventures. You’ll just need to do some research and take some precautions before signing up.

Here are some tips to help you avoid getting caught up in a scam.

1. Go with Recognized Businesses

Don’t listen to people touting the benefits of “getting in on the ground floor.”

The truth is, good MLMs make a name for themselves. The best benefits come from joining up with an established, respected brand.

Even if your friend shows you bank account transactions proving how great this MLM is, question it. Research the business carefully and read as many reviews as you can. Ask around to see if anyone else you know has heard of the company. And, participate as a customer, making sure you believe in the product or service before you agree to be a seller.

2. Check with the FTC

The Federal Trade Commission recently notified hundreds of businesses that they needed to back up their claims. They didn’t necessarily do anything wrong, but they’ve been put on notice.

This list shows that even a fully operational business can operate without substantiating claims through the FTC first. It demonstrates the importance of questioning those claims before you sign on.

Once you have the name of an MLM, search “FTC [company name].” I chose a random MLM and found it on the list of six companies that received FTC warnings in 2020 about pandemic claims.

There are limits to what a company can legally claim. If you’re getting involved with a company, you’ll want to be able to confidently tout its products.

3. Research the Opportunity

As I mentioned above, if it’s a solid MLM, you’ve probably heard about it before. But that doesn’t mean you can’t go with something newer.

The key is to research, research, research. 

We live in an era where you can dig up dirt on any business online. In addition to the FTC, use Google.Scholar.com to search for any academic journals that might reference the products or services you’d be selling.

Another place to check is the Better Business Bureau (BBB). Even businesses with an A+ rating can have thousands of complaints, so make sure to check out the reviews. Pay attention to any mention of the quality of the products or services, especially when it comes to the non-delivery of promises. Lastly, check out the number of unresolved complaints on the company.

Check with your state’s Attorney General. Have there been any complaints filed about the company? There may not have been complaints, but this can be a great way to identify glaring issues.

Your own social media connections can be a valuable resource, as well. Search social media for any friends who might have been involved with the MLM. Those who were selling a while ago and stopped could be particularly helpful.

4. Ask the Right Questions

If, after all your research, you’re still on board, contact the person trying to recruit you. It’s time to ask some questions.

Your person might not be able to help you with that. If not, ask for the name and phone number of someone who can clarify some things for you.

Here are some good questions to help get you started:

• How will I be compensated? Is this pay structure in writing?
• What are the startup costs?
• What are the ongoing costs?
• Can they document any medical or scientific claims they’re making?

What to Do if You’ve Been Scammed?

Despite our best efforts, sometimes a great opportunity gets us. If that happens to you, you will have some recourse. Here are some steps to take:

1. Let the MLM Know

Keep a copy of all your complaints and send it to the powers that be with the MLM. Let them know of any action you plan to take, whether it’s contacting an attorney, filing complaints, or both.

If you get no response, move forward. Keep copies of every complaint you file and the letter you send. Later, you’ll be able to forward those to the MLM and potentially get a response.

2. Consider Legal Action

Legal fees can be expensive, but if your losses qualify, you may be able to complain in small claims court. You don’t need an attorney to take someone to small claims court, but there is a limit to how much you’ll be able to win.

Multiple MLMs have faced class action lawsuits over the years. If you can find one filed by distributors, you may be able to recoup some of your losses. You can search for the company in the Class Action Lawsuits database or input “[name of company] class action lawsuits” into your favorite search engine.

3. File Complaints

The government takes an interest in fraud against consumers. Here are some options for alerting the government to potentially problematic MLMs:

4. Complain to the Direct Selling Organization

Many MLMs hold membership in the Direct Selling Association. First, see if your MLM is listed as a member company. If so, you may have recourse.

The DSA has a Code of Ethics. Review that code and report the company if it’s in violation. The DSA has been known to take action against members who violate that code.

5. Protect Your Identity

When you find yourself at the other end of a scammy company, your first thought will be the money you lost. Your next thought should be to protect yourself from losing more.

That includes safeguarding your bank account.

Does the company have your bank account information? What about usernames and passwords that you might use with other accounts?

Change any passwords, and keep an eye on your bank account, looking for suspicious activity.

While you’re at it, you may want to invest in identity theft protection. Services like Aura, LifeLock, and Identity Guard can keep an eye on things and let you know if your time with the MLM has led to fraud anywhere else in your financial life.

Multi-level marketing can be a great side hustle. If you find one you believe in and earn a little extra income while having fun, it will be worth it. However, it’s important to know the difference between a pyramid scheme and an MLM so that you can protect your money.

Read Other Types of Scams You Should Watch Out: