Multi-level marketing schemes are scams. Here's how to avoid them.

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Multi-level marketing schemes are scams. Here's how to avoid them.

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It’s Cheat Week at Mashable. Join us as we take a look at how liars, scammers, grifters, and everyday people take advantage of life's little loopholes in order to get ahead.

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Like gender reveal parties and painfully public engagements, seeing multi-level marketing scams pop up on your feed has become a social media milestone. At some point, you're sure to scroll past pink and blue balloons, watch vertical videos of couples shrieking at Disneyland, and receive the dreaded "Hey girl!" message from a high school acquaintance you haven't spoken to in years. 

The Securities and Exchange Commission notes three hallmarks of a pyramid scheme: There's heavy emphasis on recruitment, a promise of high rewards in little time, and an insistence that the participant can quit their day job to "work from home." 

More often than not, "investors"—who usually pay to participate—make money not from their product revenue, but from getting others to participate as well. As Jim from The Office pointed out to a lost Michael, the foundation of participants and layers of recruiters eventually starts to look like a pyramid. 

Pyramid schemes are illegal, but multi-level marketing technically isn't. Also called pyramid selling, network marketing, and referral marketing, participants typically buy product in bulk and then sell it individually to customers. Think companies like LuLaRoe, which sells clothing; Herbalife, which sells supplements; or Rodan + Fields, which sells skincare. Instead of a traditional retail store or site, customers can only buy products by going through "certified" or "registered" sales reps. In other words, you can only get your heinously patterned legging fix by buying directly from someone who had to buy them wholesale in hopes of shilling them to friends and family. 

As the Federal Trade Commission reports, less than one percent of MLM participants make a profit. That's right: More than 99 percent of participants lose money instead of making it. Most of these companies target vulnerable women like stay-at-home moms and military wives who don't tend to be financially independent anyway. The 2011 report states that out of 350 MLMs analyzed, every single one was recruitment driven and top-weighted. Those at the top made the most profit "at the expense of a revolving door of recruits." 

"This is after subtracting purchases they must make to qualify for commission and advancement of the scheme," the report continues. "To say nothing of minimal operating expenses for conducting and aggressive recruitment campaign — which (based on the compensation plans) is essential to get into the profit column." 

Spend money to make money? That sounds sketchy. 

MLMs have been around for decades, but the universal adoption of social media has only fueled them. At the same time, they're so widely hated that MLMs even have a subreddit dedicated to complaining about them. On r/antiMLM, Reddit users warn others of the toxic MLM "hustle" and mock the "huns" who get sucked into it. 

To avoid getting scammed by MLMs — which eventually collapse anyway — skip the "business opportunity" and stay aware of these warning signs. 

Run from the "Hey girl!" messages

When old acquaintances hit you up again after years of silence, it can mean one of two things: They genuinely want to rekindle your friendship, or they're trying to sell you essential oils. 

MLM huns often use a pre-written format to reach out to potential customers. Sometimes they flub it, like in this post from r/antiMLM. If the message you get seems a tad robotic, it's probably only a matter of time before they launch into their pitch about working your own hours and being a small business owner. 

Just politely end the conversation and move on without the burden of thousands of dollars worth of inventory to get rid of. 

If you have to "invest" money to join, don't

While some "investments" are worth paying for up front, like buying a house, you shouldn't spend thousands of dollars on cheaply made clothing and expect to make a profit off it. MLMs are legal, according to the FTC, but that doesn't mean the strict parameters set by the government will protect you from shady purchases. 

As Quartz reported in 2017, MLMs only pushed people further into debt because of the pressure to buy inventory. The "buy in" investment for LuLaRoe, for example, will cost you $5,000. While the company claims that participants, which it calls consultants, can profit from spending less than $5,000, Business Insider obtained data in 2017 that showed more than 80 percent of consultants made less than $5,000. A total of 10,834 sold nothing at all, and the average revenue was about $3,387. Based on a LuLaRoe consultant's numbers, one blogger estimated that consultants would have to spend at least $15,000 on inventory and mark prices up 40 percent to make any profit. 

And while there are success stories of women who made upwards of $30,000 a month selling, the high profits were ephemeral. Jill Domme, a former consultant, told Vice she once sold $37,566 of inventory in a month, but sales dipped and never recovered. She's now $39,000 in debt and drives for GrubHub. 

Buying a massive inventory in hopes of selling it at markup probably isn't the best investment. 

Just look it up

Got an offer that sounds too good to be true? Google it! 

Jaded ex-participants who managed to escape the crushing jaws of MLMs have taken to the internet to warn others. Elle Beau, a former Younique representative, wrote a detailed blog about her "Poonique" journey. She, along with others determined to prevent vulnerable people from falling into the trap, formed the "Anti-MLM Coalition" and compiled a master list of known scams and direct selling schemes. 

The South Dakota Office of the Attorney General also recommends looking into how long the company has been in business, whether the company has been sued for "deceptive business practices," and checking with the state attorney general for complaints against the company. 

If you find any mentions of recruitment, make a run for it. You don't want to get crushed when that pyramid comes crumbling down.

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September 2, 2019 at 06:04AM