Multi-Level Marketing Scams How a MLM Could End Up Costing You

Multi-Level Marketing Scams How a MLM Could End Up Costing You Multi-Level Marketing Scams: How a MLM Job Could End Up Costing You Thousands Multi-Level Marketing Scams: How a MLM Job Could End Up Costing You ThousandsCompanies like Mary Kay,  LuLaRoe and Herbalife are making money off the backs of their employees. Dont believe the hype.If youre on social media in any capacity, chances are youve had an experience like thisâ€"an old friend, one you havent spoken to in years, randomly messages you, asking if you want to catch up.Heyyyyyy, they type. How ARE YOU? Seems like your life is going super well! We should grab a cup of coffee sometime and talk!You reply that it is so great to hear from them, that youre happy to chat. And usually, thats when they pounce. They ask you whether youre still working in retail or the dreaded corporate world.Arent you tired of slaving away all day for pennies? Have you ever thought about being your own boss? Owning your own business? They say they were JUST LIKE you last year, barely making ends meet. Heck, they even had to take out a high-interest payday loan to cover rent one month, thats how bad it was!But then they came across a unique business opportunity that changed their ENTIRE LIFE. They cant wait to tell you all about it If you make the mistake of meeting up with them for that coffee, youre not gonna be spending that time reminiscing about the old days. Instead, youll likely get sucked into a pyramid scheme  that could cost you thousands of dollars and a whole lot of stress.What is a pyramid scheme?Most businesses make money by selling things directly to the customer, but pyramid schemes work a little differently.  Instead of marketing their products to consumers, pyramid schemes require their sales agentsâ€"who work as independent contractorsâ€"to buy large quantities of the product themselves, and then resell at a markup.This often proves difficult for the sales agents, who buy hundredsâ€"or even thousandsâ€"of dollars worth of product to start, then realize too late that they cant possibly sell it all.  In order to avoid losing the cash they spent buying their worthless inventory, people who get sucked into pyramid schemes have basically one option: become a recruiter for new sales agents.A telltale sign of a pyramid scheme? Your income is based primarily on the cut of the money you get from the people you recruit paying to buy product, not on the amount of product you actually sell.This is why its called a pyramid scheme. The people at the very top rake in the dough while everyone  underneath them scrambles to  get more and more people to buy in, thus expanding the bottom of the pyramid exponentially.At the end of the day,  pyramid schemes sell very little product to actual customers, and  instead make most of their profit off the backs of their employees.Is it different from a Multi-Level Marketing (MLM) program?This is a tricky question. Ask any of the people trying to recruit you into becoming a small business owner like they are, and theyll bend over backward to assure you its NOT a pyramid scheme. Its a multi-level marketing p rogram, theyll insist. Its completely different and totally legitimate! But is it?Maybe? According to the FTC:If the money you make is based on your sales to the public, it may be a legitimate multi-level marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s probably not. It could be a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.The thing is, its hard to know whether  or not even a legit MLM fits this profile. Most MLMs are notoriously secretive about their contractors sales, and some dont track them at all.  When you look at what theyre selling,  the reason why sales agents find it so difficult to unload product becomes clear.Most MLMs sell things that you can get cheaper at a normal store. Mary Kay and SeneGence, for example, sell drugstore-quality makeup at department store prices. Why buy $18 mascara or lipstick when you can get the same thing at Walgreens for $8? Or hea d to Sephora  or Macys and spend the same amount on a designer brand?Herbalife sells nutritional shakes and supplements,  which arent exactly in short supply for less at Walmart. LuLaRoe hawks clothingâ€"comparable in quality to HM or Forever 21â€"with much higher price tags than either of those retailers.According to Pink Truth,  a blog dedicated to educating would-be Mary Kay consultants on the dangers of MLM business models, there are six main reasons why MLM sales agents often find it tough to make a profit on selling their products:The prices of the products are high when compared to products of similar quality available through traditional or online retail outlets. (Mary Kay products are on par with what you will find in Target, yet they’re priced at department store prices and consultants will tell you they’re department store quality.)The products are undifferentiated. Similar products are widely available in stores and online. (Have you been to Sephora or Ulta? Have you shopped on eBay or Amazon? There are a zillion makeup and skin care products, and Mary Kay is just another brand.)In the person-to-person selling model, choice is restricted and there is the pressure of a personal relationship. In stores or online, the choices are unlimited and the sale most often comes with no pressure. (Mary Kay’s product line is limited, and consultants leverage their personal relationships to sell more, with purchases leading to repeat contacts and requests to hold parties and come to events. Customers just don’t want to do that anymore.)There is too much competition selling the product to make profitable retail sales. There are an unlimited number of sales representatives with no territories. Distributors are encouraged to recruit more distributors, who are naturally their competitors. They enroll their friends, family, and neighbors. When they do so, they not only lose potential customers, they also create new competitors.There isn’t a big enough margin in order to turn a profit. Distributors find that they can’t sell products at “suggested retail” pricing, and must discount, often heavily. Then factor in the cost of supplies, free samples, advertising, shipping, and all the other costs related to selling the products, and any hope of a reasonable profit vanishes.MLMs promote and reward recruiting far more heavily than selling. New recruits are pushed toward recruiting and away from retailing, even before the new recruits realize how impossible it is to turn a profit retailing.   The only way to be profitable (with a minuscule number of exceptions) is to get to the upper levels of the hierarchy, and recruiting is the only way to move up the hierarchy.Whether what your friend is trying to sign you up for is a legitimate MLM or a full-blown pyramid scheme, theyre likely making some quick cash off your new business opportunity.  Consider whether you want to start a job that requires you to spend money before you make any.Sadly, most MLM contractors end up losing money, and lots of it.Speaking of making money, should you take your friend up on her lucrative offer, youre  unlikely to get rich quicklyâ€"no matter how many stories she tells you about her mentors Mercedes Benz.In fact, the vast majority of people who start working for MLM companies actually end up losing money, not earning it. According to two separate studies recently conducted on MLM profitability, more than 99 percent of MLM distributors lose money on their business ventures, and many MLMs actively misrepresent contractor earning numbers in an attempt to recruit new members.In the  study  The Case (for and) Against Multi-Level Marketing,  Jon M. Taylor of the Consumer Awareness Institute writes:I have analyzed the compensation plans of over 350 MLMs, using the five causative and defining characteristics of recruitment-driven MLMs, or product-based pyramid schemes. For every MLM examined so far (100% of them), I have found them to be recruit ment-driven and top-weighted. This means that income is derived primarily from building a large downline, not from retailing products to consumers. Also, most of the commissions and bonuses paid by the company to participants go to a relatively small number at the top of the hierarchy (pyramid) of participants. As such, they are extremely unfair and deceptive.Also, in all (100%) of the MLMs for which I was able to obtain average earnings data, the loss rate was abysmal, with an average of 99.6% of all participants losing money (using liberal assumptions in their favor), after subtracting “pay-to-play” purchases and minimum operating expenses.It should be noted that, yes, it is POSSIBLE to make money in an MLM. But more than 99 percent of people who try, fail. Thats a pretty high bar to cross.  In short, your friend probably isnt doing as well as she claims to be doing. If she was, why would she be so desperate to recruit you?Watch for signs that  the person youre talking to is t rying to recruit you.MLM scam and pyramid scheme recruiters can come out of nowhere, and often seem like theyre peddling a real possibility of success. Some recruiters approach strangers at the mall or on the street and start a friendly conversation that eventually turns into  a conscription  pitch. One of our bloggers was almost sucked into an MLM while she was leaving a job interview in downtown Chicago just  after she graduated from college:I was leaving a job interview in the loop and was feeling kind of downtrodden. It was my third interview of the week and so far Id gotten no bites. I was beginning to think Id never find a job, when a very pretty older woman dressed in a chic, close-fitting designer suit stopped to compliment my shoes. I thanked her, and she asked me what I was doing downtown. I told her Id just left a job interview for a marketing position, and her eyes lit up.I am actually looking to hire people JUST LIKE you for marketing roles, she exclaimed, excited. She then went on to compliment everything from my personality (shed known me for less than a minute), to my hair and even my eyes. She said I seemed like the perfect fit for the job she was hiring for, and asked for my number so she could call me later and explain what the opportunity was.It goes without saying I was very drawn in. She looked like a fancy, successful business woman, she spoke very articulately and professionally, and best of all, she seemed to be willing to give me,  a desperate 22-year-old college grad, a shot at a job.When she called later, my hopes were dashed. She sent me the link to a talk shed given that she said would explain everything. Turns out, she was a Mary Kay director and the job opportunity was actually an opportunity to spend $100 I didnt have on a starter product kit and try and hawk makeup to my equally poor friends. I Googled Mary Kay Chicago and found a bunch of message board posts from women whod had the EXACT same experience as I had. Apparently h er shoe compliment approach is actually something theyre taught as a recruiting tactic.These days, youre probably more likely to  be recruited on social media than on the street, but no matter where the pitch is coming from. Keep an eye out for these warning signs:MLM scam and pyramid scheme recruiters typically spend a lot of time putting down the typical 9-5 corporate lifestyle. Theyll claim their opportunity will give you a chance to own your own business, make your own schedule, and make way more money without lifting a finger. They wont mention the fact that this new job will come with zero benefits like healthcare and vacation time, and unlike most small business owners, youll have no chance to sell your business in the future if you hit gold.Theyll use the phrases residual income or passive income a lot. They might mention friends who have retired at 35 and just living off their residual income, which is what they claim they make just from getting up high enough in the pyrami d. They wont mention that, in order to make money in a pyramid scheme, the people under you have to continue working. Most MLMs have high turnover and dropout rates, and when someone under you drops out, you can kiss your cut of their cash goodbye.  Anyone making residual income is actually working constantly recruiting new members to replace the ones whove ditched.If you meet them in person, they will be dressed to the nines.  Think designer clothes, new shoes, perfectly-done hair. They will look out of place at the Starbucks or Dunkin Donuts where theyre meeting you, and thats by design. They want to indicate how successful they are through their outward appearance. Dont be fooled.They will likely be cagey about describing exactly how they make money, and they rarely will say the name of the company theyre working for until youre already sold. Theyll call themselves  mentors, or network marketers.Theyll tell you their entire life story, starting with the bad, the struggle, the str ife, and ending with their current MASSIVE success, which is all due to this AMAZING opportunity that they just LOVE to share with others.Theyll use a lot of motivational quote cliches, both in person and on social media. Watch out for people who are constantly sharing memes and quote photos about how success  is a product of hard work, and boasting about how hard theyre killing it. Theyre probably not killing it. MLMs and pyramid schemes use motivational quotes and self-help books to motivate people into buying more product.What resources are available to victims of MLM scams?If you or someone you know has fallen victim to an MLM or pyramid scheme scam, here are your options:Report them to the U.S. Securities and Exchange Commission.File a complaint with the Federal Trade Commission.Check to see if any class-action lawsuits have been filed on behalf of former distributors at your company. Recently, MLM companies LuLaRoe and Jeunesse each had $1 billion class action lawsuits filed a gainst them. Google your companys name + lawsuit and see if there  is anything currently pending you could add your name to.Remember, MLMs are rarely the path to quick money. Theyre not going to make you rich overnight, or probably at all. They may actually drain your savings and leave you worse off than you are now. The next time a friend reaches out with a business opportunity, tell him youre set, and ignore them if they try again.To learn more about avoidings dangerous scams, check out these related posts and articles from OppLoans:3 Identity Theft Warning Signs and Tips to Protect Your IdentityHow to Avoid Scam Contractors and Fake Charities Post-Natural DisasterDon’t Let a Phishing Scam Lead to Bad Credit!Have you ever fallen victim to an MLM scam? We want to hear your story.  You can  email us  or you can find us on  Facebook  and  Twitter.