Is Multi Level Marketing Ethical? – 5 Red Flag Warning Signs

You’ve probably heard of multi level marketing, or network marketing as it’s sometimes called. And, while it may sound interesting, you may be wondering: Is multi level marketing ethical as a business model? I mean, they’ve literally been around for decades. They must be OK, right?

Companies like Amway, Mary Kay, Avon, Herbalife, Vasayo, Dagcoin, and many others. You may have even joined one, or at been pitched one by a close friend or relative wanting to share this great “opportunity” with you.

Maybe you have been to a meeting or party where you watched someone draw on a chalk board or flip chart the famous 2 at 200 who recruit 2 at 200 compensation model.

But is Multi level marketing really a great opportunity? Can you make money with multi level marketing? And, is Multi level marketing ethical? All important questions to consider before you jump into a multi level marketing business.

Is multi level marketing ethical - recruit 2 who each recruit 2 who each in turn recruit 2 model of MLM compensation
Recruit 2 who recruit 2 MLM model

Read on and we’ll get answers to these questions, and more, about the world of multi level marketing before you take cousin Ed up on his great business “opportunity”. No offense to cousin Ed, but it is your money and your decision after all.

At a Glance:

Multi level marketing, while legal, in my opinion is not ethical as a business model based on these 5 red flags or warning signs. 1. According to the FTC 99% of participants lose money. 2. They often place more emphasis on recruiting new members than the actual products or services. 3. The products and services are much higher priced than you could buy elsewhere. 4. Some multi level companies become illegal pyramids as they shift their primary compensation from selling products to recruiting new members. 5. Top earners are the best recruiters not those that sell the most products.

What is Multi Level Marketing Anyway?

Just a bit of my history, my grandmother was fairly successful as an Amway distributor in the 1970s. I myself was an Amway distributor in the late 1980s. And in the 1990s, my wife at the time, got involved with the Advocare MLM which eventually got shut down by the Federal Trade Commission. So, as you can see, I have some firsthand experience with multi level marketing.

What is Multi Level Marketing?

The term multi level marketing (MLM) refers to a business model used by some direct sales companies to sell products and services. MLM encourages existing members to promote and sell their offerings to other individuals and bring on new recruits into the business. Distributors are paid a percentage of their recruits’ sales. New recruits become the distributor’s network or downline and are, in turn, encouraged to make sales to earn money. Many MLM schemes are legal but there are illegal operations that are run as pyramid schemes.

Multilevel marketing, when done legally, is a legitimate business strategy used by some direct sales companies to market and sell their products and services.

Current members/distributors are encouraged to promote and sell their offerings to other individuals and bring on new recruits into the business and are then paid a commission on the sales of those new recruits.

Multi level marketing is presented as a home business opportunity. A way to make some extra money from home, become your own boss and quit the 9-5 rat race.

In reality, you become an independent commissioned salesman for the parent organization. You earn a commission on your retail sales, and if you recruit new distributors/members, you earn a percentage commission on their sales as well. And, the person that “invited” (known as your downline) you to the opportunity, earns a commission on your sales

In order to pay all of these different “multi levels” of commissions, the retail price of the products often end up substantially higher than comparable products offered at big box retailers. This makes it harder to generate any significant retail sales and many MLM companies will encourage personal use of the products by their members to keep commissions moving through the system.

So, you end up paying more for products than you could get them elsewhere, just to generate some sales and commissions for your up line. Which means you then need to recruit members yourself (downline) and encourage them to do the same so you can earn some commissions.

Why do people get into multi level marketing? The reason most often given for joining an MLM opportunity is they are looking for a way to make some extra money in their spare time. And, multi level marketing can be an option that provides that. Also, most people are introduced to MLMs by family members or friends. So you have some level of comfort and trust with them and, you may feel like you are helping them out by joining.

An AARP Foundation survey of multi level marketing members found that:

  • 60% — are women.
  • 76% have no prior experience in commission-based sales
  • 72% are married or living with a partner.
  • 55% also worked as a paid employee while participating in MLMs

You may have heard the term network marketing associated with some of these types of “opportunities”. They are basically interchangeable terms for the same basic business structure where independent distributors or members market the companies products for commission payments from their sales and from those of the members they recruit (downline).

In some multi level marketing businesses you will be required to purchase inventory for resale and you are responsible for delivery to your customer, others will ship directly to your customer from the companies website. Cost of inventory can get expensive so just be aware.

Now, in many multi level marketing opportunities, the members that make the most money are those that recruit the most new members rather than sell the most products. This is where an MLM can become suspect. When the primary way to make money, and succeed, is through recruitment of new members rather than product sales, you can find yourself involved in an illegal pyramid scheme.

The U.S. Federal Trade Commission (FTC) states: “Steer clear of multi level marketing plans that pay commissions for recruiting new distributors. They’re actually illegal pyramid schemes.” They go further and state that if the primary means of earning income is through recruiting, it could be an illegal business.

But, does that mean that making commissions on your recruits or downline is illegal? Absolutely not, think of a franchise, they make a commission off of their franchisees sales. The difference is that the main goal of the franchise is the sale of products and or services and providing a successful business model and environment to help the franchisees succeed.

So, Is Multi Level Marketing Ethical?

The question remains then: Is Multi Level Marketing ethical? In order to answer that, we need to have a definition of “ethical”. It seems, that nowadays, ethical can mean different things to different people depending on the over-riding circumstances. For this discussion, we will use the following definition.

Definition of ethical

adjective: 1. Pertaining to or dealing with morals or the principles of morality; pertaining to right and wrong in conduct. 2. Being in accordance with the rules or standards for right conduct or practice, especially the standards of a profession:

Now the definition mentions morals, which is another argument altogether, everybody wants to define their own morals. So let’s focus on the second definition: being in accordance with the rules or standards for right conduct or practice.

is multi level marketing ethical - cartoon graphic of man trying to decide between legal and ethical

Each country or government jurisdiction has rules that govern what are and are not legal business practices. So on that basis, multi level marketing is a legal business model when the focus is on sales of a real product and or service.

And, if the MLM business follows these rules then, on that basis, it would also be ethical. Now, critics will claim MLM’s to be unethical because you make a commission off the purchases and sales of your recruits (downline) who are risking their money in the process.

My answer to that is: Starting a business, any business, involves risk. Never risk money you can’t afford to lose when starting any business venture. Do your own due diligence before you join any business opportunit6y. Assess your financial and life situations as well as your skills, talents and experiences.

If you are interested in an MLM opportunity, look for those where you will be mentored and trained on building a successful business. If the training is centered primarily on how to recruit new members, you may want to look elsewhere as you could be dealing with a pyramid scheme.

The difference between a pyramid scheme and a legal multi level marketing business is that there is no real product that is sold in a pyramid scheme. Members make money entirely by recruiting new recruits into the opportunity. Pyramid schemes are not only illegal, they are a waste of your time and money.

Because eventually all pyramid schemes collapse when they run out of new people to recruit. Without new recruits their is no commissions, and without commissions nobody makes money and the scheme dies. There have been some large MLM businesses, that did have products, that have been fined by the FTC for becoming primarily a pyramid scheme.

chart of the differences between multi level marketing and a pyramid scheme

They began to focus primarily on recruiting rather than actual product sales. So, be careful, even though the company has been around a long time doesn’t guarantee it is a legitimate, or ethical, business. You should ask this question: Can I build a real long-term profitable business on sales of the product alone, even if you never recruit a single new member?

It’s OK if you do recruit new members and earn some commission from their sales and purchases, (that’s the whole multi level marketing formula) as long as that is not the primary means of building a successful business with the MLM opportunity. In short, there needs to be an exchange of real products or services with real customers. Recruiting new members is fine, but that needs to be in addition to actual product sales.

Is Multi Level Marketing Legit or a Pyramid Scheme?

OK, so how do you know if a MLM company is legal? 1) Is the focus on recruiting or on the products and or services? Remember, you are most likely there because someone recruited you. 2) Check with your state’s attorney general’s office or consumer protection division. Most states regulate direct selling companies through these agencies. 3) Look them up online at the Better Business Bureau. If they don’t have a BBB profile, it could be a big red flag.

is multi level marketing ethical - difference between multi level marketing and an illegal pyramid scheme according to the Federal Trade Commission

The main difference between multi-level marketing and pyramid scheme is that, with a pyramid scheme, no real product or service is sold. Members make money based on recruiting new members into the scheme. Some multi level marketing companies have been fined by the FTC because, even though they had products, the primary means of earning was through recruitment of new members.

In 2016 the Herbalife MLM paid a 200 million dollar fine to avoid being labeled a pyramid scheme. The FTC claimed they had deceived members into thinking they could make significant money by selling their products. And that in order to actually make significant income, one had to recruit new members into the MLM.

Pyramid schemes can be very attractive as they produce a high rate of return to the early members. However, eventually you run out of new people to recruit and the pyramid collapses. The only ones that make any real money were the organizers and earliest members. Everyone else loses their money and are left with nothing.

If you think you have been a victim of a pyramid scheme, contact your local law enforcement and file a police report as soon as possible. Then contact your local district attorney’s office, State Attorney General’s office and the office of consumer protection to report the scheme and schemers.

For More on MLMs and Pyramid Schemes
Read: What is a Multi Level Marketing Scheme

Unfortunately, by the time everyone knows what’s happening, the schemers have already spent most if not all the money. It will be very hard, if not impossible, to get your money back. You could file a lawsuit to try to get your money back, but you will have to spend money on attorney fees and the schemers may not have any money to go after even if you get a judgment against them.

Can You Make Money with Multi Level Marketing?

The short answer is yes, of course you can. People have been making money with multi level marketing for decades. But, how much can you really make and how many people actually make any significant money with multi level marketing?

So, how much do MLM members really make? A survey reported that the average MLM member makes about $2,400 per year selling products. With some members on the high end earning up to $300,000. So, if you are willing to work hard you could produce a nice income but most likely not enough to quit your day job.

And unfortunately, some people don’t make any money at all, and many actually lose money. The AARP Foundation found that only about 25% of MLM members it surveyed made a profit, 27% broke even, and the other 48% lost money. And, ff the 25% that made a profit, 14% made less than $5,000.

Not very encouraging numbers to say the least. Even worse when you consider that only 1% of multi level marketing members make any significant income from their MLM business. That 1% are the best recruiters, those that have the largest downline. They make the most money because they earn commissions from everyone in their downline. But those in their downline, not so much. 🙁

percentages of members who lost money with various mlm companines
Data from US Federal Trade Commission Study

The Pros and Cons of Multi Level Marketing

What are the pros and cons of Multi Level Marketing? Like any business opportunity their are good things and not so good things unique to each opportunity, MLMs are no different. In the table below I have listed what are, in my opinion, the pros and cons of the Multi Level Marketing business model.

If you have some others that I missed, or maybe disagree with, please leave them in the comment section below. We can all learn from each other and I would be happy to discuss any ideas, questions, comments or concerns with you.

The Pros of Multi Level Marketing
Can be a relatively inexpensive way to start a business
Flexible schedule allows you to work around your schedule
Help you develop your communication skills
Some will offer sales training and support
Can be a good way to make some extra money
The Cons of Multi Level Marketing
Only 1% of members make any significant income
Many members actually lose money
Must deal with rejection and discouragement
Products tend to be higher priced than store alternatives
Some MLMs are actually illegal Pyramid Schemes
Your friends and family will start to avoid you

Is a multi level marketing business a good investment? Only you can decide that, but any business opportunity will cost you an investment of your time, money and energies. If you are an outgoing person and enjoy throwing parties, giving presentations and can handle rejection, then multi level marketing could work well for you. If that doesn’t appeal to you, maybe you should look elsewhere for a business opportunity.

There’s a Better Way! – Affiliate Marketing

graphic of how affiliate marketing works

What if I could show you a way to sell products and services, even similar to those sold by your major Multi level marketing companies, to people all over the world from the comfort of your home or anywhere else you can get an internet connection?

And, you wouldn’t need to do any recruiting, hold any parties in your home, stock any inventory or handle any orders, shipping or customer service. Even better, you are not limited to the products of a single company or industry.

Affiliate marketing is that “way” and it is my #1 recommended business opportunity. It doesn’t require a huge investment to get started. No need to purchase “starter kits” or inventory. You simply promote the products and services of other people and companies and earn a commission when someone makes a purchase from your recommendation.

You get to select the types of products and services you want to promote, and how and to who you will be promoting them. No need to worry with up lines or down lines, just promote, convert and earn commissions. Now it sounds simple, and it absolutely is, but it’s not easy.

For More Info on Affiliate Marketing
Read: A No BS Beginners Guide to Affiliate Marketing

It will take work, time, training and some tools to be successful. I have a free 10-day home business training that will take you step by step from beginner to up and ready to start a business. Just click on the picture on the right and you can get started learning today.

Free 10-Day home business training

Final Verdict: Is Multi Level Marketing Ethical? – Not for Me.

While some multi level marketing companies are legitimate, and while a few distributors do make a significant income, it is not a business model I would recommend. The very low success rate of 1%, combined with the need to recruit others to join to make any significant money, and the high price of the actual products being sold are all big red flags for me.

And, at least for me, this makes Multi Level Marketing an unethical as a business model. Add to that, the problems some established MLMs have had issues with the Federal Trade Commission (FTC), it becomes very difficult to determine if you are dealing with a legitimate business opportunity or something bordering on a pyramid scheme.

That’s not to say you can’t make money with multi level marketing. Mary Kay, Avon and Amway have been around for decades and some of their top distributors with extensive down lines make a lot of money. But even with these established MLM companies, most of their distributors don’t make any significant money. In fact, many end up losing money.

Ultimately, it is your decision and you should do your own due diligence before investing in any business opportunity, MLM or any other. If you have any comments, questions, ideas or suggestions please leave them in the comment section below and I will get back to you ASAP.

I’m Looking forward to working with you,

about the author - Rex McMahon


P.S. Again, my 10-day home business training is COMPLETELY FREE to get started. No catch, no obligation, no bait and switch. I will personally be in touch with you upon joining to offer my support and guidance to help you get up and running online.

P.P.S. If you have any questions or are unsure of anything, I am here and I promise I will get back to you on all of your questions and comments. Just leave them below in the comment section. Follow me on Twitter: @onlinebenjamin1, Instagram: dotcomdinero, and Facebook: Online Benjamins

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