What Is Multilevel Marketing (MLM)?

The term marketing (MLM) refers to a strategy 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 also illegal operations that are run as pyramid schemes. This has cast some negative light on legitimate MLM businesses.

KEY TAKEAWAYS

• Multilevel marketing is a legitimate business strategy used by some direct sales 
• companies to sell products and services.
• Existing members are encouraged to promote and sell their offerings to other individuals and bring on new recruits into the business.
• Participants are paid a percentage of their recruits' sales.
• Members at all levels receive some form of commission, which means the more layers there are, the more money people can earn.
• The FTC investigates MLM programs to ensure they don't operate as pyramid schemes, which are illegal.

Is Multilevel Marketing a Pyramid Scheme?

Multilevel marketing is controversial and often compared to pyramid schemes. While some multilevel marketing operations are legal, others have come under investigation. This typically occurs when the majority of the operation’s profits funnel up to the top, leaving little for the rest of its members.

When an organization focuses primarily on recruitment, rather than selling products, this may also signal that it is operating under a pyramid scheme. Sometimes, members of these schemes will number in the hundreds or even thousands. 

 

Here are some warning signs of a pyramid scheme:

• Promoters make extravagant promises about their earning potential. Stop. These promises are false.
• Promoters emphasize recruiting new distributors for your sales network as the real way to make money. Walk away. In a legitimate MLM program, you should be able to make money just by selling the product.
• 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. Leave by the nearest exit. Any company that tries to pressure you to join is one to avoid.
• Distributors buy more products than they want to use or can resell, just to stay active in the company or to qualify for bonuses or other rewards. If you see this happening, keep your money.

What Are Some Red Flags to Look Out for an Illegal MLM Pyramid Scheme?