{"id":8790,"date":"2023-08-06T02:28:42","date_gmt":"2023-08-06T02:28:42","guid":{"rendered":"https:\/\/isafespend.com\/budgeting\/what-is-an-mlm\/"},"modified":"2023-08-06T02:28:43","modified_gmt":"2023-08-06T02:28:43","slug":"what-is-an-mlm","status":"publish","type":"post","link":"https:\/\/isafespend.com\/?p=8790","title":{"rendered":"What Is an MLM?"},"content":{"rendered":"
\n <\/p>\n

Definitions and Examples of MLMs <\/span> <\/h2>\n

\nRather than having a storefront operation, multilevel marketing companies rely on independent distributors to sell their products directly to consumers and bring other salespeople into the company. Sales are often online or in customers\u2019 homes. These distributors aren\u2019t hourly or salaried employees. Instead, they are independent contractors and only make money when they sell the product. The company encourages each distributor to recruit new participants to join their downline. Then, the distributor earns a percentage of all sales their recruits generate.\n<\/p>\n

\nMany people use the terms \u201cMLM\u201d and \u201cpyramid scheme\u201d interchangeably. And while they\u2019re not entirely the same thing, some MLM companies are pyramid schemes and in violation of federal law.\n<\/p>\n

\nAn illegal pyramid scheme is a company that recruits distributors, just like an MLM would. But in the case of a pyramid scheme, participants can\u2019t really make money selling a product or service; rather they make money by recruiting new distributors to join under them. Pyramid schemes are illegal, and the Federal Trade Commission (FTC) works to shut them down.\u00a0\n<\/p>\n

\nA good example of FTC action against a pyramid scheme is its January 2020 temporary shutdown of an instant-coffee pyramid scheme called \u201cSuccess by Health.\u201d The FTC\u2019s press release about the action indicates the company\u2019s founders received $7 million from their distributors and pocketed more than $1.3 million of it.\n<\/p>\n

\n\u201cThe FTC alleges that less than 2% of participating consumers received more money from the defendants than they paid to them, and that those lucky few averaged less than $250 per month\u2014a far cry from the defendants\u2019 promises of \u2018financial freedom,\u2019\u201d the FTC\u2019s release noted.\n<\/p>\n

\nThe difference between a pyramid scheme like Success by Health and a legal MLM is that legal MLMs have a legitimate product and distributors can make money by selling that product. And while legitimate MLM companies also encourage distributors to recruit new participants into their \u201cdownline,\u201d they don\u2019t necessarily have to do so to make money.\n<\/p>\n

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\nNote<\/h3>\n
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Many MLM companies require distributors to buy their own inventory to sell. Participants may also have to pay a monthly fee to use the company\u2019s marketing and have a website.<\/p>\n<\/div>\n<\/div>\n

<\/p>\n

How MLMs Work <\/span> <\/h2>\n

\nMLMs rely on more people continually joining the organization so the people at higher levels can earn money from the sales of people who are newer to the organization. You may be expected to pay money upfront to join. You’ll have sales quotas you’ll be urged to meet, and you may also be expected to bring a certain amount of people to the organization who will form your downline.\n<\/p>\n

\nThere are hundreds of MLM companies operating in the U.S., and it can be tricky to figure out if a popular new product or job opportunity from a friend is an MLM in disguise. You may have had the experience of a casual conversation with an acquaintance turning into a sales pitch to join their MLM team. When you join a team at the invitation of a friend or acquaintance, you become part of their “downline.” This puts you lower in the hierarchy and in a position where those above you earn money from your sales. The people you bring into the organization then become downline from you. Here are some things most MLMs have in common:\n<\/p>\n