What You Need to Know about Multi-level Marketing: The Good, Bad, and Ugly

We all know someone who “does” multi-level marketing… Our crazy step-aunt, maybe a grandmother, or a friend who is SURE to get rich from selling products you’ve never heard of!

Other names, of course, are network marketing or direct selling. It’s all the same thing. So, why am I writing about this?

Because… This is a finance blog! And… Let’s get real here, no one joins a company with a multi-level marketing business strategy just for fun (let me know if you know someone who does!). They want to make money.

I think it’s safe to assume that you’d like to make more money too, or you wouldn’t be here! 😉 That’s why I want to talk about this.

I’ve been around the block a time or two with these business strategies, and I want to give you honest feedback on how they work, what to expect, the time you have to invest, and how much money you can actually make.

Disclaimer: If you’re looking for a hard answer on if you should or should not try your hand at making money with one of these companies, this isn’t the post for you. If these companies weren’t legitimate, they wouldn’t be around… That’s why we have things like the Federal Trade Commission (FTC), that helps eradicate shady “businesses”. But, if they were legitimate “get rich quick” methods that worked, everyone would do it! None of my advice can be taken as law, be sure to use your common sense. I am not a licensed financial advisor!

Introduction

So, if you’re not familiar with any companies that use this business strategy, here are some examples: Herbalife, Avon, YoungLife, Mary Kay, Amway, CutCo, or Origami Owl. These are just a few. There are many out there!

Basically, you open up your own business through these established companies, sell their products, and build a team of people to increase your income–because as they make more sales, you get more commissions. The more people they get on their team, the more commission they get, and the more you get, and so on.

Pyramid scheme” is another way some people describe it.

Now, I want to make this very clear (a mentor of mine explained this to me) — “Pyramid scheme” is a legal term for something that is illegal. The FTC is always on the lookout for these scams, and they usually get shut down pretty quick.

Quick history lesson… another term for pyramid scheme is a Ponzi scheme. This started back in 1918 and is named after the man who ran the scam, Charles Ponzi. He started out by realizing that he could buy stamps in other countries, have a friend ship them to America, and exchange them at a higher rate than he bought them. He quickly accrued money in this manner, and decided to take his ploy one step further by gathering investors.

He guaranteed his investors a payout by a certain date from their investment, and always followed through, but he was making these payouts from new investors. There was no new money being circulated. He was simply borrowing from the newest investment and giving it to the older investor.

Once he was under suspicion of his illicit activities, Boston launched an investigation, and all of his previously unsuspecting investors decided to pull out of the investment and cash out… Problem was, there wasn’t enough money to cash everyone out.

In the end, Ponzi got charged with 86 counts of mail fraud (to which he pleaded guilty) and ended up in prison, divorced and penniless… Whomp whomp whomp…

(Check out the full story on Charles Ponzi here!)

THIS, my friends, is a real pyramid scheme. No goods or products are being exchanged in return for this money that’s being passed around, and there is nothing in place to ensure that anyone gets anything.

This is the difference in direct marketing businesses like those mentioned above and a pyramid or Ponzi scheme.

Basics of Multi-Level Marketing

When you buy into (or start a business with) one of these companies, you receive goods in exchange for your money. This is often called a “starter kit.” In my experience, you receive a substantial amount of product for a discounted price. Most companies give you wholesale value.

This is the start of your business. Whether you want to try all the products for yourself, or sell everything in the kit, it’s really up to you. You’ve received goods in return for money, so this shatters the definition of a pyramid scheme right from the start.

“But Kelsey,” I hear you thinking… “What about all the people who came before me in line getting a percentage of my money?”

This is where a better metaphor of describing these business models comes in–the ladder.

Ask someone to describe a pyramid scheme for you… It will usually go something like this: “well there’s a person who gets a few people beneath them and then each of them gets a few people underneath them and so on, till the base is so wide and all of the money has been so widely distributed that there’s hardly any to go around… and all the money goes to the top.

Hmmmm. that sounds kind of like a job to me… one person at the top making all the money… CEO… and the base is so wide that the people at the bottom make next to nothing…. and of course, the janitor for this fictional company we speak of wouldn’t dare ever dream of being able to work alongside the CEO!!!

Here’s where the ladder comes in. In multi-level marketing, everyone starts at the bottom. Depending on how hard (or little) you work, anyone can stay at the bottom, or anyone can rise straight to the top and become the “CEO” of their own business… As for the people who sign up as “business partners” beneath you, they can either stay “beneath” you, or they can rise above you, if they work harder and longer than you.

There are no set positions in multi-level marketing, which is often a strong drawing point to newcomers… “Advance at your pace!” or “Be your own boss!” … These taglines are great, but people often don’t understand the discipline or follow through it takes to manage themselves in a manner that will truly advance their business to its full potential.

What it Takes

Here’s another observation of mine about multi-level marketing–most of it is “happy-clappy,” “hype-up, sign-up” mumbo jumbo. Most companies I’ve been exposed to don’t share much about the hard work it takes to get to the top.

You hear success stories and you see vacations, you see the cars they drive and the life they get to live… but you don’t see the countless hours they poured into their marketing techniques, their trial-and-errors, the 100 no’s and rejections they went through to get that one “yes,” and you don’t see how many people quit before they found someone on their team who would tough it out.

If you decide to start your own business in a multi-level marketing company, remember not to let your decision be dictated by the emotion and hype of making a lot of money. Just like any business, it will be hard work. The main difference in these businesses and starting a traditional business is the investment piece. In a traditional business, you create or invest in the product.

If you want to open up a gym, you invest in the building and the equipment. If you want to run a crafting business, you have to create the products you intend to sell. If you want to start a dentist’s office, you have to invest in the equipment and find the employees to hire, and more often than not you are looking at a pretty hefty loan to get started.

On the flip side, starting a business in multi-level marketing usually costs around $100. This not only gets you “in,” but also comes with your very own “starter kit” with some products (usually). Multi-level marketing appeals to many because of its inherent low-cost, low-risk nature.

If you decide you hate it, you’ve only lost $100.

My Experience

I was rather naïve my first time trying this out. I spent a LOT of money back stocking product and on useless “business tools” (like business cards, and even an iPad so that I could process credit card payments with a Square!) before I even got one customer or had hosted one event (party).

Looking back, I wish I had had someone to tell me this was all backwards. I hate to break it to you, but all the tools in the world won’t push your business forward… Multi-level marketing is a people business, and YOU are your number one resource!

But that’s okay. I learned my lessons, and I’m happy to pass them on to you.

The time commitment piece is also huge. You will be (or should be!) spending quite a bit of time learning your product. You can’t sell something you know nothing about!

Additionally, you will spend a LOT of time marketing your business to the world. Since multi-level marketing is a people business, you’re going to invest a lot of time making connections with people. There is definitely an art to this. Be careful who you choose to be your mentor during the early stages of your business. It can often make or break you!

Another huge mistake I made was not budgeting my money around my new business. A key factor in starting a business in network marketing is setting that money aside to grow your business. Most good business owners I have seen don’t spend the money they earn early on in their business. They reinvest it back into their business so they can grow it.

I definitely did not do this, nor did I budget my money at all, even in my personal life. If you struggle with budgeting your money, check out my FREE budget worksheet!

Summary

So, those are the basics of multi-level marketing. I have known people who make upwards of $1,200,000 a year.

It is an amazing opportunity if you have or can learn to have a great connecting personality and are able to discipline yourself and put in the work necessary to make your business a roaring success.

If you are like me, and have reservations about it (my biggest one was “what do I have to lose? If it fails I haven’t invested too much money.”), think long and hard about your intentions and thought processes about joining. For me personally, I was looking for an opportunity that I could make a lot of money at with very little work.

The hard truth is that anything worth having will be a lot of work. I have come to a point in my life that I not only realize this, but embrace it… Why, you ask?

Simply because my success is that much sweeter–because I earned it.

I hope this helped you navigate through the hairy maze of multi-level marketing, and as always, if you have any questions, comments, or suggestions, don’t hesitate to reach out to me!

Have you tried your hand at network marketing before? What was your experience?

I’d LOVE to hear from you!

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