While in graduate school, June Smith* worried about the student loans she’d have to repay after graduation. But after a friend hosted a party selling nail art supplies, she thought she had found a solution to make some extra cash.
At the end of the party, a sales leader explained to June how to sign up and become a nail wrap consultant and sell the product herself. “I confessed that I was anxious and I sucked at sales,” said June. “But they were still encouraging [that I move forward].”
Convinced, she completed the signup process and invested approximately $300 for the startup kit, business cards, and other supplies. She would later invest an additional $3,000.
Though she earned small amounts of money, it wasn’t until June sat down and compared her investments to her earnings that she realized she was losing money at a rapid pace.
“It was a money pit,” June says.
June isn’t alone in her experience. According to the Federal Trade Commission (FTC), less than 1 percent of multi-level marketing (MLM) consultants make a profit. Many people dream of being part of the small minority, but it’s important to know about the dangers of MLMs before investing your hard-earned money.
What is an MLM business?
“Multi-level marketing” and “pyramid scheme” are often used interchangeably, but they’re not the same thing.
The Better Business Bureau defines MLMs, also known as network marketing, as a system of selling products in which the company doesn’t have retail stores. Instead, businesses rely on a network of independent salespeople to sell products. Some popular MLMs you may have heard of include Scentsy, Herbalife, and Pampered Chef.
Salespeople purchase inventory from the company and sell it at a markup to their own customers. Most sell on social media, though some hold live sales, too.
What differentiates MLMs from other types of retailers is that salespeople can make more money by recruiting and training other sales consultants. If they recruit another independent consultant, they can make a commission off the new person’s sales.
Pyramid schemes, however, primarily work by promising big profits for recruiting other members. There’s little to no mention of selling an actual product to consumers; instead, it’s all about building the network.
Pyramid schemes are illegal, but MLMs are not. MLMs can sometimes fall into a gray area, however. Some businesses have received penalties and restrictions from the FTC when they have too closely resembled pyramid schemes.
The dangers of multi-level marketing companies
Many multi-level marketing companies advertise themselves as a dream job for those looking for flexible work or a reliable side hustle. According to them, you can earn a full-time income working just a few hours a week, set your own schedule by working from home, and easily sell the products to your network.
The reality can be much more difficult. These are the five biggest dangers to keep in mind before signing up with an MLM company.
1. Startup costs are expensive
When Shannon Wilt* signed up as a consultant with a clothing company, she spent thousands just to get her business off the ground.
“In the beginning, I ordered supplies, the initial onboarding kit, and I wanted to carry some additional styles at the time to set myself apart from all the other people who were just joining,” Shannon said. “I put about $13,000 on a credit card at the time. However, this was also not unheard of or crazy at that time [with the company].”
Whether you want to sell candles, essential oils, skincare products, or energy drinks, you likely can’t just sign up with a company and start selling. Most companies require you to spend hundreds or thousands to become a consultant.
Beyond an initial membership fee, you have to purchase inventory, create a website, and market your business, all of which adds to startup costs. Some people rely on their savings, credit cards, or even business loans to get started, sticking them with major debt before they’ve earned a dollar.
2. You might alienate friends, family, and acquaintances
If you spend time on Facebook or Instagram, you’ve probably seen plenty of posts from sellers touting the benefits of one product or another. That’s because many MLM companies recommend tapping into your personal network of friends and family.
Repeatedly tapping into that network can strain your relationships, or even cause your loved ones to avoid your messages or block your social media posts altogether. Once you’ve exhausted the goodwill of those you know, trying to build a new clientele from strangers can be difficult.
3. You could be encouraged to buy more inventory
In interviews with consultants from various companies, there was one common theme, regardless of product: When they struggled to make money and turned to the company for help, they were encouraged to buy more inventory.
“They told me [I wasn’t selling] because I didn’t have enough in stock,” Karen Bond* said. “They recommended I use a low-interest credit card to buy another $5,000 of merchandise to improve my business.”
Although some consultants say that sales did pick up with more options in stock, others said it didn’t make any difference. Instead, they had more credit card debt and even more inventory they couldn’t sell.
4. To make big money, you need to recruit
You can make money by selling products directly to customers. However, your profit margins might be slim.
For example, an advanced consultant selling Pure Romance products gets a 40 percent discount off the retail price on merchandise to sell. However, an executive director — the top tier of sellers who’ve recruited at least 30 other consultants to work for the company — gets a 60 percent discount.
That means they make more money off each sale. Moreover, they also earn up to 6 percent commission on sales the consultants under them make.
To boost your profits and overall income, recruiting others downline is essential.
5. Getting a refund might be impossible
Some companies allow sellers a chance to send back unused, unopened products for a full or partial refund. However, return policies vary from company to company and can change at any time.
For example, clothing company LuLaRoe previously allowed sales consultants to return unsold products for a full refund, reported Inc. However, the company abruptly changed that policy; sellers can now only get a 90 percent refund and are responsible for shipping costs.
The company can also decide to not issue refunds for certain products, such as seasonal prints — a change that can leave many sellers unexpectedly in the red.
Alternatives to MLMs to make money
Selling multi-level marketing products might sound like the perfect way to make a sizeable income while balancing other obligations. However, making an investment into a multi-level marketing company is a big decision. If you aren’t successful, you could lose thousands with no recourse.
If you’re looking for legitimate ways to make money without emptying your savings or using a credit card, you can launch one of these side hustles with little or no upfront investment.
*The consultants named in this piece asked to remain anonymous due to concerns about company retaliation.
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