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MLM's - Multilevel Marketing Companies

August 27, 2015 William W. Keep School of Business, The College of New Jersey

Many college students look for opportunities to earn extra money. Some want help to cover expenses while others want to explore career possibilities. Over the past few years, students have contacted me about multilevel marketing (MLM) companies (e.g., Vemma, WakeUpNow, etc.) actively recruiting on college and even high school campuses. As an expert on MLM companies and the illegal form called a pyramid scheme, I caution students against making quick decisions.

An MLM company is a form of direct selling that typically offers two ways to earn money: 1) buy products that you resell to customers outside the distributor network (e.g., friends and family members) at a mark-up and 2) recruit others to sign up as distributor who then repeat the process of buying products to sell and recruiting others. How this works varies across companies. Customers may buy directly from you or order online, with you given credit for the purchase.

In virtually all cases, however, the path to earning higher income will be through recruiting others because you earn rewards based on the purchases made by those you recruit, and by those recruited by those you recruit. Developing this “downline” or “network” of recruits can involve multiple “generations” or “levels.” In this way the MLM distributor develops his/her own “business.” Success stories sometimes include exceptionally high income and some of the associated trappings such as expensive cars increase the appeal of building a downline.

The process of recruits earning rewards based on recruiting others has gotten the MLM business model into trouble. A number MLM companies closed and paid penalties (or lost in court) when prosecutors accused them of operating pyramid schemes. A pyramid scheme means people join and pay a fee and/or purchase products to earn rewards for recruiting others who follow the same pattern. This scheme can be described as an endless chain (i.e., like a chain letter) that falsely gives the impression of earning income by operating a business. Inevitably, the vast majority of those who join an illegal pyramid scheme will have invested both time and money and “earn” no reward. Once started, a pyramid scheme can grow rapidly, creating large numbers of victims, almost all of whom have lost money.

The MLM business model itself has not been declared illegal and some firms have used this approach for many years. These companies recognize that even with their model only a small percentage of participants will earn a livable income, much less the kind of income described in some success stories. From time to time we also see examples of MLM companies admitting that their distributors have, in fact, misrepresented the products, the ease of earning income, or both. As these companies can have many tens of thousands of representatives, ensuring that each one honestly represents the opportunity to a potential recruit can be difficult.

Some things that worry me about how college students may view the MLM opportunity, include:

a)    Person-to-person selling is an easy way to earn income. [Ask anyone who has tried sales and they will tell you it takes a lot of time and effort. While the person recruiting others to join an MLM company may point to success stories, the data on this type of business shows that most distributors earn modest or no income. Plus, students often forget the time and money involved in the process. As a result, many who earn income earn little once calculated on a per hour basis.]

b)    The MLM company will benefit only if I succeed. [Actually, the company benefits even from distributors who do not succeed. Critics of MLM companies point to the fact that churning unsuccessful distributors will be a moneymaker for the company as many recruits make purchases and then become inactive.]

c)    Some young people have been very successful by starting their own business; this is a low risk opportunity to show what I can do. [I encourage students to read about young people who have succeed in business or investing. They will find that success came with a great deal of homework and effort. If interested in an MLM opportunity, students should do their research to better understand just how success was achieved.]

College graduates have higher lifetime earnings than those who do not graduate with a four-year degree in part because they are more prepared for the challenges of building a successful career. When in college it is easy to become impatient, easy to wonder, “Why can’t that be me?” I encourage students when considering an MLM opportunity to step back, take a bit of time to do some relatively easy research on the Internet, and consider their best options. Generally, I think they will find spending time connecting with alumni and learning more about various career paths to be a more fruitful use of their time.