Becoming a multi-level marketing (MLM) business owner can be a rewarding experience. Yet, this is an area of entrepreneurship people should enter into with caution. Many companies that seem like legitimate MLM companies are pyramid schemes and don’t fulfill the promises they make to their distributors. While it’s an estimated 36 billion dollar industry, a report from AARP found “47 percent [of sales representatives] lose money and 27 percent make no money.”
With that being said, joining the right company can also present great opportunities. Learn more about what an MLM is, how they work, tips for making money, and what to look out for before investing in one.
What Is Multi-Level Marketing (MLM)?
When a person joins an MLM organization, they agree to become a direct sales representative and distributor of a company’s products or services. The business model functions off of dispensing their offering through the company’s salespeople. With no physical location, it’s an attractive option for those in search of remote work since there is no in-office work required. Instead, they market and sell the business’s products both online and in-person as independent contractors. Reps typically purchase the product directly from the MLM, and make a profit as they they sell the product.
The Sales Process Explained
The name MLM comes from the idea that there are multiple levels of marketing. Not only do representatives of the business sell the company’s product, they’re also encouraged and incentivized to get more people to sign up as contractors. This is done by recruiting and training new distributors. As their team expands, they can make more money.
A person can easily join by reviewing and then signing the business’s contract to become a new distributor. This document should provide information on various commissions, requirements for bonuses, and company perks. After this, a new recruit usually purchases a certain amount of inventory before they can begin selling product. The upfront investment is usually the primary means for MLMs to make a profit. For example, as more recruits join, their initial investment serves as the company’s number one source of revenue.
Sponsors are people who recruit individuals. The representatives who join under a sponsor are referred to in the business as the “downline.” Those who came before a sponsor in the business are called the “upline.” Legitimate MLMs will not make recruiting new individuals a mandatory part of the sales process. Beware of companies that solely focus on gaining new recruits.
Popular MLM Examples
While MLMs have gained traction in the last few years, this business model isn’t a new concept. In fact, the first MLMs became popularized in the 1930s with Wachter’s and California Vitamin Company (later renamed Nutrilite). Other MLMs like Tupperware, Avon, and Mary Kay are household names in America. Today, some of the most well known MLM businesses are doTerra, Forever Living, Monat, Rodan + Fields, and Scentsy. Overall, most people view these particular companies as well-established businesses with good products.
According to the MLM News Report, the most popular industry for MLM organizations are supplements (38 percent). Yet, in 2019, 50 percent of the top 10 MLM companies sold beauty products. Together, these companies generate billions of dollars every year with their millions of representatives.
Tips for Succeeding as a Business Owner in MLM
Joining an MLM doesn’t guarantee a profit, in fact most MLMs require a distributor to “buy in” to the business before setting up shop. This is why it’s important to know how to get the most out of the experience before deciding if it’s right for you. Below, find a few pointers for finding success with this type of business model.
Find a Mentor
One of the best ways to learn the ropes of the business is by building a strong relationship with those who are upline. Typically, this will be the person who recruited you. While they’ll likely offer introductory training, make it a point to keep learning the business from those who are the most successful at it. Try meeting at least once a week online or in-person to discuss marketing strategies, growing your sales network, and getting tips for receiving a good commission check.
Believe in the Product You’re Selling
Being a great salesperson requires strong persuasion and influence skills. What that being said, this requires a high degree of authenticity. As Brené Brown says in The Gifts of Imperfection, “Authenticity is a collection of choices that we have to make every day. It’s about the choice to show up and be real. The choice to be honest . . .” Essentially, authenticity is what allows us to connect as humans and feel a sense of belonging.
Before joining an MLM, make sure you’ve tried the product yourself, you believe in it, and you’re passionate about introducing it to others. You’ll also need to have the desire to serve the mission of the MLM venture. Do they openly explain what their purpose is and how they fulfill a vision of a better future? Are they ethical in the way they treat their customers and reps? If not, rethink investing your time, energy, and money into the company.
Develop Real Relationships with Your Customers
Like any sales job, you want to expand your customer base and serve your clients to the best of your abilities. This means building real, meaningful connections with your customers and community. Take notes when your clients share personal information like talking about their kids or what they do for a living. The next time you see them, ask them specific questions about their life and how you can best serve them. Use the principles of servant leadership to guide your company using the MLM business’s products. More often than not, your customers will take note, advocate on your behalf, and introduce you to more potential clients.
Create a Plan for Business Success
While many MLMs present themselves as “get rich quick” opportunities, they are not. No business makes money without the owner putting in hard work and dedication. Too often marketing tactics from sponsors promise a finite game—one where new recruits quickly win at business and life within a matter of months. To avoid this, choose a company you can grow with, and create a long-term strategy for success. It’s beneficial to develop your own business plan. As a 1099 contractor, you are a business owner. With this in mind, set yourself up for as much success as possible.
For a quick introduction on starting a business, check out this article.
How to Spot a Pyramid Scheme
Some MLM organizations present amazing opportunities, but these benefits might actually be too good to be true. Before becoming a consultant for an MLM, make sure it’s not a ploy designed to profit off your initial investment. Additionally, it’s important to remember participating in fraudulent marketing is a criminal offense that you can be prosecuted for. Those found guilty could serve time in prison or pay a hefty fine.
Here’s the tell-tale signs of a pyramid scheme:
Extreme Sales Rhetoric
Whether it’s lucrative money-making potential, incredible vacations, or living a life of luxury, unethical sponsors use this language in their pitch. Speaking to new recruits’ desires is how they get people to sign up and invest in the company. Avoid reps who solely talk about how the company is the solution for providing a total transformation in your life.
Large Upfront Investments and Low Commission
Go over the company’s documents and review the requirements for becoming a distributor. When going into business with anyone, you’ll typically want an advisor or attorney to review the company’s contract. Nevertheless, some pyramid schemes are blatantly unfair. If the fine print says you must invest several hundreds or thousands of dollars into the company for training and products, it is likely a poor business opportunity. Additionally, look at the structure of earnings. Is your commission incredibly low compared to how much money you’re filtering into the company? Many times, this will be the case. If so, walk away.
Heavy Emphasis on Recruiting Other Distributors
Does recruiting others offer a bigger payout than selling the company’s product or service? If so, the U.S. Securities and Exchange Commission says you’re likely dealing with a pyramid scheme. Beware of pressure to spend more time bringing on new members than selling the product. This is likely an illegal operation you’ll want to avoid joining, as it can cause significant financial and legal issues.
Final Review of Becoming an MLM Distributor
Every business opportunity has its pros and cons. Many reps of MLMs truly believe in the product they sell. They love working their business and making a positive impact on their customers’ lives. For this reason, there’s nothing wrong with teaming up with or supporting an organization whose mission you want to serve if the operations are legal and ethical.
If you’re in it to profit, understand that statistically speaking, this isn’t a business model that is friendly to consultants. For instance, data obtained from Business Insider found that 80 percent of MLM LuLaRoe’s contractors made less than $5,000 annually. Additionally, a survey from MagnifyMoney found, “Most participants make less than 70 cents per hour in sales—before deducting expenses” and “fewer than half of participants made $500 in the last five years.” That’s a far cry from some of the extravagant promises sponsors use when recruiting new people to join the organization.
Above all, it’s important to beware of companies that focus more heavily on selling the company to reps than selling the product to customers. This is a tell-tale sign of a pyramid scheme focused on primarily profiting from contractors’ upfront investment. In short, know what you’re signing up for, who you’re getting into business with, and whether or not the relationship will be mutually beneficial.
