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Updated 07/05/2016
 

MLM Scam Turns Aspiring Entrepreneurs Into Frauds [Proof]

mlm scam

Multi-level marketing (MLM) is a business strategy that is referred to as pyramid, referral, affiliate, or network marketing. Team leaders are given compensation for sales and for recruiting other salespeople.

While forms of “pyramid” marketing are met with harsh criticism, from an objective standpoint, multi-level marketing is a strategy meant to streamline or accelerate an internal sales force and revenue.

There is a fine line between a pyramid scheme (illegal in the U.S.) and a multi-level marketing scheme. The only difference is that MLM has a product of value involved, with the product being the main focus (rather than the recruitment of other people). Even large companies using MLM admit that only 18% of products are sold to people outside of the memberships.

This sounds a little like Michael Scott’s plan:

Considering you’re on a “MLM scam” post, I have two personal stories that you’ll find relatable.

I’m sure you’ve been pitched by one of your friends and things went similarly…

At a party as a college sophomore, two guys were trying to recruit me to work with them. They used phrases like “financial freedom,” “work from home,” “young people revolution,” and “be your own boss” in their pitch. They said things like “there’s an opportunity to enjoy the products while succeeding by helping others succeed.”

They wanted me to join Vemma. You pay $500 to be an “authorized seller” of an energy drink, and then pay $150 every month to stay a member and get energy drinks delivered monthly. (These are all ballpark figures.) When you’re a member, you create “teams” and get paid as you create “cycles” with your team. Basically, you get compensated for recruiting people to work for Vemma while creating your own tree (or pyramid).

After the pitch, I said it sounded like a pyramid scheme. These guys were well trained and knew the perfect response. They said, “It’s not a pyramid scheme when there’s a physical product involved.”

Okay, that sounds great.

So, I asked if they liked the energy drink they were selling. One said it was alright and the other said he hadn’t tried it.

That’s the point. The product doesn’t have value and/or is substantially overpriced. You’re only a member because of the benefits of recruiting other people and that’s a pyramid scheme. The energy drinks don’t have value; the value is in being a member.

I went on a first date about a year later. During conversation, we talked about my life as an online marketer and how I’m doing well with business. She said nothing at the time, but she remembered this…

The first date seemed to go well, and I was able to get a second date.

The second date seemed a little different. She immediately brought up a new venture she was excited about. She explained that she gets to “help people with their future.” And then she told me a story about how her mailman is making six figures now.

I knew exactly where this was headed.

She was talking about Vemma, except instead of an energy drink, the product is “financial advice” and the company is Primerica.

I was put in a tough spot. I didn’t want to tell her her idea was stupid, but I’m also strongly opinionated and didn’t want to just let it slide. I made a few jokes about it and then agreed I wouldn’t make fun of it until I went to a ‘meeting.’

I went to the meeting, and I can see exactly how people get sucked into these programs.

The presentation was well polished. The presenter took complicated concepts about finance and oversimplified them.

The presenter quickly lost credibility with me. He was teaching us how to “stack our payments” for our loans. He mentioned the smartest way to pay off debt is pay off the smallest monthly payment. Once that’s done, take that payment and stack it with your next smallest debt.

I knew this was wrong, but everyone in the meeting shook their head in approval. The fastest way to pay off debt is to pay off the loans with the highest interest first.

His way might help someone psychologically, but it’s not the most financially savvy way. But the people at these meeting are desperate, looking for easy cash and unwilling to question authority.

After the meeting, I was trying to figure out a way to go on a third date without having to talk about multi-level marketing ever again. She made it easy and texted me to hear my thoughts on the meeting. I told her it was exactly what I expected: a bunch of tips for people with no clue about financial management and a pitch on how “to succeed by helping others succeed.”

That was almost two years ago. We haven’t spoken since. She like my business sense and thought I’d be an asset to her network, but she was not a fan of mine.

There’s nothing wrong with people who get involved in multi-level marketing. In fact, I love the entrepreneurial spirit of these people, that they’re not looking to follow the status quo, and they don’t want a normal job like everyone else.

Let’s dive into why people fall into these traps and where aspiring entrepreneurs can better use their talents.

Who Offers the Opportunity?

A number of recognizable brands leverage MLM: Avon, Amway, Herbalife, Natura, and Mary Kay. All mentioned brands report a gross income exceeding $2 billion (based on 2013 numbers), with the 50th on the top list grossing over $200 million per year.

The Art of Persuasion

In an age of tons of young entrepreneurs, what recent graduate wouldn’t want to be their own boss? With kids just stepping out of college and into million-dollar lifestyles, it appears to be a tangible dream of many graduates.

However, since those going to college aren’t stupid, how do MLM representatives inspire the educated to consider a partnership?

  • It’s an opportunity to make large sums of money despite having zero or little business experience.
  • MLM entails one-on-one interaction with customers, a point of interest lacking with most websites and tech startups.
  • Malls, catalogs, and traditional brick-and-mortar stores are closing down and paling in numbers, so MLM offers a “new” way to compensate for the “old” way to shop.
  • It’s a quick way to make money with no ceilings involved. You’re compensated based on performance and time put forth.
  • There are no schedules, cubicles, overbearing bosses, or traditional hours involved, aspects that turn young people away from the thought of getting a traditional job.
  • You can start by making friends and family members (those who love and trust you already) lifetime customers.
  • Even if you don’t begin making the money you had hoped for, the flexible hours give you the ability to do it in your spare time.
  • It provides direct business and entrepreneurial experience that recent grads can bring with them into the future and other business settings.

Whether all, any, or none of the above statements are true is debatable, yet they are popular reasons to grow curious about multi-level marketing.

Numbers Don’t Lie

Since the potential to make big money is the main attraction, it’s important to consider some facts and numbers related to the success of MLM.

At Amway, among the most profitable MLM-structured organizations, about 0.5% become “direct” distributors, with the average income of agents making $40 per month. This number is before taxes and doesn’t include an agent’s own expenses and time invested. When the Wisconsin Attorney General filed charges against Amway, tax returns from all distributors in the state revealed an average net loss of $918 for that state’s “direct” distributors.

If 2,000 members are needed for one person to sustain an income, that means those 2,000 members will need to recruit (in totality) millions to reach the level of success of their predecessor. Reality reflects a constant churning of active agents, and a very low percentage of them can actually use the system as their primary source of income.

If the dropout rate is 5.5% per month, it equates to over 60% of all agents enrolled for the year. That’s a very low retention rate. And some MLMs disguise dropout rates via “active” and “inactive” distributor labels.

It’s basic marketing tactic: sell the benefits, not the features. Such is with the notion of gambling and winning versus losing. The actual number of winners is considerably low, yet what’s advertised are the benefits.

Scams exist because unethical practices are disguised as promises rather than actualities. As with winning the lottery, many play because “someone has to win,” yet millions must lose in order for very few to win.

I’m not saying you can’t make a lot of money joining a multi-level marketing program, but the odds are heavily stacked against you if you’re not one of the beginning members and have a high place in the pyramid.

Your “teams” are bound to collapse when immediate results aren’t seen and the people you’ve recruited quit. The stats on retention make MLM a bad bet.

This chart shows MLM is impossible to sustain:

multilevel marketing scam

Business is hard. If you’re just looking for an easy way to make money, get a job.

If you like a lot of the benefits that an MLM program brings, and you’re looking to put in effort, build an asset of value. Even if you were successful in an MLM business, you wouldn’t have anything to show for it when you’re done. You’d have no assets. You’ve built nothing. The only thing you’ve built is more money for the person sitting above you in the pyramid. Your efforts would be much better spent building something yourself.

Value is Timeless

Entrepreneurs find a need and deliver value to that targeted market. Why are people looking to take a different route?

Let’s use Noah Kagan, Facebook’s 30th employee, as an example.

With twenty-four hours, some hustle, and beef jerky, Noah made $1,000. By no means is that amount enough to live well, yet the feat is impressive and a lesson to be learned by young people with a passion to build their own business.

Noah started with an obvious yet largely oversighted idea: to begin a successful business, the journey starts within. Ask yourself, “What needs do I have?” A good entrepreneur understands what makes people tick.

Noah paid attention to what makes buyers tick rather than coming up with a cool business name. (In this case, what makes people want, buy, pay, and hesitate to readily purchase beef jerky.)

If you can understand the motivations of the potential market and what would stop them from making a purchase, you’re on the road to being a success at selling…anything.

Also, be able to identify the buyers. Understand where (on or offline) to advertise to them. For a number of marketers this means creating buyer personas. Noah figured he could gain more attention (in less time) by incorporating referrals.

Steps to Success

Noah’s jerky story is one story of success, yet you can reverse engineer it to find a handful of steps that paved the way:

  • Communicating with a market in real-time (social media, phone calls, etc) is more active than other forms of marketing (emails, billboards, etc).
  • Referrals are good. If you can find one interested party, they can help find additional customers.
  • Rather than upsell, consider downselling. In Noah’s case, rather than three-month supplies, he also offered a one-month supply.
  • Unless you’re selling oxygen, chances are likely that you can’t sell to all people. Therefore, pay attention to the personas who are highly interested.
  • Don’t reinvent the wheel. Focus on business models that exist and work well.
  • Work backwards from what people want and love. If you’re unsure, then ask!
  • You don’t need to spend a lot of money, but you do need to spend quality time thinking of your plan and target market.
  • Work on building a network of potential buyers; if you can get them to say “yes” once, it’s likely you can use the recipe to do it again in the future.

Wrap Up

If you’re looking to validate a business idea, check out Noah Kagan’s resource page. Noah’s YouTube videos go through the validation process. (This one’s my favorite, but check out his whole channel.)

Additionally, Sam Altman (President of Y Combinator), created the “Startup Playbook” for building a company. He walks through the idea phase, creating a team, and starting something great.

Beginning a startup may seem like a large project, yet it can be small and simple (like a blog that makes recurring revenue). If you have your idea or you’re getting close, you’ll need to get something live. Check out the guide that I made on how to set up a website.

I’ve created over 100 sites in six years. I’ll walk you through all of the steps:

  • Picking out the perfect domain name
  • Where to host your site
  • Getting your site or blog running

I’ll show you a few shortcuts and tricks too!

My guide is easy to follow. Those without any experience can easily succeed. You’ll have a site live in less time than it takes to sit through an MLM meeting.

Have questions or want to pitch me an idea? Shoot me an email (cam [at] allpowermoves.com). I’ll be able give you advice or point you in the direction of good resources.