Reason 1: It All Comes Down to the Products#

The first main reason is all about the products, which is what supposedly separates them legally from a fraudulent pyramid scheme.

• The MLM industry is one of the most powerful lobbying groups in America and worldwide.
• Herbalife alone, just one of hundreds of MLMs, spent $810,000 on federal lobbying in 2021.
• Their legal argument is that money only changes hands when a product is sold, so they’re just like regular salespeople who earn commission.

Unfortunately, it’s exactly these products that make MLMs much, much worse than pyramid schemes.

• The average return for a victim of a pyramid scheme is a reduction of 10 percent of their invested money, meaning they get 90 percent of what they put in back. It’s a bad investment, sure, but usually not financially crippling.
• Returns in pyramid schemes stay surprisingly high for a while because early investors get paid out. When the whole thing collapses, the money mostly hasn’t disappeared, and sometimes authorities can get some of it back for victims.
• Think of Bernie Madoff and his Ponzi scheme – even most of his investors got most of their money back eventually. After Madoff bought a penthouse apartment, a private jet, and a house in the Hamptons with some of the money, there wasn’t much else to do with it except keep it in the bank and use it to pay other investors. Even though pyramid schemes are different from Ponzi schemes, the outcome in terms of money being recoverable can be similar.

However, the average return from a multi-level marketing company is only around 30 percent of the invested capital. This figure comes from their own marketing materials that promote their bonus structures!

This means someone joining an MLM company would actually be three times more likely to make money by signing up for a fraudulent pyramid scheme instead.

The actual returns for most people are usually much lower than 30 percent. Sometimes, even people at the very top ranks in MLMs struggle financially, but we’ll get to that soon.

The reason the numbers are so bad is because of the product.

• For the people at the very top of the MLM to legally collect everyone’s money, a lot of product has to be sold or moved.
• But that product has overhead costs that pull money out of the system. Money goes to manufacturing and shipping the products, and some money goes straight to the MLM company itself.
• MLM products are priced way higher than similar products from competitors, even after any discount given to members. This is because the companies have to add in all that extra cost just to be able to pay out bonuses up the chain.
• Product quality from these companies is also a common complaint from people who used to be involved.

The companies rely on their members to promote the “business.” The main way members try to sell the business to potential recruits is by promoting the opportunity as a way to make extra income or achieve financial freedom. Since the products are just there to provide legal cover, the companies don’t feel much pressure to make their products, you know, good.

Having returns three times worse than what’s been called the most infamous corporate fraud in history (which the text implies via the Madoff comparison, even if Madoff ran a Ponzi scheme) is just Reason One.

Reason 2: Even the Top Earners Don’t Make Money How You Think#

It’s time to understand how money really works in these companies. Another reason why MLMs are worse than pyramid schemes is that even the people at the very top don’t make their huge fortunes from the basic business model itself.

• The most effective marketing for these companies is showing off the fancy lifestyle of their high-ranking members. You’ll see it plastered all over social media and displayed at big company seminars to really push that image of financial freedom and luxury living.
• To sell this image even more, the companies give members arbitrary ranks.
  • For companies like Amway, It Works, Kyani, and Usana, these ranks are named after precious gemstones (like Ruby, Sapphire, Emerald, and Diamond).
  • For Herbalife, the ranks are, ironically, named after executive positions you’d find in a regular company (Supervisor, President, Chief Executive, and Founder).
• High-ranking members get extra bonuses and perks, like free cars, expensive jewelry, and luxury vacations.
• They are obviously encouraged to show off these perks to make it look like they’re incredibly successful.

But here’s the twist: even at the very top, a lot of members struggle financially.

• All MLM companies operating in America are required to share income disclosure statements that show how much their members earn.
• Amway, the world’s largest MLM, reported that the top one percent of their independent business owners made an average revenue of $87,422** and a **median revenue of$56,096.
• Those numbers are slightly above what an entry-level professional might make.
• But this is just revenue (money coming in). In a worrying number of cases, it’s actually the people in the top one percent of these schemes who end up losing the most money financially.

As part of running an MLM business, independent business owners are expected to spend a lot of money on the company’s products for their own use. Reps often say things like needing to “become a product of the product.” This monthly spending on products can easily add up to hundreds of dollars.

On top of this, high-ranking members are expected to spend money on showing off their wealth – the material displays needed to attract people to the supposedly “lucrative” business opportunity.

To keep their arbitrary rank, members are also required to hit a certain level of business volume every month. The company and other members in the scheme train members to care deeply about these ranks, often motivated by the fear of losing their status. Because of this fear, members will buy extra products themselves to hit the required volume, convincing themselves they can sell it later for a profit.

As the text puts it: “You make a little, not much, not enough to pay the bills that are racking up. You make money from signing people.” This focus on recruiting creates a specific problem.

This leads to a situation so common it has its own name: “Garage Qualified.” This means high-level members only qualify for their rank because of the boxes of product piling up unsold in their garage. People buy more product than they can sell, and it just sits there.

At some point, when they run out of money, there has to be an end point to this.

The financial figures shown on the FTC disclosure statements are just top-line revenue. They don’t include all the extra expenses, which means even top members can end up struggling financially.

Back when Vice magazine was doing good reporting, they interviewed former top representatives from LuLaRoe, an MLM selling clothes. These women, who were all once in the top one percent of the company, ended up financially broke after running up credit card debt just to look successful for the people below them in the business. Both they and Vice Media (the company that published the interviews) are now bankrupt.

But maybe that’s not being totally fair. There are a few people in these schemes who make millions of dollars every year, not just in revenue, but in actual profit. The only problem for everyone else is that they don’t make this money by actually working the business (meaning selling the products or earning commissions on their downline’s product sales).

Roughly the top 50 members from every company have figured out one reliable way to make money in an MLM, and it’s clearly by taking advantage of everyone else.

As one former rep said, trying to stay positive about the opportunity: “You are not selling clothes, you are giving people Freedom, you are giving people life, you are giving people hope, you were giving people confidence.” While another admitted the reality: “I wasn’t alone in receiving merchandise that I just was not able to sell to anyone because it was crap.”

A business full of people looking to get rich quick, who see the high-ranking members as role models and mentors, is the perfect setup to sell overpriced books, seminars, and courses.

• Top MLM members host conferences where hopeful members pay hundreds or even thousands of dollars to attend weekend events to listen to live speeches by the top earners.
• Members are also pushed to buy books and CDs to share with new people they try to recruit.

For the people at the top, it’s a win-win situation. They’re winning twice:

1. They make extra money with much higher profit margins by selling tickets to these events.
2. The whole setup is designed to make people more invested in the “business opportunity” that the top earners are benefiting from.

Unfortunately for everyone else in the scheme, these seminars, books, courses, CDs, and training sessions just become yet another expense that eats away at their already small income.

Reason 3: The Social and Emotional Damage#

The third reason multi-level marketing companies are worse than pyramid schemes is that they deliberately cause much more damage than just financial harm.

• New recruits in MLMs are told to use their existing network of friends and family to find customers for the products or to sign up as members under them.
• Unless you’ve been completely out of the loop, you’ve probably heard about multi-level marketing companies and the negative things they do. And so has everyone else.
• This makes finding people willing to support the scheme harder than most new recruits expect.

The groups most open to joining MLMs are often isolated cultural groups who might not be as aware of the industry’s bad reputation, or groups where there’s a strong sense of trust within the community.

The business structure of multi-level marketing companies doesn’t really look like one big pyramid. It actually looks like multiple pyramids, each with a charismatic leader at the top.

• These groups, often called “networks,” are heavily separated by race and religion.
• Companies will create specific teams like Mormon teams, Latin American teams, African-American teams, and Asian American teams.
• The “dream” of the business can be sold more effectively by using the customs and social pressures specific to each culture.
• As one person noted, describing how different groups responded to the opportunity: “Opportunity for anybody, everybody… and Latinos grabbed it a little stronger and all of a sudden all the, you know, non-Latinos are seeing these guys rise up, you know, making money, getting recognition and going, well, what are they doing?”

Mormons, for example, are highly represented in MLM companies.

• Their culture often values women staying home to raise children, which can limit their opportunities to earn income outside the home. This makes the MLM pitch of making money from home sound more attractive.
• Mormons also have a tight-knit social network of other Mormons who generally trust each other. This allows these schemes to do very well in that community.
• There are even over 70 MLM companies located in Utah alone.

Multi-level marketing companies are also very common in migrant communities.

• When people move to a new country, they often look for ways to socialize and earn extra money. MLMs pretend to offer both of these things.

Since the entire system is built around social relationships, it becomes very difficult for people to leave the scheme after they realize they won’t ever make money.

• Members are told to cut off contact with friends or family who don’t join the business or buy their products.
• The reason given is that these people are a “negative influence” on their journey to becoming a successful entrepreneur.
• The real reason high-ranking members encourage this is because they know friends and family are the people most likely to talk them out of the business.
• If they can isolate new recruits from their normal social circles, those recruits will become dependent on the business for something even more important than money: human connection.

People who get heavily involved in these businesses often struggle to keep any friendships outside of their MLM network. This, combined with the social pressure from feeling like they’re letting down members of their community, makes it extremely hard to leave.

Pyramid schemes do ruin people financially, but usually not as severely as MLMs. And, crucially, pyramid schemes don’t simultaneously ruin people’s relationships and social lives.