The term multi level marketing instantly stirs up images of schemes, fraud and networking exercises.
But does MLM only mean something illegal or is that a valid way of conducting business?
Well, this sure does make you probe deeper about the dynamics of multi level marketing and the reason why some choose this format despite the controversy attached to it.
In reality, multi level marketing has many facets.
At the same time, there are some aspects of this business strategy which are rather advantageous.
This is exactly why different direct marketing enterprises are opting for this kind of strategy.
However, before we move any further towards deciding for or against it, it is very important to understand what is multi level marketing?
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Definition of Multi Level Marketing
They achieve the sales by incentivizing their existing distributors to recruit more distributors.
Under multi level marketing, the company pays current distributors a neat percentage of the sales clocked by their recruits.
So, every distributor earns money in cardinally two ways.
- One is the revenue they earn from the direct sales of the product.
- The other one is revenue they earn as sales percentage from downline recruits.
Principally on the face of it, this is legitimate.
But it often invites controversy for the Pyramid Scheme of operation that many of these firms follow.
The problem is that in pyramid schemes, they sometimes use the money from new recruits towards payment to the distributors at the top of the pyramid.
So the pyramid scheme focuses a lot more on engaging and attracting more recruits compared to selling the actual product
Therefore, the pyramid takes on an illegitimate hue and can attract negative publicity.
Multi Level Marketing Definition as per FTC
In this context, the US Federal Trade Commission is perhaps one of the biggest authorities on the trade and investment practices.
It defines MLM as a
“Multilevel or network marketing where individuals sell products to the public often by word of mouth and direct sales.”
Therefore, the FTC outlines that distributors no doubt earn a commission in this process and this is not just from the sale of the product, but also from the sales clocked by those they have recruited in the entire distribution net.
The FTC, however, says that not every multi level marketing initiative is legitimate.
When the money that you make or at least the major chunk of the money that you make is through your sales to the public, it will be termed as a legal format.
On the contrary, if the money you are earning is primarily through the people that you might be recruiting into the distribution net, it becomes an illegal pyramid scheme.
This is because this kind of pyramid schemes is illegal and often results in a significant majority of people losing money in the entire process.
Therefore, the FTC clearly mandates every individual interested in a multi level marketing initiative to pay attention to the fine print.
The devil, as they say, is always in the details.
This is exactly why it becomes that much more important to clearly understand the revenue model as well as the revenue generator of the MLM that you might be considering.
After all, it is only a detailed study of these particulars that can help you understand the legitimacy of a multi level marketing firm.
So, when you set about to find answers to the question if multi level marketing is legal, you need to consider some key factors before arriving at a clear-cut answer for that.
The profitability of a company or business and its fundamental mode of earning money is a key determinant of the legitimacy of the business model.
Apart from that, the other pre-conditions outlined by the US FTC include:
1. Type & Quality of Product
Direct sales marketing is a common strategy for many types of products.
But not all direct sales initiatives are MLMs, and neither are all MLMs illegal.
It depends a lot on the
- Merit of the product
- The overall pricing
- The safety elements
- The relative contribution of product sales to the core revenue
All these factors together make the product a viable option or a fraud scheme.
It, therefore, becomes extremely important to consider all these factors.
Be careful about
- Finding out what you sell
- Are there any similar products in the market
- The credentials of the distributors who are selling the product
- How credible are the claims about the product’s relative safety and efficiency
2. Skepticism Helps
Whenever you are considering a multi level marketing initiative, it is important to remember that almost any kind of product can be sold via this kind of direct sales initiative.
This could include almost anything from
- Nutrient supplements
- Digital products
- Training courses
The only common chord that unites them is the fact that they are all available through select representatives.
And, it won’t be possible to buy these from over the counter in any grocery or chemist shop.
This is exactly why it becomes imperative to examine the veracity of the claims made by these MLM very minutely.
Never be simply buoyed by the magic or the miracle proposed on the website or the brochure of the product.
Skepticism in this case actually can help you identify a fake concept right at the root, and you can then nip it in the bud.
Remember even the slightest bit of carelessness could result in making you fall for a trap.
You might end up being in a pyramid scheme with significant losses instead of a great MLM with high returns prospects.
The ground rule as specified by the FTC is very clear:
- Before you decide to buy/promote the product, you must be very sure about the credibility of it.
- More than claims on the website, look for hard evidence like honest and genuine feedback, a potential approval from a key regulatory authority and the like.
- Also, don’t rely upon and believe in everything that the company says. Do some due diligence on your own and verify its competence and reliability before you take up the cudgels of promoting it.
Of course, keep in mind that many of the negative reviews are usually posted on the Internet by (1) the competitors; (2) those members who fail to work properly and make money; (3) some sick people who call anything “scam”; and (4) the internet marketers who drive traffic to their websites through publishing negative controversial reviews on their websites and blogs.
Many of the multi level marketing programs are not scam.
But many of those who call these programs scam, are the real “scams”.
So be careful.
You can’t trust everything you find over the Internet.
It seems the number of the false negative reviews are more than the true ones these days.
This is because negative reviews attract more traffic to the websites and make more money for them.
Not only is it a standard that FTC uses to determine the authenticity but also encourages you to do the same so that you can answer your question, ‘is multi level marketing illegal’ on your own without any possible assistance or risk of getting trapped.
3. Research Is King
In-depth probe is crucial to establish the veracity of any possible type of multi level marketing initiative.
If you are approached or constantly told about the wonderful impact of a specific product, don’t make a decision based on hearsay.
Know for your own on how and where the company is based, its authenticity.
Review words like scam, fraud, etc. with respect to the company BUT don’t believe the reviews and reports you find unless you make sure that the reviewer’s identity is clear and he is ready to attend in any court to defend what he has published against the company.
The reviews and reports that are posted by anonymous people or those who are at the other side of the world and can’t be accessible, has absolutely no value.
If you find and issue, see it throws up any potential newspaper or magazine articles on the issue.
Here is a quick synopsis of the questions that you must pose to ensure that your due diligence is complete.
You have to follow this before you accept the terms of the multi level marketing program you want to join:
- The duration for which the company is in business
- Possible buzz about the company and its business ethics
- Overall product reputation in the market
- Track record in terms of using deceptive business practices if any
- Also, check with the State’s Attorney General’s office for possible complaints
- Evaluate The Plan At Leisure
And again, don’t rely on the reviews and reports that by anonymous people and bloggers or those who are at the other side of the world and can’t be accessible at all.
Another factor that the US FTC stresses upon and can play a major role in helping you identify if any multi level marketing firm is illegal is to consider the plan closely.
It is never wise to sign a contract in an opportunity meeting.
You must take enough time to consider the pros and cons of the whole project.
Never lose sight of the fact that it is your money, your investment and your future which is at stake.
There is absolutely no need to bow to any kind of pressure.
- Clearly, understand the exact terms and condition of the compensation plan. Even if your sponsor sounds a bit cagey about the details, probe till the time you are convinced about every minute details.
- The terms and condition of the overall sales plan and the investment route is also equally important.
- The kind of support that you can refer to in support of the claims that the company is making.
- The name and contact details of the key company players. For example, think of the Amway experience and how the company bends backwards in withholding the actual identity of the real company owners and players in the business. Remember there is no reason for you to commit your money towards a scheme where you have no way of verifying the actual authenticity of the real owners.
When you have to take up the responsibility of selling and putting forth the company’s claims to those you would be recruiting, you have 100% rights to verify every detail with regard to the product.
Be honest and realistic in your expectations from even your own self.
Remember if your promises fall through, you could be liable for any kind of appropriate disciplinary action against your claims.
Another key factor to remember is that your sponsors would make money if you join the MLM they are selling you.
So they are liable to answer every question that you might pose to them.
Evaluate the multi level marketing plan for any possible loophole and be aware of potential frauds that might be getting paid to sell you a fake picture.
A fast and on time help desk that answers all of your questions in no time is an important positive point for any multi level marketing plan you to join.
If they leave your questions unanswered or their answers are not clear and understandable, then you’d better to avoid them.
The Refund Scenario
Not just any multi level marketing, this is a cardinal rule for any type of investment.
You must get a clear picture of the company’s refund policy in detail.
- Ensure that the plan includes details of the terms and condition with regard to the unused products and associated risk/penalties
- Make sure there is sufficient information about the formalities for utilizing and returning unused products
Also, you must ensure the various payments that the plan requires.
Find out if you have to pay for seminars or training kits and how much money or time would be involved in creating a distribution channel.
You need to be careful about keeping your exit routes well charted out.
So find out how often you need to go for training and what happens if you opt out of any of the offerings.
You can feel confused and are in doubt about the legitimacy of the multi level marketing that you are considering.
If so, it is a good idea to consult a friend who might be able to help you with some constructive suggestion or point out an obvious fallacy.
Remember, it would not harm you to even take a legal opinion in this context to go ahead on a fool proof plan without stepping on potential milestones.
Are You Really Cut out for Multi Level Marketing?
Direct sales or multi level marketing is not really everyone’s cup of tea.
Therefore, before anyone can convince or dissuade you, it is up to you to do some soul searching.
You must carefully understand the overall job profile.
You should also consider the terms and conditions of the program.
Also make sure to take a call on your own about the possible ramifications.
Ask yourself if you are really cut out for this kind of schedule and would you be able to stand up to the challenges posed.
MLM surely entails aggressive direct marketing.
It often entails the concerned representative that has to be really pushy to get the kind of returns that’s being promised by the company.
Sometimes the core multi level marketing principles might be intact
But it won’t be the kind of profession that you would be comfortable with.
It is, for this reason, know the actual realities, make some ground level assessment.
Then take a call on joining the firm that’s selling you the absolutely stupendous dream of great returns, easy money and sustainable source to generate easy money from them.
Advantages of Multi Level Marketing?
You might question, is multi level marketing legal?
But whether the credentials and legitimacy of this type of marketing scheme are established or not; the fact is there are a huge number of advantages of MLMs.
This is why it is so popular across various genres of business, particularly when you need to generate aggressive response and awareness for a specific product.
1. Low Risk
If you are a budding entrepreneur then it becomes very important for you to increase sales without increasing the risk.
The MLM, in this case, provides just the right kind of vehicle to take forward your entrepreneurial initiative.
The relative risk is much lesser, and sometimes the pyramid scheme provides just the right type of insurance against eventual losses if any.
With just a few hundred dollars, you can look at starting the business and then expand it gradually based on the response.
As an entrepreneur, another associated advantage is the fact that the low exposure means that you get an opportunity to test your product on a fairly limited market before you launch it on a fairly larger base and expose it to a greater customer base.
2. Create Demand
Networking and multi level marketing almost always ensure that you can quickly create a large demand base.
If your product is good and you are in desperate need for some low-cost promotion alternative, there is hardly an alternative as effective as MLM.
The most important advantage is that the easy availability of the product around potential customers ensures the probability of repeat customers increase manifold and the users are more than keen on repeating the experience.
Now we all understand the importance of repeat customers when you are still setting up shop and keen about reaching more and more people at minimum cost.
3. Potential to Generate Income
One of the greatest advantages of the multi level marketing plan is the kind of income that it can generate.
Frankly, there is no cap on the exact nature and extent of income that you can achieve.
You must remember that whether you are in a corporate job or perhaps working as a first-time entrepreneur perpetually in need of steady cash flow, this additional income source can be a major boom for the business and often act as the all-important backup that helps them stay afloat.
4. No Inventory Hassle
The traditional multi level marketing program is such that it does not need you to stack up on any inventory.
The whole inventory gets broken down into tiny pieces that every distributor has.
You, on the other hand, have a pretty hassle free existence where you can simply enjoy the returns.
You can capitalize on technology like drop shipping, consumer leads, internet telephony and the like and shift out the pressure of inventory on third party sources.
Overall it divides the responsibility of running the company on multiple sources while you can enjoy the benefits of the returns individually.
Disadvantages of Multi Level Marketing
But over a point of time, the multi level marketing programs have often attracted criticism and concerns about the potential legitimacy of these plans.
Often the claim is the Pyramid Scheme that they are involved in leads to selective or individual gains that can be detrimental towards the greater good.
More and more people affected and also suffer huge losses.
That’s often is the greatest argument favoring a complete stop to this type of investment or business program.
1. Uncertain Returns
Yes indeed, this is one of the greatest problems with multi level marketing.
The extent and possibility of returns are often very different for very different kinds of people.
It invariably depens on the kind person you are.
It also depends on the business acumen that you possess
And of course, your position in the entire pyramid.
The higher you are, the more the profit and quite understandably the margins are significantly narrow lower down.
The broad consensus is that this type of business model is ideal for aggressive and dynamic individuals.
Also this type of business is great for the very competitive people and those who can go to any length to book profit.
If you are not able to recruit a certain minimum number of people, it is never possible to earn the desired profit level.
2. Downline Disadvantage
Often when people join the MLM, they are so focused on the whole concept of earning money.
Therefore, they completely forget about the downline recruit part of the business.
It is, after all, a pyramid, and at some point in time, the business will reach its saturation point.
This will be the point when no new recruits are made.
It also becomes that much difficult to add new people given the sudden high exposure that the product already achieved thus far.
As a result of this, the returns on the overall basis also start diminishing.
Remember that along with the product sales, one key source of revenue for any multi level marketing is the commission they earn on the sales clocked by the downline recruits.
So, as this number begins to reduce significantly, it clearly has its ramification on the overall earnings of the entire chain from top to the bottom.
The core idea is that you earn and help others earn as well.
When the bottom or the base of the pyramid starts drying up, the entire supply chain starts wilting and eventually leads to its collapse.
Conclusion: Multi Level Marketing Is All About Making Quick Gains in a Short Time
If you were to ask, is multi level marketing legal, my answer would be it is dependent on a wide range of factors.
The most important one is undoubtedly the product that you are distributing using a multi level marketing program.
It is one of the key factors that can generate customer response and improve the chances of repeat customers.
If the product is not great or if the primary target is to just generate quick money on the basis of a fake business model then, of course, it becomes an illegal venture.