Slicing Through the Pyramid: The Predatory Nature of Multi-Level Marketing

You are sitting at your kitchen table with a family friend. Let’s call him Ben. Ben reaches into a box and pulls out a sharp knife, light glinting off its sharp blade. Does this sound like the beginning of a horror story? Well, it is, but not in the traditional stabbing-you-with-a-knife way that you are probably thinking of. He starts demonstrating how well-made these knives are. “It will literally cut through anything!” Ben is a sales representative for the high-end knife company Cutco. Slicing easily through the chicken thigh on the counter, the product seems legit. Strangely enough, after the demonstration, Ben shifts from selling you the knives to recruiting you to be part of his sales “team.” Despite the set being overpriced, you feel obligated to buy one because Ben is a family friend and you want to support him, but you are not quite ready yet to actually sell the knives since you will be starting college soon and will not have much time to focus on the business.

Knives are not the only products being sold this way. Not even close. Others are essential oils, hair and skin products, bright-colored clothing, protein shakes and fitness coaching. Those selling these products do so with the promise that it will change your life,” but the ”it” they are referring to here is not the product itself, but rather the company you are committing to sell for. This company probably will change your life, just not in a good way.

These companies are called Multi-Level Marketing companies, or MLMs. Based on the Federal Trade Commission’s (FTC) definition, an MLM company is characterized by selling a  product with an emphasis on recruiting new distributors. Products can only be sold through distributors and the more people these distributors recruit, the more money they receive from commission. It is statistically impossible to make money without recruiting, so having a downline is a necessity. The idea of an MLM has been around for a long time––think Tupperware parties––but they have exploded in the last decade, using social media as a medium to reach the widest possible audience. While many think that MLMs are a viable business opportunity, the Multi-Level Marketing business model is insubstantial, deceptive, and predatory. This claim applies to the business model itself rather than a specific company, because it is a systemic problem that must be eradicated in order to spare the financial catastrophes of millions.

You may not know exactly what a pyramid scheme is, but most people would instantly associate it with the word “scam.” Perhaps you heard about it from the TV sitcom The Office, where the main character, Michael Scott, hilariously tries to convince his co-workers that they can become rich through a triangle business model. But trust him, it’s a triangle, not a pyramid! More accurately, Oxford Languages Dictionary defines a pyramid scheme as “a form of investment (illegal in the US and elsewhere) in which each paying participant recruits two further participants, with returns being given to early participants using money contributed by later ones.” Many people would argue that MLMs are not a pyramid scheme because they sell a real product, but this is a common misunderstanding. The truth is that MLMs could also be referred to as “product-based pyramid schemes” because they follow most of the same criteria that the typical pyramid scheme entails. 

Some think that an MLM is just like any other business structure with a CEO at the top and a variety of positions that get paid differently underneath. In reality, you cannot compare the two types of jobs because in any relatively normal job, such as in an office or restaurant, the employee is guaranteed a salary. Think about it this way: You are a cashier at a pizza shop, and it has been a very slow day. You only ring up one pizza. Your boss still has to pay you the same amount they paid you on a day that you rang up a hundred pizzas. You know how much money to expect in your paycheck every two weeks because it is a set salary. Now pretend you are selling makeup for an MLM company. It is a slow day, and you only sell one lipstick. You have to sell even more now each day to make up for the slow day. If you do not, you ultimately lose money since you had to invest money in the first place. Because of this dilemma, you end up buying products for yourself, but now you just have a surplus of inventory and you are not bringing in a substantial living wage. According to MLM attorney Thomas Ritter, in his article “Pay To Play,” it is against the law to be forced to hold inventory of a product. MLMs get away with this by not necessarily requiring it in their sales pitch, but still expecting distributors to buy a certain amount of product in order to rank and actually make some money. Most distributors end up being their own clients, so they have the illusion of being an amazing seller of a high rank, while actually losing money because they are the ones buying surplus of their own overpriced products. As Jon M. Taylor, president of the Consumer Awareness Institute, puts it, “to present MLM as an ‘income’ or ‘business opportunity’ is misleading. However, it may be acceptable to sell it as a ‘buyer’s club,’ where participants get to pay more for some good–and some highly questionable–products” (Taylor).

The FTC’s main purpose is to protect American consumers, and they have proven that being involved in an MLM is not financially sustainable. An astonishing statistic published on the FTC’s website reveals that “the loss rates for MLM participants (averaging at least 99.6% as shown in Appendix 7A) is far greater than for participants in classic pyramid schemes, which is approximately 90%” (Taylor). The general public, who may not be well informed about MLMs, may surely recognize the term “pyramid scheme” as being a scam, so more people should be aware that MLMs result in more losses, even though they are technically deemed legal. In that same study, which is conducted by Taylor, profit and losses from MLMs are compared to other various income options (see fig. 1).

The bar graph from Taylor’s study reveals some very alarming statistics that should scare anyone away from being recruited into one of these MLM companies. For perspective, wage earners typically do not have out-of-pocket expenses that are not reimbursed by their employer, so they typically do not lose money. Legitimate direct selling would be like door-to-door selling, most popular with products like encyclopedias, magazines, or insurance. They would only rarely lose money, such as for unreimbursed travel. MLM distributors who falsely believe this fake sense of being their “own boss” have argued that traditional small businesses make less profit than one may think, but this is simply not true. As Taylor notes, “a study by the NFIB (National Federation of Independent Business), using U.S. census figures in 1999, found that approximately 39% of small businesses are profitable over the lifetime of the business” (Taylor). The most shocking information presented in this graph is that individuals have a better chance of making money gambling rather than participating in an MLM. The gambling statistics in the bar graph from Taylor’s are based on the odds for a single bet on one number at the roulette wheel at Caesar’s Palace in Las Vegas (statistics provided by Caesar’s Palace in April 2001). Most would want to stay clear of a “business opportunity” that has a higher risk of losing money compared to gambling. If this is true, then why are so many people sucked into MLM companies?

Seductively promising a life of luxury, these MLMs use deceptive and predatory methods to attract new distributors. Luckily, there are tell-tale signs to determine if a distributor for an MLM is being deceptive. When wondering if a company is an illegal pyramid scheme or not, the FTC recommends analyzing the pitches that the distributors throw at you. If the “promoters make extravagant promises about your earning potential” or “play on your emotions or use high-pressure sales tactics,” then individuals are advised to stay clear of the business opportunity because all these claims are false (“Multi-Level Marketing”). These are the advisories for pyramid schemes, but the similarities between these pitches and the pitches MLMs use are striking. For example, when reaching out, MLM distributors may use the following phrases:

1. This company changed my life.
2. I am able to spend more time with my family because of the financial freedom.
3. You have the ability to be your own boss and CEO!

Imagine you are on Facebook and you receive a direct message from a childhood friend. Your eyes light up and all the memories of your childhood reappear like a rushing river, flooding your brain. The old friend greets you with excitement over possibly reviving the friendship and meeting up. But your excitement is halted when the childhood friend tells you they are reaching out because you seem like a perfect match for a business opportunity they have. It is then when you realize that the conversation is strictly for a business transaction, not actual friendship. When you ask your friend some more questions about the business, you realize that the company did change their life, but not in any of the positive ways that are listed above. They do not, in fact, have financial freedom, nor are they their own CEO. The real CEO is the person sitting at the top, taking these distributors’ money and livelihoods.

Adding to the deception, MLM companies urge distributors to create perfectly curated social media feeds that makes it seem like they are living perfect lives. But, of course, they are not living perfect lives because MLMs don’t offer benefits like holiday, legal protection, sick and maternity pay, or workplace perks. Instead, MLMs need to grasp around for some other flashy, alluring benefit to reel people in. Some MLMs promise that hitting a certain rank within the company will get you a free car. This free car is a clever way to entice people to join, but in reality, the car is not as “free” as advertised––it comes with many strings attached. What MLMs actually do is encourage you to commit to leasing payments for a car, often at dealerships they specify, and if you do not maintain your sales, they withdraw their contribution to your lease payments, leaving you to shoulder the burden of the entire amount (Martin). As seen in the income disclosure statements, it is impossible that all distributors are living this life of luxury since 99% are losing money, but they are encouraged to “fake it until they make it.” Those in higher ranks, or the top 1%––better known as the “faces of the company” on social media––feed the narrative that the other distributors are not making money because they are not working hard enough. It is not the seller that is the problem, but the system as a whole. Those in the upline call out those below them to work harder while most people join because MLMs are advertised as a “side hustle” and a way to make extra money while also taking care of your family or going to school. Jennifer Chatman, a professor at the Hass School of Business at UC Berkeley, compares these schemes to cults–– it is all a facade to recruit new people. Courtney, a former distributor for MLM company It Works!, tells Business Insider that she was told to only post positive things on social media to show that she was living the perfect life. She was also told to pretend to be friends with these new moms who may be struggling financially to gain their trust and then pitch the sale (Silverstein, Lee, and Kosciulek). The whole system sets people up to exploit others in their most vulnerable state.

It is no coincidence most people that are successfully recruited are vulnerable since the behavior these distributors exhibit is incredibly predatory. As seen in the graphic “Life Events in the 6 Months Prior to Joining an MLM” (see fig. 2), the AARP study of Multi-Level Marketing, conducted through interviewing MLM distributors, reveals the reasons why people needed extra cash and were ultimately enticed by MLM companies.

The most preyed-upon people are already vulnerable. The whole idea of working longer and promoting harder contradicts the claim that MLMs are a side hustle since one must use most of their waking hours selling and messaging other vulnerable people on social media.

To get a firsthand account on how this is done, I reached out to Savannah Marie, a YouTuber who has amassed 38 thousand subscribers by posting anti-MLM content. The anti-MLM community is prevalent on social media on websites such as YouTube and Reddit. The community’s main purpose is to educate others about the deceptive and predatory nature of MLMs. Savannah is a prominent figure in this community, and I had the privilege of asking her about her own experience with MLMs and how her channel came about. Savannah informed me that the first MLM she was involved in was called Gold Canyon Candles. She stated that she first discovered the company because “an old friend’s dad was selling them and I had expressed my love for Gold Canyon Candles in the past to them. I did not know it was an MLM, or what an MLM even was at the time” (Marie). She was offered the opportunity after having her daughter, where a promise of side money looked enticing:

So right after I had my daughter, I was obviously on maternity leave and he hit me up to tell me that they had some special sign up deal where I could join Gold Canyon for a reduced price and make an income while I was out of work with my newborn baby. I was 24, nearly 25. At the time, it didn’t seem predatory because I knew I loved those candles already, and I thought people would certainly buy them from me (spoiler alert: they didn’t). Looking back and knowing what I know now though, oh GOD yeah. I was preyed on hardcore.

Savannah Marie

Marie experienced the predatory behavior first hand, but she was too vulnerable and inexperienced to realize it at the moment. This is exactly the game that the companies play. If you were picking an opposing team to play in a sport, would you pick the stronger, more experienced team? Or the weaker, less experienced one? Of course, anyone would choose to play the team you think you would win against the easiest, and this is precisely what MLMs do with vulnerable people.

I asked Savannah if there was a moment when she realized this company was not working for her. With Golden Canyon Candles, she expressed that she was “straight-up dropped from the company because [she] didn’t hit the minimum requirement of selling $200 worth of product in a month” (Marie). The very few sales she made, including some to herself, were not substantial enough, even though it is supposed to be a side job. The truth is in order to make sales, it is required that you work all day until you do so. The “time flexibility” pitch is a lie because messaging hundreds of people is too time consuming to be labeled as a “side hustle.” It was not until her second experience with an MLM company, Limelife, that she discovered how flawed the business structure really is:

I realized how horrible these companies were. I made a video about my experience with the company and posted it on YouTube just because when I had joined, there wasn’t an anti-MLM community on YouTube and I wish there had been videos for me to watch to educate me before I joined. It turned out that it resonated with a lot of people and that anti-MLM content was an unfilled niche that the world honestly needed, so I just kept doing it.

Savannah Marie

Marie continues to make content to spread awareness. She highlights the stories of those who have been exploited by various MLMs to prevent others from getting sucked in. The end goal is to have these MLM companies deemed illegal. Next time someone gets a message about a “business opportunity” from a childhood friend, they will most definitely reconsider after watching one of her videos. Sadly, there are people who had an even more horrific experience than Marie.

The most notorious are the horror stories of the women who were consultants for a clothing company called LuLaRoe. LuLaRoe is an infamous, multi-billion MLM that caught media attention due to the countless lawsuits and flaws in the product. The company sold bright, colorful clothes but were mostly known for their crazy patterned leggings (see fig. 3).

LuLaRoe is an MLM company that clearly follows the insubstantial, deceptive, and predatory nature of the business structure. The website Vice produced a video where they interviewed two past LuLaRoe distributors, Roberta and Courtney. The interview explains how LuLaRoe deceived and preyed on stay-at-home moms, who were a majority of the distributors. Being a part of the company meant more than just selling clothes––it was a lifestyle. There were huge incentives, such as cruises, conventions, and private concerts. All it took was five thousand dollars to enter the company, which is a major red flag the FTC proposes as a possible pyramid scheme. Roberta reported that she was motivated to join the company from the sense of “sisterhood” the company promoted. They would have team meetings to empower women, and she felt immense support from the other women in the company. She was also attracted to the claim of making her own schedule and making the same amount of money as a full-time job in a side hustle. At the highest point in the company, Roberta had seventy-five people below her. She felt like she was part of a community (“Why Women are Quitting”).

However, LuLaRoe was not substantial financially. By this, I mean that the company did not bring in a livable wage for anyone. Distributors who were considered a high rank are in debt instead of having the financial freedom it promised. These women could not even sell the clothes after quitting the company because of the horrible quality. They were made cheaply and ripped easily. Sometimes the clothes would even show up from the factory as soaking wet or moldy. When distributors spoke up about these incidents on social media, they were instantly told to take their posts down as it did not portray the positive and perfect life that they must display to the world. Roberta told Vice that when she spoke up, people who she thought were her friends in the company unfriended her and no longer showed the support she entered the company for (“Why Women are Quitting”). Roberta believes that more women are afraid to speak up in fear of losing friends and being singled out by the company. The only reason she is not afraid to speak up is because “LuLaRoe already took everything from [her]” (“Why Women are Quitting”).

Courtney, a former LuLaRoe consultant, used to have 1,300 people below her in the company. She explained how the company pushed recruiting and inventory instead of sales, and this is exactly how she made most of her money. As seen in the graphic of the pyramid model for LuLaRoe from Vice (see fig. 4), Courtney would be the figure on top, and if her team purchased 175 pieces, she would receive 5% of the money.

Courtney would also receive 3% of the second downline’s sales or purchases if they get 1,750 pieces. As the downline grew, Courtney got more and more money for the work of those below her. Because of this, it was evident that exploiting more people was easier in making a profit than actually selling the product itself. These women were puppets for the LuLaRoe corporation. While they were deceived into thinking they were their own boss and in control of their income, they were being played by the actual CEOs of the company, DeAnne and Mark Stidham. As of 2020, LuLaRoe is still operating as an effort to milk extra cash, but it is facing multiple class-action lawsuits (over thirty-five), including one for 49 million dollars for being a pyramid scheme. Courtney, who was once at the top of the company, is now in debt and had to sell her house, while still having extra inventory. 

The true victims of Multi-Level Marketing are those brainwashed in the companies. They may be losing money but convinced that if they keep working, they will finally be successful as the initial pitch promised. As seen in official studies posted by the FTC, making money in this pyramid structure is virtually impossible. They give false hope of climbing to the top where people actually make money, but the truth is these people at the top entered the business when it first came into fruition, making it easier for them to recruit and have everyone else do the work. This business model is predatory and should cease to exist. By raising awareness on this issue, fewer people will fall into the trap.

Works Cited

AARP Study of Multilevel Marketing. http://www.aarp.org/content/dam/aarp/aarp_foundation/2018/pdf/AARP%20Foundation%20MLM%20Research%20Study%20Report%2010.8.18.pdf.

Bosley, Stacie A., et al. “Voluntary Disclosure and Earnings Expectations in Multi‐Level Marketing.” Economic Inquiry, vol. 58, no. 4, Oct. 2020, pp. 1643–1662. https://doi.org/10.1111/ecin.12840.

Martin, Hannah. “Why There’s No Such Thing as a Free MLM Car.” Talented Ladies Club, 26 Nov. 2020, http://www.talentedladiesclub.com/articles/why-theres-no-such-thing-as-a-free-mlm-car/.

Jani, James. The Multilevel Marketing Cults: Lies, Pyramid Schemes, and the Pursuit of Financial Freedom. 2020, http://youtu.be/He1bgJ0sqtw.

Marie, Savannah. Personal interview. 9 Dec. 2020.

“Multi-Level Marketing Businesses and Pyramid Schemes.” Consumer Information, 27 Oct. 2020, http://www.consumer.ftc.gov/articles/0065-multi-level-marketing-businesses-and-pyramid-schemes.

Penrod, Emma. “MLM: Multi-Level Marketing Companies Promise Part-Time Work That Will Bring in Lots of Money. But Is It Too Good to Be True?” Utah Business, vol. 34, no. 3, Mar. 2020.

Silverstein, Sara, Jennifer Lee, and Amelia Kosciulek. “People Who Sell for Multilevel Marketing Companies Look Wildly Successful on Facebook, but the Reality Is Much More Complicated.” Business Insider, Business Insider, 6 Aug. 2019, http://www.businessinsider.com/mlms-use-social-media-facebook-portray-financial-success-2019-7.

Taylor, Jon M. The Case (for and) against Multi-Level Marketing. http://www.ftc.gov/sites/default/files/documents/public_comments/trade-regulation-rule-disclosure-requirements-and-prohibitions-concerning-business-opportunities-ftc.r511993-00012%C2%A0/00012-57312.pdf.

Thomas Ritter et al. “Required Purchases: The MLM Pay to Play Dilemma.” The MLM Attorney, 2 Feb. 2016, http://thompsonburton.com/mlmattorney/2016/02/02/required-purchases-the-mlm-pay-to-play-dilemma/.

“Why Women Are Quitting Their Side Hustle: Leaving LuLaRoe.” Broadly Specials, VICE Video, Vice, 2019, http://video.vice.com/en_us/video/why-women-are-leaving-lularoe/5cd2e56dbe407766d2269f41.