After a night of scrolling through my Instagram feed, I noticed several posts from friends who had started working for multi-level marketing (MLM) companies. It came as no surprise when I subsequently started receiving messages from salespeople along the lines of, ‘Hey, you have quite a following on social media. Do you want to make $500+ right from your phone?’
MLM has been criticized for its parallels with pyramid schemes. In the age of online influencers, sponsorships, and public relations campaigns, MLM companies have transformed their strategies from the days of door-to-door sales and mailed catalogues to promoting over social media. With a quick click or tap, users can easily sign up to work for an MLM company and may start earning commission in a matter of weeks.
It is no coincidence that these companies target millennials, including new graduates, stay-at-home parents, and desperate college students, who are more susceptible to exploitation. With all of this in mind, are MLM companies doing more harm than good?
What is an MLM company?
You may have had a family friend make a small profit selling cosmetics or an old high school classmate try to recruit you for a company they work for. That’s exactly what MLM tries to do.
MLM is a business structure that bases its income on direct sales commission from a network of distributors and subsequent recruits. MLM companies range from selling beauty and skincare products to clothing and home decor. Distributors not only earn commission for the products they sell but also on the products that their recruits sell.
According to David Soberman, Canadian National Chair of Strategic Marketing and Professor at the Rotman School of Management, MLM involves recruiting others to sell something tangible while earning commission on sales. “These people can recruit others. So you may have more than 2 levels between the company and the consumer,” Soberman wrote to The Varsity.
Some MLM companies may charge new distributors a starter fee in exchange for a distribution kit and other necessities to sell the product, while others may provide training and business tools to increase success when generating profit or hiring new recruits.
How is MLM different from a pyramid scheme?
Though they parallel features of pyramid schemes, MLM companies are not illegal in Ontario.
“Pyramid schemes entail recruiting members who pay a fee. A new member only obtains repayment and profits for enrolling others into the scheme, rather than supplying investments or from the selling of something tangible,” Soberman wrote. “As recruiting multiplies, recruiting may become impossible, and most members are unable to profit (and lose what they paid to join). As [a] result, pyramid schemes are usually illegal as the main flow of money is from recruiting people not from selling things.”
According to the Direct Sellers Association of Canada, MLM companies generated $2.55 billion in sales in 2015. A majority of those sales come from women. MLM companies, including Arbonne, Stella&Dot, ItWorks!, and Market America, have a strong presence in the Canadian market. In the US, Market America, which sells several lifestyle and beauty brands, received a federal lawsuit in 2017 for operating an illegal pyramid scheme targeting Chinese immigrants.
On its website, the US Federal Trade Commission writes, “If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s probably not. It could be a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”
MLM at U of T
U of T is no stranger to MLM controversies. Students have reported companies utilizing a clipboard scheme during lectures and companies recruiting students on campus. It is also no surprise that students turn to MLM companies to try to make a quick profit.
Rosemary Norheim, a former U of T student, currently works as a distributor at ItWorks! In response to controversies regarding MLM, Norheim wrote to The Varsity, “Every MLM and how it works is different, so I think some tend more towards being illegal than others.”
“It’s completely normal to have no one you know buy from you or join your team. I didn’t have either happen for months! Almost everything I do is with people I don’t already know. I may ask people I know for support, but it isn’t where the vast majority of sales or recruitments come in. If that’s the part that is being criticized — using friends and family — then what I do totally does not apply because that is not what my business is based on.”
After a few months with the company, Norheim claims to have earned roughly $2,700 and has recruited 18 women to her sales team.
How can you get out of one?
“The most important thing is to advise students not to pay anything or commit to pay anything when they join an MLM. Trouble occurs when a student signs a paper that says you accept 200 boxes of a product which you can sell at whatever price you want,” Soberman wrote. “If they are unable to sell, they are stuck with boxes of stuff they cannot sell and are also legally obliged to pay for it.”
Deleting the first message from a potential seller is the first step to avoiding them. Though enticing, the money advertised in a sales pitch may not always be accurate. Profit depends on how much product one sells, although users report losing more money than gaining.
While joining an MLM company may be a risky choice, for people like Norheim, the appeal can be too great to pass up.