10 Signs It Is An MLM Scam
10 Ways to Spot a Multi-Level Marketing Scam
Mindy Lilyquist, work-at-home mom and former About.com Home Business Expert, started her home business in all the wrong ways. At just 19 years of age, and with less than 30-days involvement, she unknowingly became a victim in one of the largest MLM scams in the history of network marketing.
Equinox International began in the early 1990s and on April 25, 2000, the Federal Trade Commission issued a notice that Equinox indeed was an MLM scam, and settled the court case with a penalty of $40,000,000 in restitution to the victims. Her portion of the payout came 10 years after she'd been scammed, and was a paltry $40.05.
The sordid details of her story aren’t as important as the lessons she learned from the brutal experience. The reality is direct sales is a viable way to start a home business quickly and affordably. But like all other facets of life, there are shysters and it's up to you to research and do your due diligence when investigating an opportunity. Here are 10 signs that the company may be an MLM scam.
Signs It Could Be An MLM Scam:
1) No or low-quality product or service. There are many red flags that should warn you away from a business or financial opportunity, but the biggest is a lack of a product. Programs that push recruiting over the sales of a product or service might be a pyramid scheme. If a company isn’t focused on acquiring more customers to buy its products, but rather, it's interested in "building a team" or membership of sales reps, consider it a red flag. The foundation of any good MLM business is about getting products and service to end consumers.
While building a team can be a part of that, income is based on goods sold by the team, not in the recruiting itself.
2) Outrageous & Unfounded Product Claims: This is seen most in health and wellness companies in which reps boast that their products cure ailments or work miracles. Outlandish hype is a red flag in any industry, including direct sales. A successful business is founded on quality products. If the company you are considering becoming a representative for has bizarre products or products which seem a little too good to be true, use caution. The last thing you want your name tied to is a faulty product or a product which is the focus of litigation.
3) High-Pressure Sales Tactics: The most common high-pressure tactic is the lure of getting in on the ground floor. But in direct sales, it's a good opportunity no matter when you get in. In fact, you're safer to go with a company that has been around for twenty years than a start up. Any effort to prevent you from studying the company and "sleep on it" isn't someone you want to work with.
4) Pressure To "Buy-In" and stock inventory: All MLM businesses will have some start-up costs. You can't buy a McDonalds without investing money, and the same is true for direct sales, although its much less expensive. What you want to watch out for are "fast track" programs or pressure to have inventory that requires additional investment. Due to this practice, the law now requires MLM companies to buy back inventory, but that doesn't mean you want to be saddled with debt before you start and truly understand the business.
Having a few popular products on hand can be nice, but don't fill your garage with products unless you know for sure, based on your experience in the business, that you can sell them.
5) Poor Company Communication: Don’t be afraid to ask hard questions. If you don’t get solid answers or are chastised for not being a positive thinker or believing in the company, consider it a red flag. In order to be successful at any business, you need strong support and solid training. The law requires MLM companies give you a slew of information, including financial details about average income. Study this and ask questions. If the rep is hesitant to answer or glosses over your concerns, he's not someone to work with.
A legitimate MLM company wants you to be informed
6) Expensive On-Going Training or Other Business Items: Some Amway reps got into a bit of hot water for the sales of tapes they (the reps) created and sold. Most representative teams and the company have free training either locally or online. While they may also have additional training (i.e. audiotapes), you can buy, there shouldn't be pressure to do so. Further, most companies have an annual convention, which can be fun and informative, but expensive to attend. If a company routinely pressures you to pay for training (outside of a typical annual convention) this is another red flag.
7) Poor Better Business Bureau Rating: Truthfully, this is a difficult marker because the BBB routinely marks home business opportunities low simply because they're involved in working at home, not based on any investigation. However, you can see if there are complaints and how the company dealt with them. If a company is responding to and fixing problems (all companies in every industry will have customer service issues), that's a good sign. However, if they fail to respond or offer help, that is a red flag.
8) Deceptive advertising practices: Some MLM reps will promote their business as a "job" or use other descriptions to lure prospects. MLM isn't a job, it's a business. Any MLM rep promoting "employment" is using deception and isn't someone you want to work with. Other deceptive (and often illegal) practices include making income guarantees or suggesting you'll make money doing very little.
9) Cryptic "Job" Interview: Another issue that Amway and other companies were dinged for was how reps would lure people into coming to a "meeting" to hear how they could "leverage time and money." There are two problems related to this. The first is that many companies, in safeguarding their brand, don't allow reps to advertise their name. This practice means reps have to entice people to learn about them, but because they can't say the name, it seems suspicious. Second, many reps and companies know people are leery of and have many misconceived notions about MLM, so they use deception to get prospects to hear their spiel.
The important part of this is to follow your gut feeling. Good reps from legitimate companies that are prevented from using a company name in promotions are usually able to provide some idea about the business (including the name when talking to you) and are clear that it is a business. Anything else should be suspect.
10) Unsettling feeling: Mindy reports that "From day one, I failed to acknowledge the biggest sign that something wasn't right – my gut. I felt unsettled from the moment I walked into my so-called interview to the moment I no longer had ties with the company. In further hindsight, the other representatives also displayed unease." The lesson here is to not dismiss your intuition. If it doesn't feel right, scam or not, it's not for you. If you feel coerced or conned, then it's definitely not for you.
While some of these 10 items are flags of a scam, some, such as unsettled feeling, aren't necessarily a scam but are definitely an indication that the home business opportunity isn't for you. You can avoid a lot of mistakes and build a successful MLM business by investigating the company, choosing a product or service you can get behind, and having a belief, not only in the product, but in the company and system as well.
Updated July 2017 Leslie Truex