Multi-level marketing (MLM) schemes have become popular as a potential side hustle for those looking to supplement their income. These schemes often involve selling products directly to consumers and recruiting others to join the business. However, before diving into an MLM opportunity, there are crucial factors to consider. This article, based on research by Deanna Grant-Smith and Laura de Zwaan from the Queensland University of Technology and Griffith University, explores the risks and realities of MLM participation.
How MLMs Work
MLMs are often mistaken for pyramid schemes, but under Australian Consumer Law, legal MLMs are distinguished because consultants earn primarily from selling products or services, not just from recruiting new members. Nevertheless, most MLMs incentivize recruitment, allowing consultants to earn commissions from their recruits’ sales. This structure creates a “downline,” where the higher up you are, the more you can potentially earn from others below you.
For example, if Mary recruits Jane, Jane becomes part of Mary’s downline, and Mary earns a portion of Jane’s sales. If Jane recruits Angela, both Mary and Jane benefit from Angela’s sales. This layered earning potential is what draws many to MLMs, but it is also a point of criticism.
The Financial Reality of MLMs
While MLMs promise flexibility, financial independence, and a good work-life balance, studies have shown that these benefits are rarely achieved. A survey of 287 MLM consultants in Australia found that most earned less than A$5,000 annually, and many didn’t account for all expenses when calculating their profits. Around 40% of former MLM consultants cited financial reasons for leaving the business.
Additionally, a US survey of over 1,000 MLM sellers found that most earned less than US$0.70 per hour, and fewer than half made more than US$500 over five years. Many even incurred credit card debt to finance their MLM involvement.
Risks and Considerations Before Joining an MLM
If you are considering joining an MLM, here are some important questions to ask yourself:
- Can I Afford to Join an MLM?
- Starting an MLM business often requires purchasing a starter kit or demonstration products or paying a joining fee. Many consultants reported spending more than $1,000 to start, and it often takes more than a year to make any profit. Additionally, there could be ongoing costs, like membership fees or pressure to meet sales quotas.
- Do I Have the Financial Knowledge and Skills?
- Most MLM recruits lack experience in running a home-based business. The commission and remuneration structures of MLMs can be complex, and many overestimate their financial literacy.
- Do I Have All the Information to Make an Informed Decision?
- It’s crucial to gather comprehensive information before committing to an MLM. Recruiters often highlight success stories while downplaying the likelihood of achieving them. Talk to current and former consultants to understand both the pros and cons.
Videos on MLMs to Watch
Thinking of Joining an MLM? Here’s What You Need to Know
This video provides an overview of MLMs, explaining their structure and how they differ from illegal pyramid schemes. It emphasizes the importance of understanding what you’re getting into before joining an MLM and covers the potential benefits and risks.
The Reality of MLM Earnings
This video highlights the financial realities faced by MLM participants, presenting data on average earnings and common financial challenges. It underscores that many MLM participants earn very little or even lose money after expenses.
Financial Literacy in MLMs
This video discusses the importance of financial literacy for MLM participants, explaining the common knowledge gaps that can lead to financial difficulties. It provides insights into how better financial understanding can help manage the complexities of MLM compensation plans.
Costs and Risks of MLM Participation
This video breaks down the hidden costs and risks associated with joining an MLM. It includes real-life examples of people who faced unexpected expenses and difficulties in meeting sales targets or covering ongoing costs.
Questions to Ask Before Joining an MLM
This video encourages viewers to critically evaluate their decision to join an MLM by presenting key questions they should ask themselves beforehand. It also covers factors like upfront costs, time commitments, and realistic earnings expectations.
Is MLM Right for You?
This video explores whether MLMs are a suitable business model for everyone. It provides a balanced view of the potential benefits and drawbacks, helping viewers determine if an MLM aligns with their financial goals, values, and lifestyle.
MLMs might seem like a viable side hustle, but the reality is that many participants do not achieve the promised financial success. Before deciding to join an MLM, consider your financial situation, skills, and all available information carefully.
Source: This article is based on information from “Thinking of joining a multi-level marketing scheme or MLM as your side hustle? Read this first” by Deanna Grant-Smith and Laura de Zwaan, republished from The Conversation under a Creative Commons license.