What are MLMs?

This might ring a bell: you get a message from someone who you haven’t heard from in years. You’re excited to reconnect, but pretty soon, they start telling you about a great new “opportunity” they’ve gotten to take part in. They might tell you that they’ve become a “business owner” and that they are willing to offer you the same chance at making millions.

Sounds too good to be true?

That’s because it is. In many ways, these multi-level-marketing business models are just barely legal pyramid schemes.

Sound harsh? Let’s break it down.

Photo by Eugene Tkachenko on Unsplash

How do Multi-Level-Marketing schemes work?

There are usually two ways that people make money in this business model:

  • Sell the company’s products.
  • Sign up people and make money off of the products that they sell.

That second option is the most profitable. People develop what’s called a “downline” of distributors beneath them, and they make money off of them.

However, there are actually very few people simply buying the products.

One of the largest MLMs bragged that their products were used in 70 million households worldwide.

Compare that to Walmart, whose stores are visited by 140 million people in America.

There just aren’t that many people actually buying these products.

That means that your potential for making profit rests almost entirely on signing up more people.

This side of the business model is basically a Pyramid Scheme. For reference, Pyramid Schemes are illegal, because they don’t actually generate anything of value, and they lead to people losing lots of money. The people at the bottom of the pyramid put in a lot of money, and the people at the top reap the benefits.

What all of this means is that this business model has a very real threat of losing lots of money, but very limited potential for returns.

How do MLMs get people to sign up?

So far, we’ve talked about facts here. We could talk about how the FTC has a whole page devoted to a warning about pyramid schemes and how to spot them.

But ultimately, facts have a hard time arguing against experiences and emotions.

And that’s exactly how MLMs get people to sign up.

You’ll hear several phrases a lot: “you’ll become a business owner,” or “entrepreneur.” They’ll talk about “setting your own schedule” and “unlimited potential.”

You’ll hear stories about a few people who were extremely successful and received fully paid trips, or other extravagant bonuses.

You might be invited to a free conference, which leads to an overwhelmingly positive and fun experience focused on the potential at hand.

All of those things tug at parts of us that want something more for the future, either for ourselves, or for our loved ones. And people sign up, not as part of a rational cost/benefit calculation, but off the feelings that those words and events created.

And in finance, making decisions purely with emotion is one of the quickest ways to lose money.

What are some alternatives?

Rather than buying into an MLM, you should use what the MLM wanted to take advantage of: your work ethic, your creativity, your aspirations for the future.

Each of us is truly original, with unique experiences and skills. If you want to increase your income, ask yourself this question: using those unique experiences and skills, how can you add value to the lives of people around you?

The answer might not come right away, but if you’re looking at the world through those lenses, new opportunities will make themselves apparent.

In the meantime, it’s easier to make sound decisions once your finances are in order. If you’re ready to make a change and learn how to use your finances more effectively, sign up for a free Bronze Account. A licensed advisor will reach out to set up a strategy session with you.

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