MLM Marketing: How to Detect Scams the FTC Way

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A rose, by any other name, would still have thorns.

I know; that isn’t exactly the right quote, but it fits multi-level or MLM marketing perfectly. No matter what you call it, may it be MLM, direct selling, network marketing, unfranchising, or home-based leveraged multi-tiered income business opportunity (whew!), you will be talking about the same marketing strategy. The sales force earns commissions from the sales they were able to generate personally. In addition to that, they earn a percentage of the sales generated by people they were able to recruit into the business.

The Direct Selling Association, a well-respected US industry group, stated that, in 2009, 94.2% of their approximately 200 member companies were using MLM as their primary marketing strategy. This generated 97.1% of their total sales. Today, it is estimated that in the US alone, over a thousand companies are using MLM marketing.

The thorns? Critics of this type of marketing insist that MLM and its name variations are words used to hide what it truly is: a pyramid scheme, Ponzi scheme, and other similar consumer fraud scams.

But what is the legal reality?

How can you separate the legitimate MLM companies from those that you need to avoid?

The United States Federal Trade Commission (FTC) tells us that we must do our research, have a good dose of business sense and a healthy share of skepticism. They came up with eight steps on how to evaluate an MLM plan, which I recommended that you follow to find out if the MLM marketing company is legitimate.

[Note: different countries have specific rules about MLMs, but these 8 points are generally useful in most situations.]

  1. Consider the company’s track record – Today, this is easily done through Internet research, but you must also check your local Chamber of Commerce or Better Business Bureau for complaints. Keep in mind, though, that not having any complaint doesn’t guarantee legitimacy. Find out how long have they been in business.
  2. Know the product – I have always believed that you can easily market a product that you actually love. As such, find out everything you can from the product that you’re going to sell.
  3. Ask questions – Ask about the terms and conditions of the company. Find out if they have an Income Disclosure Statement. I have compiled the ones I could find in a list I posted here. They’re all I can track down, as I found out that, on average, MLM companies don’t seem to have one. If the company doesn’t have one, ask your sponsor about the compensation structure.
  4. Learn about any restrictions – Find out if the company has any returns policy, and what their restrictions are, if any.
  5. Talk to other distributors – You can ask for the name and contact details of other distributors to ask them the same questions you gave to your sponsor.
  6. Consult trusted neutral persons – Present everything you’ve gathered about the company to someone you trust who is not affiliated in any way to the MLM marketing company you wish to join.
  7. Don’t rush into a decision – Take your time. Don’t fall for any “opportunity meeting” unless you are very sure about the decision that you’ll make.
  8. Does it fit your goals and talent? – Having a great product and MLM marketing strategy don’t guarantee success. Honestly assess yourself if this is undoubtedly for you. Would you enjoy doing this type of work?

If you follow these steps that the FTC gave, you are considerably minimizing the chances of falling for an MLM marketing scam. You need to exercise due diligence before committing to any company or individual.

If you have other questions, hit me up in the comments section below.

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