Many of us automatically associate scams with buzzwords like multi-level marketing (MLM) and downline. We quickly assume that these words denote a “pyramid scheme” and the opportunity that comes with those words lacks legitimacy or is a scam.
It owes much of its vile reputation to unscrupulous practitioners and its closed similarity to illegal pyramid or Ponzi schemes.
To understand the nature of MLM and why it has become the bogeyman of business models, we first need to take a look at how it operates.
How does MLM work?
Multi-level marketing is a business model in which you make money from the sales you generate from a certain product, as well as a percentage of the sales of other salespeople you recruit to sell the product.
To enrol in an MLM, you typically have to pay an upfront participation fee. In exchange, you will become a distributor of their products or services, which can range from aromatherapy knick-knacks, restaurant start-ups, to placenta pills. You can maximise your profit by getting your family and friends to sign up.
Incentives for hitting sales targets or recruiting a certain number of new members can include cars, trips abroad, as well as cash.
Theoretically, an MLM model can function as a profitable means of distributions for all parties involved. Unfortunately, not all MLM opportunities are legitimate as many are simply pyramid schemes designed by frauds and disguised as legitimate opportunities to separate the unwary with their money.
What’s the difference between MLM and pyramid or Ponzi schemes?
First things first: MLM can be a legitimate business model, while pyramid schemes are downright illegal in Malaysia.
Why? Because pyramid and Ponzi schemes are non-sustainable business model that solely involves the exchange of money (usually in joining fees) and has no real product or service to boot.
This means that over time, there will be no possible way for the people at the “bottom” of the pyramid to make any money and the only ones who will profit from a scheme are the people at the “top” of the pyramid.
The end result is that people can spend several thousands of their hard-earned money to enrol in one of these schemes and end up losing everything.
The problem is, it can be difficult to tell the difference between a legitimate MLM and a pyramid scheme. This is because they are both founded on the paradigm of “multiple levels” of distributors and recruits. Some MLM companies are simply cleverly-disguised pyramid schemes.
One of the most well-known MLM scams in Malaysia is the one involving Steven’s Corner. As one of the most popular mamak shops in Malaysia and having been in the business for 30 years, many Malaysians were interested when they were invited to be part of the franchise’s expansion plan, called Steven’s TeaGarden.
Investment started at a hefty RM3,000 with a promise of RM150 monthly return. However, the payment stopped after just a few months and the whole fiasco unfurled.
Can they work?
Yes. Amway, Tupperware and Avon are examples of successful and legitimate MLM models. They support huge networks of distributors and recruits who sell every type of product for dietary supplements to kitchenware to beauty products.
Many of these businesses allow you to get into direct sales and make a passive income from your home and do not actively recruit others to sell in an attempt to boost their own income.
However, you will need to be wary when you enlist in programmes that require you to purchase a large amount of product because you could end up just sitting on it or worse, end up in debt.
To quell your fears of joining a legitimate MLM, consider these tell-tale signs you might encounter before you sign up.
1) If they are more interested in recruiting and selling
One of the foremost signs you would want to watch out for is if a company is more interested in recruiting than in selling. If you are being recruited with the primary purpose to recruit more people of your own, or if they are more interested in getting you to recruit more “team members” than “customers” to sell the product and you’ve not actually heard them talk at all about the actual product then it’s definitely a red flag.
2) If they provide little or no training
Are they providing you with actual business techniques and sales support in order to help you sell your products? Or does training comprise mostly of ways to get new recruits on-board? If the answer is yes, head for the exit.
A legitimate MLM programme should prepare and hone your skills with training sessions led by the veterans and industry pioneers.
3) If you’re being pushed to pay more
You might be asked to join a “fast track” or become an “elite” by purchasing a great deal of inventory all at once (read: Lampe Berger). Or you might be pressured into buying an expensive package in order to get the business support you require.
Such occurrences, especially if you are asked to fork out for extra training on a regular basis, could spell trouble.
At the end of the day, you should always do your research and make an effort to learn more about an MLM company before you start investing. If their products are legitimate and are as good as they say they are, you will be able to verify them.
Success does not come without hard work. This principle applies to traditional business models as well as MLMs. With a little digging, due diligence and some luck, finding the right MLM can help you reach your financial goals faster.