How Does Multi-Level Marketing (MLM) Work?

A multi-level marketing firm (MLM) is a company that sells products through a network of independent distributors, who are rewarded both for sales and for recruiting more distributors.

If you’re an MLM participant and you sign up additional salespeople, you’ll typically receive a cut of the inventory purchases or sales made by the recruits, as well as a cut of any additional participants signed up by their recruits, and so on, potentially through multiple levels of distributors—hence the “multi-level” name.

But the chances of making a profit in an MLM are very slim, and many participants end up losing money. Here’s what you should know before you become involved in one.

Key Takeaways

• An MLM participant sells products through a network of independent salespeople and also makes money by recruiting other participants.
• The business structure of MLM schemes is extremely similar to that of an illegal pyramid scheme.
• The difference between a legitimate MLM and pyramid scheme is that a pyramid scheme is a scam in which you make almost all of your money through recruitment.
• There are many other ways to make money that offer the opportunity promised by MLMs, without their drawbacks.

How MLMs Work

In an MLM, salespeople (known as “distributors,” “contractors,” “participants,” or other titles depending on the jargon of individual companies) buy products from a company, then try to sell them to customers at home, at work, or in other non-retail locations for a marked-up price.

Downline Distributors

What sets MLMs apart from other types of direct-selling companies is the emphasis on recruiting other salespeople. If you’re in an MLM, you are encouraged to recruit other salespeople, who are referred to as your “downline” distributors. You then get to claim part of the commission generated by your downline, and in turn, pay some of your commissions to those “upline” from you.

Upfront and Ongoing Fees

Typically, MLMs require new recruits to pay registration fees and buy inventory or training materials to get started. These costs can range from a few hundred dollars to thousands of dollars a year.

Emotionally-Charged Sales and Recruiting Events

MLM events are often emotionally intense gatherings, with a similar atmosphere to religious festivals, designed to encourage distributors to continue with the company even in the highly likely event that their sales efforts haven’t yielded a profit.

Because they don’t operate retail locations, MLM participants often focus their sales and recruiting pitches on their existing social networks such as friends and family, or members of churches or other organizations they belong to.

Examples of MLMs

Amway, one of the most well-known MLM companies, has been around since 1959 and was at the center of an FTC decision that helped to distinguish legitimate MLM companies from illegal pyramid schemes. Other large MLMs include Herbalife, Mary Kay, and Avon. Today, MLMs sell mainly household and beauty products and nutritional supplements.

Roughly 7.3 million Americans generated $42.7 billion in direct sales in 2021, up from $29.9 billion in 2011, according to data from the Direct Selling Association (DSA), a trade group representing the MLM industry.

The DSA counts sales to MLM participants together with those outside the MLM and classifies them all as customers because “Many of those involved in direct selling join because they enjoy the products or services—and then choose to sell and share with their friends and families,” Ginger Greenberg, a spokesperson for the DSA, wrote in an email to The Balance.

Can You Make Money Participating in an MLM?

The chances of making money if you join an MLM are remote at best, according to several independent analyses.

For example, public documents from Herbalife, a large MLM company that sells nutritional supplements, have shown meager earnings from most participants. Among the one in five distributors in 2015 who successfully built a downline of distributors below them, 95.5% took in an average of $627.55 that year. They could have made that by working 1.7 hours per week at a job paying the federal minimum wage of $7.25 an hour. That’s according to an analysis by William Keep, a marketing professor at the College of New Jersey and an expert on MLMs, which he published on investing news website Seeking Alpha.

Only a tiny fraction, 0.65% of those who built a downline, reported taking in $100,000 or more. Herbalife declined to comment.

Average MLM earnings are meager compared to the time invested—amounting to 67 cents an hour, a 2018 survey of MLM participants by personal finance website MagnifyMoney found. And that was before taking expenses into account.

Note

The picture gets even more bleak if you tally the financial costs. Only one MLM participant out of 250 actually makes a profit, according to Jon Taylor, a consumer advocate and researcher whose work is published on the Federal Trade Commission website.

One Person’s Experience

Alanda Carter, a training designer from Houston, learned about the dismal prospects of making money in MLMs the hard way in 2016 when an acquaintance persuaded her to become a “coach” at Beachbody, an MLM that sells nutritional supplements. She had just been laid off and had been diagnosed with breast cancer, so she was looking for a flexible job opportunity that would allow her to work around her medical appointments.

Carter found that expenses mounted quickly, but sales, not so much. In addition to paying around $20 for a back-office fee, she had to buy $99 worth of protein shakes every month to remain eligible to receive commissions. She paid Beachbody for sales training, a customer relationship management system, and she bought Facebook ads.

By 2019, Carter only had made five or six sales, for a net loss of $20,000, to say nothing of the time she had spent—around 10 hours a day, seven days a week. She ended up drinking most of the shakes herself.

“You never have worked so hard in your life to get so little in return,” Carter said.

Carter now hosts a podcast called “Hey Hun, You Woke Up!” where she discusses the dark side of MLMs with other former participants. Beachbody did not respond to a request for comment.

Carter’s experience is a common one for MLM participants, according to Douglas M. Brooks, a Massachusetts lawyer who represents former distributors in lawsuits against MLM companies. 

“If someone comes to me and says, ‘Hey, there’s an MLM that I’d like to join, what do you think?’ I’m going to say, ‘Don’t do it.’ And there’s a better than 99% chance that I’m giving good advice,” Brooks said.

MLMs vs. Pyramid Schemes

An illegal pyramid scheme is a company that recruits distributors, just like an MLM would. But in the case of a pyramid scheme, participants can’t really make money selling a product or service; rather, they mainly make money by recruiting new distributors to join under them.

Note

A pyramid scheme is an illegal form of fraud, and you can be sent to prison for operating one.

A pyramid scheme can be purely financial, involving selling financial investments, but also can involve selling a product. Those at the top of the sales pyramid get rich by recruiting the lower-ranking members of the organization, who pay into the scheme in hopes of collecting rewards that rarely materialize.

In a classic pyramid scheme, investors pay to join, sending money up through the pyramid in hopes that they, in turn, will be paid by their own recruits. But sooner or later, the pool of potential recruits dries up, and those at the “bottom” of the pyramid who paid into it without signing anyone else up will lose out.

Note

Whether a company is an illegal pyramid scheme or a legal MLM hinges on whether it’s mainly getting its income by selling a product mostly to the public (a legitimate MLM), or whether it’s mainly moving money from the vast majority of mostly-failing distributors toward the tiny percentage of successful people at the top (pyramid scheme).

You may notice that the definitions for MLMs and pyramid schemes are extremely similar. 

Because MLMs tend to be secretive about their finances, it’s hard to tell from the outside, without the aid of court-ordered disclosures, whether a company is a pyramid scheme or not, Keep said.

Example of a Pyramid Scheme

Many MLMs have operated for years or decades only to be found to be pyramid schemes and shut down. AdvoCare, a company selling nutritional supplements, operated as an MLM for 25 years. It had celebrity athlete endorsements from the likes of NFL quarterback Drew Brees, and won awards from the DSA, the trade group representing the MLM industry.

In 2019, the Federal Trade Commission sued AdvoCare, accusing it of being a pyramid scheme in which the vast majority of distributors either made no money or lost money. The company ultimately reached a settlement where it had to return $149 million to former members and stop operating as an MLM.

The DSA said anyone joining a direct-selling company should “investigate further and ensure the company is focused on selling a legitimate product and/or service as opposed to earning income only through inviting others to join the company.”

AdvoCare did not respond to a request for comment.

“Any MLM may be tempted to operate an illegal pyramid scheme because doing so will create more wealth more quickly for the company and top distributors, relative to operating a legal MLM,” Keep said.

Appeal of MLMs

Despite the downsides of MLMs, they have continued to draw in thousands of participants. About one in 13 U.S. adults have joined an MLM at some point or another, according to one AARP survey.

There is a chance, however slim, of getting rich as an MLM distributor. In a 2021 survey of 156 MLM participants by the AARP,  three individuals—one of whom said he founded the company—reported profits of $100,000 or more over their careers.

And MLMs offer a low barrier to entry—pretty much anyone can do it—as well as the flexibility to set your own hours, which traditional full-time jobs lack.

Criticism of MLMs

There is no shortage of criticism of multi-level marketing companies.

Participants Make Very Little to No Money

The main criticism of MLMs is that most participants don’t make much money.

Too Similar to Pyramid Schemes

Critics also say the business model is inherently predatory because of its similarity to a pyramid scheme—it’s too hard for the general public to tell the difference. They share a problem in that they both lure participants in with grand claims that are rarely delivered.

They Can Damage Relationships

Some participants risk more than money, finding that the constant hustling of friends and family that MLMs encourage is off-putting and damaging to personal relationships. For example, Carter said during her time with Beachbody, she recruited her 86-year-old mother-in-law—thinking she was doing her a favor—which she now regrets. “I am horrified that I did that,” she said. “It’s really shameful.”

She said she lost one friendship and saw things grow tense with several others after she sold them products. She even started fighting with her husband, accusing him of not being supportive enough of her business venture.

Carter’s experience isn’t uncommon.

“The problem, in general, is that the activity of recruiting people into MLM schemes is socially and psychologically unacceptable to most people in our society,” Brian Bloch, a former business professor at the University of Auckland in New Zealand, wrote in a 1996 paper. “MLM is fraught with some really nasty human relations issues.”

Alternatives to Joining an MLM

Given the poor average monetary returns for time invested in MLMs, almost any job will probably pay better than joining one.

Remote Jobs

If you need flexibility, look for work-from-home options on job-hunting sites. Telecommuting has become more common since the COVID-19  pandemic hit, so there are more legitimate options available these days—although be careful that the job posting isn’t an MLM recruitment pitch in disguise.

“Gig economy” jobs such as driving for a rideshare or food delivery service can also give you the ability to set your own hours.

Start Another Type of Small Business

For more entrepreneurial-minded people who don’t mind taking risks and working extremely hard, starting a non-MLM small business is an option. Many can be established with minimal startup costs.

Note

Keep said it’s a good idea to assess your skill set and either find a way to make it useful to someone else who will pay you to do it, or learn new skills to improve your career options. Both paths will likely pay off better than an MLM, he said.

Frequently Asked Questions (FAQs)

Is multi-level marketing illegal?

Not unless it’s a pyramid scheme, in which high-level participants in the organization get rich by scamming lower-level recruits. If a business makes money mostly by recruiting people rather than mostly by selling products to the public, it’s an illegal pyramid scheme. If the company makes money also by selling products to consumers, it’s a legal MLM.

It’s incredibly hard for an average person to determine whether any given MLM company meets the criteria for being a pyramid scheme.

Are all multi-level marketing companies pyramid schemes?

In the eyes of the Federal Trade Commission, there is a difference between a legitimate MLM that sells products to end-user consumers, and a pyramid scheme that takes in money mostly by recruiting new salespeople. However, the two are extremely similar and in practice, it’s very difficult to tell an MLM from a pyramid scheme from the outside.