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On the surface, multi-level marketing seems like an easy way to make money. Set up to allow individuals to be independent consultants and sell products on behalf of a brand, earning commissions for sales, they seem like a win-win: a bigger, more diverse workforce for companies and a boon for workers who need a side hustle, without the time to develop one. Major companies like Arbonne, Younique, and others have built their business as MLMs.

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Yet, as time passes, friends and family of independent consultants quickly find themselves fatigued by frequent sales pitches, turning down invitations to product parties, wary of their loved ones’ new endeavors. Sellers themselves may find it harder and harder to make sales, and more and more pressure to prove their value to the company. If that sounds like a recipe for misery, it is. Former MLM consultants (and even mental health professionals) have planted red flags, warning potential newcomers to steer clear, earning MLMs unenviable press coverage, with headlines like:

“They have you in a cultish grip: the women losing thousands to online beauty schemes” (The Guardian)
“How to Get Your Friend out of a MLM” (Vice)
“How MLMs And Cults Use The Same Mind Control Techniques”  (Huffington Post)

In these articles, the most frequent comparison is between MLMs and pyramid schemes. But a pyramid scheme wouldn’t be allowed to be a registered company, hold global conferences, and pay taxes. So, what about MLMs makes them fundamentally different, assuming they are?

In the Journal of Business Ethics, the ethicist Daryl Koehn argued that, while a key difference allows MLMs to operate legally (they purport to offer products as their main revenue base), they often have fundamentally the same ethical issues. Pyramid schemes are fraudulent because their very success hinges not on a product or service, but on an endless supply of new investors. In a pyramid scheme, a person is asked for an initial investment and then asked to recruit others to make (often significant) returns on that investment: a model that’s bound to fail, leave latecomers swindled.

MLMs, as product-based companies, place their selling value on their product and market recruitment as an additional element. Sales representatives can recruit and train other sales representatives and earn commissions based on their recruits’ sales, as well as their own. Or at least, that’s the idea. As Koehn explains, what would differentiate a company using multi-level marketing from a pyramid scheme, ethically and in essence, is if most of its revenue was from sales to genuine customers, not purchases for inventory from independent sellers recruited by the network.

It’s hard to know if that’s the case without seeing a breakdown of a company’s books. But, as Koehn explains, there are indicators that a company uses recruitment as its blood supply. These are: heavy emphasis on recruitment over sales; requiring “substantial upfront fees from those people who are recruited to sell the product;” and “pressuring” recruits to purchase corporate products for their own consumption.

She notes that another telltale sign is a structure that allows for the easy exploitation of recruits, such as unreliable buyback programs for unused inventory, or not differentiating between sales made by consultants for restocking their own inventory versus genuine, consumer sales (which makes it easy to pressure low-level recruits into amassing more and more stock).

Additionally, there’s the inherent pressure to sell to friends, family, and other associates, which is its own ethical minefield. As Koehn writes:

It is hard to see how MLMs could exist if recruits did not market to friends, relatives, and clients. Yet such marketing is fraught with ethical peril. It would be nice to think that thoughtful participants would avoid such perils, but the rhetoric of the MLM does not leave one optimistic.

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Journal of Business Ethics, Vol. 29, No. 1/2, Sixth Annual International Conference Promoting Business Ethics (Jan., 2001), pp. 153-160