Budgeting What Is an MLM? Multilevel Marketing Explained By Erin Gobler Erin Gobler Twitter Website Erin Gobler is personal finance coach and a writer with over decade of experience. She specializes in writing about investing, cryptocurrency, stocks, and more. Her work has been published on major financial websites including Bankrate, Fox Business, Credit Karma, The Simple Dollar, and more. learn about our editorial policies Updated on November 23, 2021 Reviewed by Ebony J. Howard Reviewed by Ebony J. Howard Ebony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries. learn about our financial review board Fact checked by Emily Ernsberger Fact checked by Emily Ernsberger Twitter Emily Ernsberger is a fact-checker and award-winning former newspaper reporter with experience covering local government and court cases. She also served as an editor for a weekly print publication. Her stint as a legal assistant at a law firm equipped her to track down legal, policy and financial information. learn about our editorial policies In This Article View All In This Article Definitions and Examples of MLMs How MLMs Work Criticism of MLMs Considerations for MLMs Photo: Maskot / Getty Images Definition A multilevel marketing company (MLM) is a business that sells its product or service through direct sales. Definitions and Examples of MLMs Rather than having a storefront operation, multilevel marketing companies rely on independent distributors to sell their products directly to consumers and bring other salespeople into the company. Sales are often online or in customers’ homes. These distributors aren’t hourly or salaried employees. Instead, they are independent contractors and only make money when they sell the product. The company encourages each distributor to recruit new participants to join their downline. Then, the distributor earns a percentage of all sales their recruits generate. Many people use the terms “MLM” and “pyramid scheme” interchangeably. And while they’re not entirely the same thing, some MLM companies are pyramid schemes and in violation of federal law. 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 make money by recruiting new distributors to join under them. Pyramid schemes are illegal, and the Federal Trade Commission (FTC) works to shut them down. A good example of FTC action against a pyramid scheme is its January 2020 temporary shutdown of an instant-coffee pyramid scheme called “Success by Health.” The FTC’s press release about the action indicates the company’s founders received $7 million from their distributors and pocketed more than $1.3 million of it. “The FTC alleges that less than 2% of participating consumers received more money from the defendants than they paid to them, and that those lucky few averaged less than $250 per month—a far cry from the defendants’ promises of ‘financial freedom,’” the FTC’s release noted. The difference between a pyramid scheme like Success by Health and a legal MLM is that legal MLMs have a legitimate product and distributors can make money by selling that product. And while legitimate MLM companies also encourage distributors to recruit new participants into their “downline,” they don’t necessarily have to do so to make money. Note Many MLM companies require distributors to buy their own inventory to sell. Participants may also have to pay a monthly fee to use the company’s marketing and have a website. How MLMs Work MLMs rely on more people continually joining the organization so the people at higher levels can earn money from the sales of people who are newer to the organization. You may be expected to pay money upfront to join. You'll have sales quotas you'll be urged to meet, and you may also be expected to bring a certain amount of people to the organization who will form your downline. There are hundreds of MLM companies operating in the U.S., and it can be tricky to figure out if a popular new product or job opportunity from a friend is an MLM in disguise. You may have had the experience of a casual conversation with an acquaintance turning into a sales pitch to join their MLM team. When you join a team at the invitation of a friend or acquaintance, you become part of their "downline." This puts you lower in the hierarchy and in a position where those above you earn money from your sales. The people you bring into the organization then become downline from you. Here are some things most MLMs have in common: You can only buy a product from a distributor: MLM companies typically only sell their products via distributors; you can’t buy the item from a retail store. Someone only promotes products from one company: There’s no shortage of influencers promoting products online. As a result, you might have a hard time figuring out which are MLM products. If an influencer you follow or someone you’re friends with on Facebook only promotes products from one company, they might be an MLM distributor.A recruiter approaches you with promises that seem too good to be true: A job opportunity might make assurances of making a lot of money, but the business model seems unclear.You have to pay to join: You’d be hard-pressed to find a legitimate job opportunity where you have to pay to get the job. If a company requires you to buy a product upfront or pay a membership fee, it’s likely an MLM.You’re asked to recruit new members: One of the key features of MLM companies is that, in addition to selling a product, distributors are encouraged to recruit participants into their downline to earn more money. This business model is an indication that the company is either an MLM or a pyramid scheme. Note Women dominate the MLM industry, outnumbering male distributors at nearly a 3-to-1 rate. Criticism of MLMs MLM companies aren’t new. 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. MLMs have only grown in prevalence since then, with brands like doTerra, LuLaRoe, and Scentsy creeping into the mainstream. Roughly 7.7 million Americans generated $40.1 billion in direct sales in 2020, up from $28.6 billion in 2010, according to data from the Direct Selling Association (DSA). Despite frequent promises of high earnings, few MLM participants ever end up making money. According to an AARP study, about seven out of 10 distributors break even or lose money, 25% make a profit, 27% make no money at all, and a startling 47% lose money. Note If you aren’t sold on joining an MLM, consider starting a business of your own. Many MLM recruiters entice people with the promise of entrepreneurship and “being your own boss.” In reality, joining an MLM means working for someone else. Considerations for MLMs While the data clearly shows that direct sales aren’t profitable for most people, many people still join for the promise of financial freedom. And certainly, there are people who make a living in an MLM company. Before joining, here are a few things to keep in mind: Make sure you understand the company and the product: If you don’t understand the business model or the product isn’t the main focus of the business, you could be dealing with an MLM that’s an illegal pyramid scheme. Ask about financial details upfront: Find out what kind of upfront cost there is. If the company requires you to buy products to sell, make sure they also accept refunds on unsold products. Familiarize yourself with sales and marketing: When you join an MLM as a distributor, you’re a salesperson. Your success will be dependent on your ability to market the product. If you’re new to sales, learn the basics of business and marketing. Key Takeaways Multilevel marketing companies are businesses that sell products or services through direct sales. MLMs rely on distributors to bring more salespeople into the company. Distributors earn money on the sales of people they bring in.The Federal Trade Commission monitors MLMs and has shut some of them down due to them being pyramid schemes.If you're considering joining an MLM, make sure you understand the payment structure, what's required of you, and any money you'll be expected to come up with upfront. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Federal Trade Commission. "Multi-Level Marketing Businesses and Pyramid Schemes." Accessed Nov. 5, 2021. Federal Trade Commission. "FTC Acts to Shut Down ‘Success by Health’ Instant Coffee Pyramid Scheme." Accessed Nov. 5, 2021. Direct Selling Association. "Research Overview." Accessed Nov. 5, 2021. AARP. "AARP Study of Multilevel Marketing: Profiling Participants and Their Experiences in Direct Sales." Page 3. Accessed Nov. 5, 2021.