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The MLM Flags in Businesses You Must Deal With

We have all, at one point or another, been approached by an old high school classmate whom we haven’t spoken to in decades with an “unbelievable,” “life changing,” “it’s going to make you rich” opportunity, and all you need to do is attend a seminar. These phrases mean you may be in for MLM.

MLM, or multilevel marketing, otherwise known as networking marketing, is a type of business model that has, unfortunately, been co-opted by so many scammers that multilevel marketing has become a synonym for Ponzi scheme.

Because everyone is aware now that MLM means bad news, many of these scammers attempt to hide their business model from their potential victims by mixing up terminologies or keeping you in the dark.

What is MLM?

MLM is the abbreviation for Multilevel Marketing, a type of marketing strategy that aims to generate revenue via a non-salaried workforce.

The entire concept of multilevel marketing relies on persuading people into “investing” in the company’s “products” through deceptive means and asking them to recruit a certain number of people by asking them to do the same thing.

MLMs rely entirely on referrals and word-of-mouth marketing to succeed.

An MLM will typically appear legitimate by offering a tangible product or service, but the person recruited doesn’t sell these products to consumers, instead passing the responsibility on to a different group of people, who then do the same exact thing — repeated ad nauseam.

MLMs also usually hold seminars and “orientations” to try and dupe potential victims into believing their imagined legitimacy.

Here are the most common MLM red flags to spot:

MLM Flag 1: The Company’s Product or Service is Confusing, Low Quality, or Non-Existent

The biggest, most common and glaring red flag to look out for is when a business’s advertised product or service is of low quality, predicated on a confusing premise, or is entirely non-existent. Although MLMs will usually try to hide this, the best way to spot this flag is by paying attention to how the company approaches recruitment: are they more concerned about people “investing” in their products rather than selling their products?

If so, that’s likely an MLM.

The foundation of any legitimate business is getting their products or services to an end consumer, and although third-party distributors can be a part of that, legitimate businesses are more concerned about selling the product at the end of the day.

MLM Flag 2: Ridiculously Outrageous Claims Not Backed by Legitimate Sources

In the 19th century, America started hiring Chinese laborers to build our extensive railroad system. These laborers brought with them traditional Chinese medicines, including snake oil derived from Chinese water snakes. The Chinese believe that oil from these snakes can do a host of good things to the body (fun fact: science actually backs this up, thanks to the high concentrations of Omega-3 Fatty Acid in snake oil), especially when taken in moderation.

Naturally, local scammers got wind of this practice and started selling their own version of snake oil, making outlandish claims that their products were cure-all elixirs, despite the fact that their products contained zero snake oil at all.

Thus, we get the term “snake oil salesman,” a person who tries to sell a product that has little-to-no benefit for consumers.

A legitimate business will try to bolster their legitimacy by having legitimate scientific or medical sources (or obtain the FDA) approval, as well as keeping their claims well within reason.

If it sounds too good to be true, it probably is.

demonstration with laptop
Photo by Headway on Unsplash

MLM Flag 3: Their Sales Tactics Require High-Pressure, Placing People Under Stress

Most startups will often allure people with the “Ground Floor” mindset: that is, they try to convince you that they’re going to make it big one day, and if you invest now and invest early, your investment is going to grow exponentially. This is a legitimate tactic when used moderately; however, if a company tries to strong-arm you, put you in undue stress, or use high-pressure tactics that don’t commensurate to the product they’re selling or the size of their company, take caution.

Any tactic that tries to get you to sign on the dotted line ASAP while discouraging you to ask more questions, talk to other people, or spending a day or two to think about it, is shady at best and, at worst, is an MLM company.

MLM Flag 4: The Company Requires You to Buy and Stock Their Inventory

Direct sales businesses and startups will generally require people to shell out an initial investment to participate with the company. In most cases, the investment is small and there’s a clear-cut path to generating revenue from the investment you’ve put it.

Be very wary, however, of a company that wants you to buy an unusual amount of their inventory for your personal stock. This used to be a widespread MLM practice until the Federal government stepped in and required MLM companies to buy back their inventory after a specific period. Yes, you should have a company’s products on hand, but you shouldn’t have to fill up your garage with it.

MLM Flag 5: The Better Business Bureau Gave it a Low Rating

In general, the BBB is a trustworthy indicator of a business’ legitimacy. Sure, the BBB sometimes gives home business opportunities a low mark simply because it’s not as big or profitable as other companies, but it’s still fairly remarkable with how accurate they are.

Despite this setback, a low BBB rating for a MLM company is a terrible sign, especially since the BBB does investigate all MLM’s more comprehensively than other companies because of the awful reputation MLM’s get. Pay attention to their BBB rating, call the BBB and ask about this company.

If the Better Business Bureau themselves think a company has a red flag, don’t even bother meeting up with your former classmate for “coffee.”

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Econ Review is an online magazine dedicated to providing business analytics, studying marketing strategies and discussions on business, tech, and finance. We provide entrepreneurs of all levels –from C-level executives to startup hopefuls – a viable resource on all things business and finance.


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