Fear the MLM

I was 15 years old when I was approached by someone on Facebook asking me to be a partner in their distribution business. I was very interested – wow, some business is actually interested in teenager me! I was an immensely stupid kid, but fortunately, they backed off when I said that I was still in school and I was left disappointed by this sudden withdrawal.

Five years on, it surprises me that MLMs continue operating with seeming impunity. Now, I understand how insidious these organisations can be.

What is an MLM?

MLM is a a business model where individuals sell products or services directly to consumers and earn commissions not only on their sales but also on the sales made by people they recruit into the business. This creates multiple levels of compensation, with each level representing a layer of recruits.

Key features of MLM include:

1. Direct Sales: Distributors sell products directly to consumers, often through personal relationships and word-of-mouth.
2. Recruitment: Distributors are encouraged to recruit new members to join the business, forming a downline.
3. Commission Structure: Earnings are typically derived from personal sales and a percentage of the sales made by the recruits (downline).
4. Multi-Level Compensation: Income potential increases with the size of the downline, as distributors earn from multiple levels of recruits.

Why MLMs are so distrusted.

If the products were that good, they wouldn’t need to use this distribution method

Yes, Tupperware started this way, and I do quite enjoy Tupperware. However, given the influx of bad news, it becomes a signalling issue. Most legitimate products will not require such distribution chains. As such, it is mostly the dubious brands that need to rely on MLM models to push their products. Typical lemons problem in signalling – when there is information asymmetry, simply marketing themselves in one way signals that there is something inherently wrong with their product/does not achieve product market fit.

You are being conned as an entrepreneur to simply do distribution with no control over the underlying product

The pitch combines an entrepreneurial opportunity with consumption to lure you in. However, members are simply a salesperson for the company – there is no way one can easily verify product safety, nor do you have control over the unit economics. A participant of an MLM is simply a marketer – without the economies of scale and expertise in marketing a product, most end up selling to their loved ones regardless of whether their loved ones need a product or not.

Sharing is usually uncaring

I don’t wish to rob anyone of the notion that hidden opportunities do not exist out there. Some people do find clever arbitrage opportunities, which allow them to earn outsized returns on their time and effort. I do wish to point out, however, that arbitrage is often based on information failure. As a result, it is unlikely that such schemes are designed to spread quickly. 

This is the same reason why I have always been skeptical of people purporting to be able to teach you how to trade in a very profitable way: Why wouldn’t they keep their secrets and trade for themselves instead of introducing more people to a fixed pie? 

Similarly for very attractive investment opportunities (I was asked to invest in an agarwood scheme promising 60% returns a month). Surely insiders could lever up from a bank with a profitable and risk-free method, which has sufficient capital and due-diligence capacity, at a low interest rate compared to the 60% they pay you monthly.

Ponzi scheme-esque

A Ponzi scheme is a fraudulent investment scam promising high returns with little or no risk to investors. It generates returns for earlier investors using the capital from newer investors, rather than from profit earned by the operation of a legitimate business. Since MLM members get a cut of the commissions from the people they recruit, there are in effect two streams of income – one that comes from selling product and the other from recruitment, which is potentially Ponzi-esque.

How to identify and avoid

A quick sense-check I used that saved a friend his $5,000 “investment”: 

• Do you get to meet the staff in real life? Having a physical presence is a necessary but insufficient condition of their trustworthiness, because they would have lease deposits or capital expenditure that they stand to lose if they are revealed to be fraudulent. It’s a lot easier to arrest them as well
• How reversible is the decision to quit the job without significant losses or hassle? Check for the notice period and what personal data you might have to give up. 
• Google the company name in quotations and type scam: E.g. ‘“ABCompany” Scam’. This will help to float any potential concerns raised by others and circumvent any search engine optimisation potentially done by the company to boost their image on the first few pages of Google.
• I would strongly recommend against any job that asks for you to pay upfront — any decent business would pay work-related costs for employees; any entreneurial setup should involve optimising capital expenditure and not buy only from a specified source.
• How is compensation structured? Most jobs would have a fixed rate of pay. For variable amounts, approach this from an expected value perspective, not with optimism.
• What value-add do you bring to the world? If you cannot understand how you are generating value, you probably aren’t and the proposition for them hiring you is a more nefarious one.
• How did you get the job? Any self-respecting business would have certain filtering systems since interviewing candidates come at a cost. This rules out any job posts sent over SMS or messaging apps, since this would stretch a legitimate HR budget. Of course, there’re no requirements and anyone can join a scam if they’re gullible enough.
• How low are the barriers to entry for the job? Do the wage premiums seem too high for something anyone can do?
• “FMCG Distribution Startup/business” is usually a gigantic red flag for an MLM
• Branding is one of the strongest moats of a business and a way to gain trust. A hesitation to reveal the company name is never a good sign

Conclusion

No matter how worried you are for your future or how much you desire entrepreneurship experience, stay far, far away from MLMs. They’re like the car dealers using sleazy salesmen – if they had any other choice to sell you something that you would find valuable, they probably would have already.