From hope to harm: Five reasons why MLMs can cause financial loss

Business

With its promise of financial freedom and flexible working hours, multilevel marketing (MLM) attracts millions of individuals around the globe each year (WFDSA, 2024).

However, beneath the surface of this alleged business opportunity, most participants — variously named distributors, consultants, or independent business owners (IBOs)—lose money, as shown earlier by Talented Ladies Club (TLC) here.

But why do participants lose money, given that most join to earn money? A core reason is that they invest far more into their ‘business’ than they ever earn back. Seminars, a lifestyle they cannot afford (see TLC report here), and the often ongoing purchases of products or service subscriptions, cause participants to lose money, ranging from a few hundred to thousands of US dollars (DeLiema et al., 2018).

This raises the question of why participants continue investing in MLMs despite losses. An article published in the journal Public Policy & Marketing (see here) by Claudia Groß and Dirk Vriens from the Radboud University in the Netherlands explains why. 

In short, MLMs have several mechanisms in place that make participants believe that spending money will pay back one day. Here are five core mechanisms that MLMs use.

1) MLM participants are the key customers 

MLMs thrive through people purchasing their products and services. However, a key issue is that MLM revenue does not have to come from customers who love the products and services. Instead, companies also profit through their own participants, people who have joined their business to earn money, purchasing products and services.

As TLC reported earlier, a business insider in a rare moment of truth, admitted that “companies focused 99% of their attention on selling products or services to their representatives” (see here).

MLM participants who buy products or pay for monthly subscriptions in the hope of ‘building their business’ enable MLM companies to earn money. As you will find in pretty much every MLM compensation plan, participants earn points and bonuses on their own purchases. This means they are incentivized to invest more into products and services than they would if they did not see their participation as a business opportunity. 

TLC’s report of a former It Works distributor illustrates how product purchases help create company revenue independent of whether participants ever earn anything through them (see TLC here). It Works provides a so-called ‘10k Diamond Bonus’ and distributors are made to believe that if they qualify, they receive $10,000 directly.

However, as a former distributor explained to TLC in an interview, “what they don’t tell you is that [the] bonus is paid over 25 months (so works out at just $400 a month) and that in order to keep receiving the money every month, you have to keep qualifying at that rank [i.e., ordering for $600/month]. If you don’t qualify at that rank, you don’t get your bonus that month. … One girl placed a $600 order through her brother (she paid for the order) to qualify for the $10k diamond bonus. However, to keep getting that money, she needed to repeat that every single month. How can you do that?”

In practice, sustaining purchases is financially impossible without substantial retail sales. Retailing products is, however, very time consuming and difficult, if not almost impossible except to a few friends and family members who are willing to support participants.

2) Social networks and emotional incentives 

In addition to the financial incentives to buy, MLMs often create an organizational culture where buying and consuming products is presented as a means to prosperity, personal growth, and overall well-being. Buying products is incentivized not only by pay-backs or higher ranks. In addition, most MLMs have an elaborate system of ranks and recognition tied to purchase volumes.

Someone who has achieved a particular rank, might receive a special pin, a new title, a distinctive jacket, or the opportunity to speak at company events. This public acknowledgment of “success” can be a powerful motivator, potentially pushing people to buy more in pursuit of status within the organization.

Additionally, the slogan that you should become “a product of the product” is a common mantra in MLM circles. Participants are encouraged to use or at least display their love for the company’s products extensively – far beyond what they would under normal circumstances. 

The story on TLC of the above It Works distributor explains how the mechanism works in practice: despite having bought into the $10k Diamond Bonus by placing an order through her brother, the distributor presented and used her (alleged) achievement to show off, get attention, and potentially recruit others. Purchasing into the rank “didn’t stop her boasting about qualifying for the bonus all over Facebook. She just didn’t tell anyone that she possibly only actually received it for one month … ‘Faking it till you make it’ was rife (it’s reframed as attraction marketing to make it seem less like the lying it really is).” (Martin, 2022)

It seems like participants pay to appear successful, despite losing money. However, public acknowledgement and the desire for social recognition incentivize participants to buy into ranks, invest money, and exaggerate and lie about how much, or rather little, they earn.

3) The psychological trap: Escalation of commitment 

The combination of hoping for income and social recognition, even if faked, creates an environment that can be difficult to escape. Participants can find themselves caught in what psychologists call “escalation of commitment”: they continue to invest time and money into the business even when facing losses because they hope that success is just around the corner.

This mindset is often reinforced by the company culture and training materials. Distributors are frequently told that those who invest more will earn more later, creating a belief that current losses are simply the price of future success. 

The story of Megan, a former distributor of LuLaRoe, illustrates this cycle. As a stay-at-home mom she was looking for a way to earn extra income and “loved the idea of owning my own boutique.” However, her experience quickly turned sour as she found herself constantly pressured to “buy, buy, buy.” (McNeal, 2017). When her investments in products and time did not pay off, she did not stop. Instead, she turned to her upline for help. And here, it “was explained to me that I wasn’t successful because I didn’t have enough inventory,” Megan shares. “So I went into even more debt to buy more.” 

This push to continually invest in inventory is a common tactic in MLMs, where distributors are often told that success is just around the corner if they only invest a little more. While such investments might seem irrational in retrospect, when participants are in the middle of it, they seem logical and worthwhile. The case of Success by Health (SBH) provides a stark example.

According to the Federal Trade Commission, SBH distributors were encouraged to sign a “Million Dollar Contract,” committing themselves to spending at least $500 on products monthly. While this is a lot of money, participants were told that becoming millionaires was “achievable for the masses” (FTC, 2020, p. 12). Compared to the millions promised to those who persist, the investment seems small, doable, and worthwhile.

What participants were not told is that less than 2% of SBH distributors received more money from the company than they paid in – let alone became millionaires.

4) The power of misinformation

This leads us to the fourth mechanism: misleading income and product claims. Participants sometimes extend their budget because they are promised not only an easy side income, but also ‘a ‘residual income,’ a ‘millionaire lifestyle’, or the chance to ‘break financially free.’ Despite regulatory efforts, thousands of such misleading claims can be found, done by participants of almost all of the biggest MLMs (TINA, 2017).

The same holds for product claims, in particular companies that offer health-related products or services, make numerous dubious, misleading, or outright illegal statements. This covers participants presenting MLM products as curing cancer, infertility, Covid-19, or leading to effortless weight loss (TINA, 2016, 2024). These types of claims not only mislead participants but also cause them to pass them on to potential customers, including their friends and family members who trust them.

5) The eternal cycle – from victims to recruiters

Probably the most insidious aspect of the MLM model is how it can turn victims into recruiters who make new victims. When participants try to recoup their investments and achieve the success they’ve been promised, they often feel compelled to pass on the same claims. They recruit others and encourage high purchase volumes within their downline, suggesting that others fake success by purchasing into ranks and qualifications.

As participants earn on what their downline purchases, recruiting others and motivating them with misleading stories why they should invest more, seems an obvious solution for earning something back on the time, money, and social relations invested. By doing so, participants who were tricked into overspending money, knowingly or unknowingly, continue the cycle of misinformation and illusion.

Beyond MLMs: A broader problem 

MLMs may be famous, but they are only one example of the broader category of “deceptive income opportunity providers” (DIOPs). People searching for a full- or part-time income often turn to so-called ‘income opportunity providers.’ These encompass employed, but mostly self-employed ‘gigs’, platform work, MLMs, franchise opportunities, and money-making claims related to trainings (Gressin, 2021). While these self-employment opportunities flourish, they may simply exploit people’s aspirations for financial independence: the company earns; most participants lose.

What makes these opportunities particularly concerning is how they shift responsibility onto the individual. By classifying participants as independent contractors or entrepreneurs, these companies can distance themselves from the financial outcomes of their distributors. This aligns with deeply held American ideals about entrepreneurship, and hard work leading to success.

How to protect yourself and others

It is essential that anyone considering joining an MLM or similar opportunity is aware of these mechanisms. Prospective participants should critically assess the promises of easy wealth and flexible work, and consider the potential risks and hidden costs. For anyone already involved in MLMs, recognizing these mechanisms can be a first step towards making more informed decisions about purchases and business practices.

It’s important to critically evaluate the true motivations behind buying decisions and to consider whether purchases are truly necessary for business success, personal use, and whether retail customers are available. For policymakers and regulators, this analysis highlights that regulation is needed to effectively address the various mechanisms together to better protect consumers from losing money when joining an MLM. 

Author: Claudia Groß, PhD, Radboud University and TIAS School for Business and Society, The Netherlands.

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