MLM Scams: Spotting Red Flags to Protect Yourself from Financial Loss

People end up in a multi-level marketing company, or MLM, for different reasons. Maybe you wanted to help a friend. Maybe you wanted to make some extra money. Or maybe you were tricked and didn’t intend to sign up at all. It’s important to know that not all multi-level marketing companies are bad. But MLM scams do exist, and even ones that aren’t outright scams can include a lot of emotional manipulation or an unhealthy cult-like mentality. It’s important to be aware of the red flags to keep yourself safe.

See 7 Flags of MLMs with Roberta Blevins for a complete transcript of the Easy Prey podcast episode.

Roberta Blevins is a former distributor for the MLM company LuLaRoe and a current anti-MLM educator and advocate. She starred in the Amazon Prime documentary LuLaRich and hosts a podcast, “Life After MLM,” where she talks to victims of cults, frauds, and scams about their experiences. Her goal isn’t to tell you not to join a multi-level marketing company. She focuses on red flag education so that you can identify when an environment is toxic and get out before you get hurt.

Roberta’s Experience with MLMs and MLM Scams

Roberta first joined the MLM company It Works. But for Roberta, it didn’t work. She didn’t like it and left it soon after. Then in 2015, she heard about LuLaRoe. She liked that it wasn’t like most MLMs, where everyone sold the same product. LuLaRoe distributors sold similar products in unique patterns. Roberta was also a young wife and new mom – she wanted to be at home with her child. The work-from-home aspect was very appealing.

Roberta joined LuLaRone in early 2016, and was in it for about eighteen months. She grew very quickly within the company. Eventually, she had a team of seventy-five women underneath her. Now, she estimates she was in the top five percent of the company. And the money she was making was decent. Unfortunately, it wasn’t any more than she had made at the job she quit to sell LuLaRoe full-time – but she was spending a lot more time working for the same money.

I wasn’t really making anything more than I was already making before, but I was working a lot more.

Roberta Blevins

Looking back, there were definitely some red flags even in the beginning. But Roberta didn’t see them at first because there was so much dopamine manipulation going on. The company and other distributors hyped everything up. She had constant opportunities to go to events, parties, and conferences. She was busy and excited about the opportunity, so it took something big to make her realize the problems.

Bad Business Decisions

Before joining LuLaRoe, Roberta was a hairstylist. She had run her own booth and a salon for a long time, so she understood basic business principles. And with that knowledge, she started to have a lot of issues with the way LuLaRoe was running its business. When she reported defective products and tried to initiate returns, she got the runaround. Several times she reported complaints with easy fixes. The company would promise the fixes but the never actually fix it. It was a terrible way to run a legitimate business.

I kept thinking, ‘A real business would fix it. A real business would think this was an issue.’

Roberta Blevins

Roberta wasn’t thinking about MLM scams. She didn’t know it was a pyramid scheme or about all its cult-like elements. She knew it was a business. And if it was a business, it was being terribly run. It was also harming her mental health. She was working much more to make the same amount of money she was previously. It wasn’t making her family happier, and she had become a completely different person. She decided she had to get out.

After leaving LuLaRoe, she started doing some research. That’s when she learned about MLM scams, how they can manipulate people, and how some of them become almost like cults. At the time, there were very few people willing to go on record and use their real names to talk about their MLM experiences. So Roberta started speaking out publicly about what had happened to her. That led to a Vice documentary, testifying in a pyramid scheme case against LuLaRoe (which settled out of court), the LuLaRich documentary, and her podcast.

Warning Signs of Abusive, Exploitative, and Manipulative MLMs

If you’re thinking about joining an MLM, it’s important to watch out for MLM scams. But it’s equally important to watch out for MLMs that aren’t outright scams, but are abusive, manipulative, exploitative, or otherwise harmful. Luckily, MLM scams and exploitative MLMs have very similar warning signs.

Pressure

A big red flag for a manipulative MLM or an MLM scam – or any type of scam – is pressure. Scammers and people who want to exploit you will pressure you into making a decision. They may push you to make a decision right away, before you’ve had time to think. They may also try to manipulate you with desire for what you could get if you join or fear of what you could miss out on if you don’t.

Whether it’s an MLM scam, a manipulative and exploitative company, or just a salesperson who cares more about you buying than if the product will actually be beneficial to you, if you feel pressured, that’s a bad sign. Making a decision under pressure rarely results in a good decision.

Avoiding Questions

It’s always a good idea to ask questions when presented with a business opportunity. But if you get pushback for asking questions, that’s a red flag. You may be told that asking those kinds of questions is being negative or not looking on the bright side. But only looking at the positives and ignoring the negatives is a great way to make terrible business and financial decisions.

If you express genuine concerns and they are brushed off, that’s a huge warning sign. This is true even if you’re already involved in the company. And if they won’t answer your questions, give dodgy or vague answers, or in any way indicate that you shouldn’t be asking questions, don’t get involved. If they won’t give you answers, don’t give them money – it’s that simple!

Secrecy

Secrets can be a lot of fun. But secrecy around any business opportunity is always a bad sign. People involved in MLM scams or exploitative or manipulative MLMs sometimes post about “great opportunities” on social media. But if you comment to ask about the company, they will DM you or invite you to meet in person. If someone says that they have a great opportunity but aren’t willing to publicly state the name of the company, that’s a red flag. It usually means they don’t want you to google the company or do any of your own research before they can put you in a high-pressure sales presentation.

If it’s a legitimate company, you should be able to say, ‘It’s this,’ and then that should be able to sand up to some scrutiny.

Roberta Blevins

Other Locations and Other People

In the anti-MLM community, people involved in MLMs are called “Huns” – an affectionate term that comes from the common pitch greeting, “Hey, hon!” One of Roberta’s maxims is to never follow a hun to a secondary location, and she’s only partially joking. It’s a way to protect yourself from manipulation. When they meet with you, many people involved in MLM scams or manipulative MLMs will try to get you somewhere else.

They may also bring in other people to try to put more pressure on you or help with manipulation. Sometimes they’ll phrase it as having you talk to their mentor, or their upline, or something else. But if they can get you to another location where you’re alone and they can get another person to help put the pressure on you, it’s a bad situation for you. If the person proposing the business opportunity wants you to go somewhere else with them or bring in another person, that’s a warning sign. Don’t do it.

MLMs, MLM Scams, and Pyramid Schemes

MLMs are technically not pyramid schemes. But there are many similarities between the two. In fact, the four cornerstones of MLMs can also be found in pyramid schemes. For some, this may not be a bad thing. As long as you’re avoiding MLM scams and manipulative and exploitative MLMs, it is possible to be really successful. But it’s also important to know what you’re getting into.

A Pay-to-Play Model

In this metaphor, the MLM is the game. In order to play the MLM game (get involved in the company and start making money), you have to pay. Some MLMs are free to join, and people think that this makes the entire point invalid. But even if there’s no membership fee to join, the first thing you have to do is pay to buy a starter kit. Sometimes that kit will be offered at a steep discount. But you have to get the kit, they say, because how are you supposed to sell the products if you don’t know anything about the products? Even if it was free to join, you still have to pay for the kit before you can start.

Conferences and events are also part of the pay-to-play aspect. You have to pay for the tickets, the hotel, the food, and the transportation. Even though the money isn’t necessarily going to the company itself, you still have to pay to get involved. That also feeds into the sunk cost fallacy – you stay longer than you would have otherwise because you’ve invested so much money into it already.

Having a pay-to-play model doesn’t necessarily mean it’s an MLM scam. But it doesn’t mean that it’s completely legitimate, either. Regardless of the company, the pay-to-play aspect is always involved, and that’s something to keep in mind.

The Endless Chain

Another cornerstone of MLMs is the endless chain. The endless chain is common to MLMs, MLM scams, and pyramid schemes. With a pyramid scheme, the endless chain requires recruitment that never ends. With MLMs, there’s a quota that you have to hit each month to get paid. That quota resets every month, and if you don’t hit it, you lose out on some or all of your earnings for the month. It’s an endless chain because you always have to qualify to get your money and it always resets.

What makes it especially difficult in MLMs is that people are constantly leaving. As bricks come out of your pyramid, you have to replace them with more bricks. And you have to hope it’s not load-bearing bricks that leave, because those are harder to replace.

With the endless chain, there’s no moment of leaving your job at the door. You are always on, always going, always trying to make another sale or another recruit. There’s never a time you can slow down or stop because that puts everything you’ve earned at risk. It’s a never-ending treadmill.

You’re constantly on, You’re always trying to get somebody. You never want to leave any money on the table. That’s the endlessness of it.

Roberta Blevins

Recruitment Mandates

In MLMs, MLM scams, and pyramid schemes, there’s always going to be a recruitment aspect. That’s because the system requires recruitment in order to make money. In a pyramid scheme, that’s the only aspect that makes money, because only money is being exchanged. But in an MLM, money is exchanged for products. (That’s the only difference between an MLM and a pyramid scheme – MLMs have products involved, and pyramid schemes don’t.) The payment structure works so that you get a cut of all the sales made by people you recruit. That makes it so the easiest and fastest way to make money is by recruitment.

There are exceptions to the recruitment mandates. Some people are just incredible salespeople. Roberta knew some people like that in LuLaRoe. They had small teams but incredible sales volume because they were good at it. Those kinds of people exist, but they are the exception. When a recruitment mandate is a foundational principle, without recruiting you will essentially stay at the bottom. Those who haven’t recruited anyone to work beneath them don’t get those bonuses from their recruits’ sales, which is where the big money is.

Extreme Money Transfer

The fourth cornerstone of both pyramid schemes and MLMs is extreme money transfer. Extreme money transfer means that the majority of the money in the company is going to only the one percent of people at the very top. With the way bonuses are structured, most of the bonuses are routed to the top. The majority of people are making little or nothing.

Be Informed and Make Your Own Decisions

Roberta would never join an MLM again. But she doesn’t like to tell people not to do it or to quit if you’re already involved. Her goal is to give you information. To her, those four cornerstones (and the fact that they’re also the cornerstones of pyramid schemes) seem like red flags. But you should do your own research and come to your own conclusions.

If you look at the numbers and decide the money works, then go for it. If the money doesn’t work or if it’s negatively impacting your mental health, energy, or the time you want to spend with your family, it might be a good idea to step away. Roberta just wants to make sure you know what the red flags are and to pay attention when you see them. It may help you avoid an MLM scam, a manipulative company, or financial loss or burnout down the road.

When MLMs Go Under

When you’re always “on,” the business opportunity quickly becomes more of a lifestyle than a job. It can invade every area of your life. Roberta has talked to many people whose MLM role became part of everything. Very few people she talked to had a great experience, didn’t spend too much time on it, and thought it was worth it.

Most people, even those who were successful, realized how much time and effort they were spending keeping up the facade of success. But an MLM can collapse – and not just MLM scams, legitimate MLMs can go under as well. And if that happens, you could lose everything.

Even though people think that this is their business, they really are just a 1099 contracted salesperson who works for commission.

Roberta Blevins

Since everything is commission-based and dependent on the particular MLM’s products, you get no hourly pay for your work and no benefits. There’s no retirement plan or 401(k). If the entire organization goes under, that bonus check you count on every month stops coming. And you get no unemployment, either. It can be devastating if you’re not paying attention or prepared.

The Appearance of Success

Many people who get involved in MLMs use up a lot of their savings on it. They get into the lifestyle, and there’s a pressure to fake it until you make it. You want the appearance of success because when you approach people (or they approach you) about the opportunity, they’re more likely to join if you look the part. Some MLM conventions have vendors outside that rent designer clothes, shoes, and purses. The people on the stage can go rent them right outside to appear more successful on stage.

There’s a promise of the American Dream that everyone wants. The people above you say you just have to do these things and you’ll be as successful as them. Because all these successful people are telling you what to do, you feel like you should do it. Even if it’s not an outright scam, it comes back to the MLM pay-to-play model. If you want to successfully play the MLM “game”, you have to spend money so you look like you’re successfully playing the game.

Buying MLM Success

Where this becomes even more risky is when you start buying the product yourself. Often, people do this because they haven’t met the quota to get the bonus check they need and it’s close to the end of the month. The math seems obvious. Your bonus is going to be $2,000, but you have to sell another $500 to get the bonus. If you spend the $500 yourself, you’ll get that bonus. In the end, you’ll be up by $1,500.

You’re buying your rank, you’re buying your levels, you’re buying your bonus, and it can get really, really dangerous.

Roberta Blevins

Many people say they would never do that. But then they get in a tight spot and they do it once. They push reality just a little bit. And it becomes easier and easier to do it again. Roberta has had people come on her podcast and talk about how they created an email address for their cat and signed their cat up for their MLM because they needed another account that month to qualify. You think it’s something you’ll never do. But if you’re in a position where you need that check, you start doing things out of desperation.

This is where MLMs have the potential to become exploitative or MLM scams. It’s easy to exploit people who are desperate for the check. In the end, the company gets their money, and they don’t really care if it comes from a customer or their own distributor. MLM scams can even set the quotas unreasonably high to get you to buy more and more with your own money each month to get the bonus check. People can end up spending more to qualify for the bonus than they get from the bonus.

The History of MLMs

Multi-level marketing as a company structure got its start in the 1950s and 1960s. It was an era of prosperity after the fear and rationing of World War II, and a variety of cultural factors came together to produce the foundations of the MLM model. It started with door-to-door sales. The Fuller Brush guy, the Kirby vacuum salesperson, the Avon lady – they were all perfectly normal. It was direct sales, straight to the customer, and the salespeople brought the products directly to the housewives.

The MLM structure as we know it today came with a company called Holiday Magic. They were the first to add the multi-level structure to direct sales. Other companies liked the idea. Some MLMs were scams, more like ponzi schemes than multi-level marketing. But many were legitimate. In the 1960s, the US Food and Drug Administration (FDA) accused MLM company Nutrilite of false advertising. Two of Nutrilite’s top sellers, Richard DeVos and Jay Van Andel, didn’t want to get in trouble with the FDA. They left Nutrilite and started their own MLM company, called American Way. Now, we know it as Amway.

In the 1960s and 1970s, an MLM company that sold makeup also ran into trouble with government agencies. Due to these issues, the US Federal Trade Commission (FTC) made rules for MLMs. These rules were affectionately known as the “Koscot rules.” The Koscot rules determined what separated a legal MLM business from an illegal pyramid scheme. It declared legitimate businesses had at least 70% of the company’s products sold to people not associated with the company, for example. All MLMs had to follow the Koscot rules.

That is, until Amway.

The Amway Rules

Amway’s fight with the FTC started in 1975 and lasted four years. You can read the whole story in the book Ponzinomics by Robert Fitzpatrick. But the short version is that at one point, a judge who wasn’t affiliated with the case filled in for the day. He looked over the case and decided that Amway looked like a legitimate business to him.

That decision replaced the Koscot rules with a new set of rules known as the “Amway rules.” The Amway rules are really just a set of legal loopholes that protect MLM businesses and MLM scams alike. It allowed MLMs to proliferate in the 1980s. The more well-known MLM companies, like Amway, Shaklee, Mary Kay, Avon, and USANA, became big in the 1980s.

Regulation for MLMs

I know MLMs will never go away. I just want to regulate an unregulated industry because we’ve seen what deregulation does.

Roberta Blevins

Roberta thinks it’s essential to regulate MLMs. We’ve seen the consequences of a lack of regulation in the financial industry, and even in what happened with the Titanic sub recently. Regulations keep everyone as safe as possible. They can help prevent MLM scams and protect people from predatory and unethical practices. That’s why Roberta works with regulatory agencies to create new rules and laws. It’s a popular industry. She just wants to make it safer.

The FTC has been working on some regulations. Last year, they reopened the business opportunity rule for a comment period. The business opportunity rule was created to regulate MLMs, but they successfully lobbied themselves out of complying. Since then, gig work has come up as a question as well. The comment period allowed people to tell the FTC if they want these regulations and why. They received thousands of comments.

Now, we’re between the states. There’s a lot of red tape in government. The first step is saying, “Here’s the question. Should we look more into this?” Everybody has said yes. So now, they’re thinking about looking into it. We’re waiting for them now.

If we want MLMs to be legitimate and we want to legitimize them, we need to add rules and regulations.

Roberta Blevins

The Real Numbers on MLMs

With the effort most people are spending on their MLM, they could be making more money in a regular job somewhere else. Roberta actually did the math on this. She used the income disclosure statements of all the MLMs she could find. She did her calculations based on the annual averages that they provide.

On average, distributors made thirty-five to fifty cents an hour. That’s less than prison wages. But obviously, those numbers are skewed. Some people are making nothing, and some are making millions. And income disclosures only cover people participating in the bonus plans. Anyone who is a specacular seller but doesn’t have a team under them won’t show up on the disclosures.

Even the median number in a lot of these income disclosure statements is zero. … More than half of people [in MLMs] are making nothing.

Roberta Blevins

How to Join an MLM Without Losing Everything

When you’re looking at any business opportunity, you have to look at it financially. You need to know what math to do to find out if you’re making money off it and if so, how much. Roberta always says that numbers don’t lie. If you decide to join an MLM, treat it like a business, not a hobby.

When Roberta asks people in MLMs about their profit and loss, they usually don’t know what she’s talking about. That makes sense. They’re not businesspeople, they’re stay-at-home moms trying to make extra money. But if you’re going to do it as a business and try to make money, you need to calculate your profit and loss.

Track Everything

If you’re going to be spending money or making money, you need to be tracking those [profit and loss] numbers, both of them.

Roberta Blevins

The first step is to track everything. Track all the time you spend working on your MLM. If it’s fifteen minutes scrolling through Facebook looking for people to reach out to, record that fifteen minutes. If you’re doing it while cooking, taking care of your kids, or any other multitasking, write it down. A lot of people think about it as a part-time business and are shocked to realize they do it You need to know how much how much time you’re putting into your business because you’ll need that number for your math later.

Track your profit. Any commissions, anything you sold, any bonus checks you’re getting, that’s all profit. And track your losses. Losses are any fees or anything you pay for the month. Lots of MLMs have a website fee. If you pay $10 per month for your website, record that as a loss. Record any promotional stuff you buy, like business cards, Facebook advertising, or the babysitter you hired for three hours while you ran business-related errands. If you drive for your business, record the mileage. Record you bought for a party at your house and the cost of that book your upline said you must read. Record every single dollar that you spend on your business.

Do the Math

Track your profit and loss for a month. Then calculate how much you gained or lost. You can do this by adding up all your profits and all your losses for the month, then subtracting your losses from your profits. This gives you your earnings. If your earnings are positive, you made money. If your earnings are negative, you lost money. From there, you can calculate how much money you made per hour. Divide your earnings by the number of hours you worked to get your hourly earnings.

Check In Every Three Months

Track everything and do the math for a month. Then do it again. At the end of three months, evaluate. In the first few months, people are usually pretty excited for you. The market is hot and happy to help you out, host parties, and do things. Chances are good that you will have some profits or at least break even in your first three months.

But don’t stop. Keep tracking the numbers and doing the math every month. After three more months, reevaluate. Are you still making money even after you subtract your losses? Does your hourly earnings seem reasonable? If you’re still in the green and want to continue, great.

But if during any of these evaluations you find that you’re losing money or spending ten hours a day hustling for less than a dollar an hour, that’s a sign that it’s time to quit. There’s no shame in quitting. In MLMs, there’s a 90% loss rate. Catching it early and getting out before you lose too much is wise. And doing this tracking can help you spot an MLM scam that will never be profitable quickly.

Check In With Your Team

If you become really successful in your MLM and have a team underneath you, start checking in with them. Ask them if they’re successful. Teach them to do this same calculating that you’re doing. And if they’re in the red, encourage them to leave. There’s a morality aspect here. Most people just won’t be successful with MLMs. If you encourage them to buy more because they’re so close to success, you are lying to them and putting them into a terrible financial situation.

Roberta once encouraged one of her team members to pay her mortgage instead of buying more LuLaRoe. She missed out on a pretty big bonus check that she would have gotten from her team member’s purchase. But she couldn’t live with the fact that she would enjoy a steak dinner because one of her team gave her their mortgage payment. Some people can live with that. Roberta has talked to people who were in the 1% of top sellers and had incredible teams but have had to go to therapy to unpack some of the things they told their team to do.

One of her friends co-opted her own cancer to shill for her MLM. People don’t want to be singled out or make their upline upset. That’s where the cult-like element comes in. If you’re experiencing that, it’s time to get out. No legitimate sales job would reward you for buying the product yourself and storing it in your garage. If a company encourages you to buy your own product or to act against your morals to sell it, it’s time to get out.

Don’t ever fall for any of that rah-rah sisterhood. It isn’t real. Even though it looks and feels super, super real, I promise you it’s not real.

Roberta Blevins

Have an Anchor to Avoid MLM Scams

If you really want to get involved in an MLM but want to keep yourself safe and avoid MLM scams, you need an anchor. An anchor is an unbiased person outside the situation. They need to be someone who will listen and is safe for you to talk to. They can even be anti-MLM. What’s important is that they have no skin in the game other than caring about you. Your anchor is the person you can – and should – go to when you have concerns, aren’t sure, or think you may be seeing red flags.

High-demand situations, like MLM scams and some MLMs, don’t want you to have an anchor outside the company. They want the person you go to to be your upline or someone else affiliated with the company. They will brand your anchor as “negative” or “unsupportive” and tell you to cut negative and unsupportive people out of your life. But there’s no high without a low, and no mountain without a valley. Trying to cut all negativity out of your life is impossible. And it will very easily isolate you in a dangerous or manipulative situation.

You deserve a safe space to air your grievances. And a company should be able to stand up to scrutiny. Your anchor person can serve both roles. They should be a safe place to discuss your complaints and concerns. And they can help you scrutinize a company and determine if it’s really safe and legitimate or actually an MLM scam.

Any sort of organization that is actively trying to silence anything that they consider negative is a very, very big red flag.

Roberta Blevins

You can find Roberta Blevins’s podcast Life After MLM wherever you listen to podcasts. The easiest place to find Roberta herself is on her website, robertablevins.com. You can also find her on Instagram @therealrobertablevins and on TikTok @bertalikewhoa.