Multi-Level Marketing: Safe or Scam?

October 5, 2014

 

Since the onset of the financial crisis of 2008, millions of Americans have looked for ways to earn additional income. For some, multi-level marketing companies like Avon and Herbalife presented a good avenue for making extra cash. In these types of operations, individuals pay the company for a bulk amount of goods that they then sell to other people. According to multi-level marketing firms and their trade groups, the system allows consumers to purchase their favorite products at a cut rate while also earning money. For many dissatisfied distributors, however, the unregulated nature of multi-level marketing creates a natural breeding ground for pyramid schemes.

Multi-level marketing companies try to drive their distributors into a frenzy of excitement about their products. This causes them to buy more and more stock, often accumulating debt in the process. As people go deeper into the multi-level marketing rabbit hole, the venture can end up consuming their lives. That’s what happened to Santa Fe hairstylist Enrique Martinez and his wife Michelle when they started to purchase shipments of probiotic chocolate from a company called MXI Corp. The couple had experience with multi-level marketing before and thought they could handle the pressure, even though their past forays hadn’t earned them any cash. Within five years, the couple had amassed more than $100,000 in debt and was spending $2,000 a month on “healthy chocolate” that did little more than take up space in their house.

Defenders of the industry point out that many multi-level marketing firms offer full refunds to their distributors for any unsold stock. In fact, all 171 members of the Direct Selling Association are required to grant refunds. Unfortunately for the Martinez family, MXI Corp is not part of that trade group. But even if the couple could have been refunded for their unsold stock, there’s a good chance they wouldn’t have taken the opportunity to do so. According to consumer advocates, that’s because the intense, emotional nature of multi-level marketing leads many distributors to simply throw away unwanted stock rather than return it. “These companies have some sort of magical hold on people,” said Brent Wilkes, who studies the effects of these firms on Latin Americans. All told, 16 million Americans will become involved with multi-level marketing sometime this year. While a few people may earn money, many others will be in danger of facing the same fate that met the Martinez family.

 

Questions:

  1. What’s should potential participants do before getting involved in multi-level marketing?
  1. What protection does a company’s membership in the Direct Selling Association offer multi-level marketing participants?

 

Source: Max Ehrenfreund, “Sometimes, Life is Like a Box of Cacao Products,” The Washington Post, August 1, 2014. Photo by John Loo.

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