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Alice is the sponsor, or upline, of everyone she recruits. The people she recruits (as well as all the people they recruit) become her downline.

The directions of these relationships are important to lớn keep in mind because they impact the money everyone in the pyramid earns in most multi-level marketing schemes. All distributors pay a portion of their earnings lớn the company as well as khổng lồ those upline of them.

“MLM distributors earn money from selling products to lớn people they know, commissions from each person they recruit to the company and commissions from the sales & recruits generated from their own recruits, continuing down multiple levels,” says Christine Alemany, CEO of TBGA, a branding and sale support agency. “In order khổng lồ succeed, a distributor must continuously recruit as many downlines as possible khổng lồ join their team.”

Typically MLMs offer a detailed compensation plan that outlines precisely how these upline & downline relationships work and how distributors get paid. These plans spell out things lượt thích recruiting và sales commissions as well as define the requirements a member must meet to lớn be eligible for compensation, usually expressed in minimum sales targets and numbers of new recruits.

Pyramid Scheme vs. MLM

It’s understandable if the dynamic of MLM companies has you questioning if they’re little more than pyramid schemes. Both, after all, operate with the same pyramid-shaped structure.

So what makes one legitimate & the other an illegal scam? It comes down to lớn the sales versus recruitment focus in the compensation plan.

According to lớn the Federal Trade Commission (FTC), “if an MLM is not a pyramid scheme, it will pay you based on your sales lớn retail customers, without having khổng lồ recruit new distributors.” Pyramid schemes, meanwhile, rely on continuous recruitment of dues-paying members to lớn stay afloat, even if they require members to keep buying products that they may not be able to sell.

MLMs and the 70% Rule

For an MLM to lớn be compliant (i.e., legal and not a pyramid scheme), it must adhere khổng lồ the 70% rule that “at least 70% of all goods sold must be purchased by non-distributors.”

That means consumers outside the company need to be buying the majority of a company’s products—rather than downstream in the distributor network or with the distributors themselves stocking up on inventory. But it’s incredibly hard lớn prove if an MLM isn’t in compliance, lưu ý Alemany and Cory Rusin, a researcher who works closely with former multi-level marketing distributors after they leave direct sales.

“It’s almost impossible to lớn track if a distributor has stashed unsold products in their garage or closet,” says Alemany. “For the most part, MLMs take their distributors at their word.”

And even if a distributor were clearing 70% of their inventory in a given month, the “financial freedom” offered by many MLMs simply cannot be achieved through direct sales alone, says Rusin.

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“When you analyze the compensation plans of MLMs, the real money is made through recruitment,” she says.

When MLMs Fail

A pyramid scheme fails when its recruitment efforts fail since the model requires infinite recruitment lớn sustain income. MLM companies typically fail when suppliers or distributors revolt against unethical business practices, as in the recent LuLaRoe scandal, though individual distributors may struggle within a MLM without it outright collapsing for some time.

In short, vendors have sued LuLaRoe for unpaid invoices, & the company has been embroiled in a class-action suit from customers who received defective merchandise. The company recently settled a suit with the state of Washington, which had sued the company for running an illegal pyramid scheme.

Should You Join An MLM?

On the surface, multi-level marketing companies may appear khổng lồ be a great way for individuals khổng lồ become “captains of their own ship” as business owners, creating revenue from products they believe in.

But the truth is that 99% of people who participate in MLMs đại bại money, according to lớn the Consumer Awareness Institute, as they struggle to lớn resell products và recruit members for network marketing companies that often tiptoe the edges of illegality và hide the true costs of participation from participants.

What’s more, the tactics used by some MLMs can take a psychological—as well as financial—toll on distributors.

“Dr. Steve Hassan, a leading cult expert, has addressed how MLMs use manipulation và blame to ensure any failures to lớn earn large sums of cash through the business model are placed on distributors for their lack of competence or hard work,” says Rusin.

Rather than turning to an MLM, Rusin, a former distributor for two different MLMs, advises you to lớn think about why you think an MLM sounds exciting và explore other opportunities to lớn fulfill those values.

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Whether it’s money, wanting to lớn quit your day job or work from trang chủ or seeking a sense of community, there are plenty of opportunities that offer those exact experiences without the hefty financial investment và psychological cost an MLM can have.

“Start your own business by exploring what your strengths are & how you can provide a needed service lớn others,” Rusin says. “There are inexpensive ways to lớn get started và you’ll have created a much more sustainable & ethical avenue of income.”