3:11 PM EST, February 19, 2013
How would you like to inexpensively start your own business that could, just maybe, lead to bigger money than you're making now? You could work for yourself and work from the comfort of your home.
That's the allure of multilevel marketing, also called network marketing or direct selling. Well-known brands in the field include Avon and Mary Kay cosmetics, Herbalife nutrition products, Tupperware, Amway, Pampered Chef, Thirty-One and Scentsy. Products are sold personally, often at parties hosted by the seller. Sellers make more if they recruit people to work under them, thus the name multilevel marketing.
The industry claims U.S. sales of about $30 billion, with about 16 million Americans participating.
Is it smart to spend your money on start-up fees, inventory, party-hosting, training and other expenses to get started in an MLM business venture?
The short answer is maybe, but go in with eyes wide open.
If you are entrepreneurial, willing to work hard and gifted in the art of sales, an MLM might be for you, experts say. A relative few people can do very well for themselves and make it their career — although that's not always the goal of sellers. Often it's fewer than 1 percent of multilevel marketing distributors who make the six-figure money often touted or intimated.
The industry's trade group, the Direct Selling Association, puts median annual earnings at $2,400, although critics say the vast majority of sellers make nothing at all.
Joe Mariano, president of the association, said core to his group's mission is to make sure marketing practices by members "are at the highest level of ethics and responsiveness to consumers."
Here's what to know if you're thinking about trying an MLM, according to the Federal Trade Commission, the Direct Selling Association and other experts.
Avoid the pyramid. The biggest criticism of MLMs is that some can be pyramid schemes, in which distributors are compensated for recruiting new sellers, not selling products. With a pyramid, only people who get in early on the scheme make money, and the pyramid collapses when it runs out of new recruits.
The FTC has pursued and shut down MLMs that emphasize recruiting more sellers rather than selling real products to the public.
"If the money you make is mainly based on the number of people you recruit and your sales to them, it's a pyramid scheme," the FTC recently said in a blog posting on its site.
Identify the pyramid. Signs of an MLM to avoid, and ones that might be a pyramid scheme, include those that pay for merely recruiting new members, rather than paying commissions based on the sale of products by sellers and those who work under them. Large upfront fees are also a red flag, as are requirements to buy large amounts of initial inventory.
Do you have what it takes? Ask yourself hard questions about whether you're cut out for personal selling. Avoid companies that suggest that time, effort and skill are not required to succeed. That's exactly what is required. And keep in mind that if you want to make bigger money, you'll have to be skilled at recruiting new sellers. Often sellers will begin selling to friends, family and neighbors, and perhaps recruiting them to sell products.
"Not everyone has the chops to be a great salesperson," said Anne Coughlan, a professor of marketing at the Kellogg School of Management at Northwestern University in Illinois, who studies different sales methods, including MLMs, and has consulted recently for Herbalife.
"Sales force skills are learned and practiced over time," she said.
Do your due diligence. Research you need to complete before sinking money into an MLM is the same as if you were going to start any business — selling insurance, real estate or becoming a franchisee, Coughlan said.
Do you think the products are of value, and can you be enthusiastic about selling them? Are they overpriced or unsafe?
"Apply a healthy dose of skepticism before buying or selling products advertised as having 'miracle' ingredients or guaranteed results," the FTC advises on its site, found here: tinyurl.com/ftc-mlm. "Many of these 'quick cures' are unproven, fraudulently marketed and useless."
Do an online search of the company's name along with such keywords as review, scam or complaint. You can also check with your state attorney general's office to inquire about complaints filed against the company.
Watch expenses. One common problem in MLMs and many business startups is spending too much money on the business before you're making much. Legitimate MLMs make clear that the decision is up to sellers about how much they spend on such expenses as training programs, traveling to seminars and hosting parties, Coughlan said.
"It's not a bet-on-the-come type of business," she said.
Cut through the hype. Be skeptical of promises or suggestions of huge earnings that aren't substantiated. Legitimate companies will be candid about your earnings potential.
As an example, Herbalife, the Los Angeles-based nutritional products seller, recently released information about its distributors' earnings for 2012. Last year, 88 percent of distributors received no commissions from the company in 2012. The company said that's in part due to many distributors joining to get a discount on Herbalife products they personally consume and not attempting to sell products. Overall, just 646 Herbalife distributors out of 493,862, or 13 people out of every 10,000, made more than $100,000 in commissions last year, according the company.
"On average, people make relatively small amounts of money doing this," Mariano said. "That's not unusual, nor is it unexpected because people do it only on a part-time basis."
Look for the out. Examine the worst-case scenario — that the MLM is not for you. What's the refund policy for your entry fee? Can you sell back inventory if you want to quit? Get that information in writing.
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