Is Multi-Level Marketing a Legitimate Business Model or a Pyramid Scheme?

I’m sure you’ve heard of MLM – multi-level marketing. Personally, I’ve always associated this business model with overpriced products and armies of enthusiastic sellers who would try, sometimes desperately, to get you to buy.

Back in school, a few classmates tried to rope me into one of those schemes. Thankfully, I had a family that taught me how economics works, so I never fell for it. But then, years later, one of my clients – a seemingly mature and educated person – tried to pull me into another MLM. He kept promising huge returns. This was a guy who had been in traditional business for years and seemed to be doing well. Out of respect, and partly out of curiosity, I checked out the product they were selling. I soon discovered it was just an average product, but sold at an extreme markup.

That was my experience with MLMs… until recently. Another client of mine introduced me to a business that was entirely based on MLM principles, right down to their technology stack. At first, I was curious. My gut told me something was off – my past experiences and the way society views these models always painted them as scams. But this client seemed different. And let’s be honest – he was paying my daily rate, so I was all in. My usual skepticism took a backseat to the consulting contract.

So, I decided to set aside my biases and figure this out. Is MLM really a scam? Or is it a misunderstood, legitimate business model? Does ethical MLM even exist, or is it just an idealistic notion?

I did some research, and wow, I stumbled onto a massive industry worth over $200 billion – roughly the size of Portugal’s GDP. What I found during my research gave me mixed feelings. On one hand, almost every major MLM case I looked into had questionable practices, to say the least. The U.S. Federal Trade Commission has investigated nearly all the big players at some point. And in most cases, those companies had to either pay fines, change their business practices, or both. That’s a red flag, for sure.

But here’s the thing that stayed with me: the numbers. Any successful MLM I found was outperforming traditional companies in the same industry, especially in terms of net profit. The return on investment for each dollar spent was about twice as good in some cases, sometimes even more. So, being a curious person, I rolled up my sleeves and dug deeper. Now, I invite you to join me on this journey as we try to answer the question: Is MLM a complete scam, or is it a business model worth considering?

If you’re new to this blog, my name is Jeff Tilley, and I’m a customer relationship management consultant. In this article, I’ll dive into one of the most unique ways to build relationships with customers – creating partner networks through Multi-Level Marketing.

Make yourself comfortable and let’s begin!

The Historical Context of MLMs: Opportunity at a Crossroads

To understand MLM, why it became so popular, and how it evolved into what it is today, we need to look at the culture and the time when it first emerged. Multi-level marketing didn’t appear in a vacuum. It developed alongside significant social changes, especially in how women engaged with the workforce and economic opportunities. This unique business model grew in response to shifting societal norms and the need for flexible work that could offer both independence and the ability to balance domestic responsibilities.

Direct selling has deep roots, but the American door-to-door sales tradition that eventually led to MLM really took off in the 19th century. Imagine traveling salesmen with their sample cases, going from town to town selling everything from encyclopedias to vacuum cleaners. These early sellers were mostly men, earning their living solely from personal sales commissions.

This male-dominated direct sales model thrived throughout the early 20th century. Companies like the Fuller Brush Company and the California Perfume Company, which later became Avon, built substantial businesses on the backs of these traveling salesmen. The model was simple – sell products, earn a commission, repeat.

The game-changing moment came in 1945 when Carl F. Rehnborg introduced something revolutionary through his company, Nutrilite. Instead of just compensating distributors for their personal sales, Rehnborg created a system where they could also earn from the sales of people they recruited into the business. This multi-level commission structure was a groundbreaking innovation that would change direct selling forever.

This shift happened during a crucial time in American women’s history. The 1940s and 50s saw significant changes in women’s social roles. During World War II, women entered the workforce in record numbers, proving their abilities beyond the domestic sphere. But after the war, societal expectations pushed many women back into homemaking roles as men reclaimed their jobs.

This created a unique tension – women had tasted economic independence but were now expected to return to traditional domestic roles. The evolving MLM model offered a solution for many women: a way to earn income without challenging the expectation that their primary place was at home.

The concept gained major traction when two successful Nutrilite distributors, Jay Van Andel and Richard DeVos, saw the potential in this business model. In 1959, they founded Amway, applying the multi-level compensation system to household products. This smart move turned homemakers into salespeople for the very products they already used and understood.

Women, who were typically the main decision-makers for household purchases, had natural networks through neighborhood connections, church groups, and parent-teacher associations.

The so-called “party plan” selling approach, pioneered by companies like Tupperware in the 1950s, was a unique and social way of selling products. It involved organizing informal gatherings – usually in someone’s home – where a salesperson would demonstrate products to a group of friends, family, or acquaintances. These events turned living rooms into temporary showrooms, where guests could see, touch, and learn about the products in a relaxed, personal setting. The key to this model was the social aspect: people were more likely to make a purchase because they were surrounded by friends and felt comfortable in a familiar environment. This method not only promoted sales but also encouraged guests to host their own parties, spreading the business model through personal networks.

What’s particularly interesting is how MLM growth has often coincided with periods of economic instability. During the Great Depression, when traditional jobs were scarce, direct selling offered an alternative income source. After World War II, as economies recalibrated, companies like Nutrilite found fertile ground. In the 1970s, during economic uncertainty, MLMs saw expansion as traditional jobs became less secure. The 1990s economic restructuring spurred another wave in MLM participation, and after the 2008 financial crisis, the industry grew even more. Most recently, the COVID-19 pandemic reignited interest, as millions sought work-from-home opportunities.

These economic downturns created financial pressure on families, prompting many households to look for additional income sources. For women, especially, MLM represented a compromise between full economic participation and traditional expectations. It offered the promise of entrepreneurship without having to leave home.

While there have been exceptions – such as in China, where men have shown higher participation rates – MLM continues to draw a disproportionately high number of female participants in most markets. Many companies report distributor bases that are 70-80% women, reflecting the historical pattern that began at the intersection of shifting gender roles and economic necessity.

This foundation not only explains how MLM evolved from its door-to-door roots but also why it developed the way it did – with a focus on home parties, personal relationships, and products tied to domestic life. The industry grew at a critical moment in social history, transforming from men with sample cases knocking on doors to women inviting friends into their living rooms, offering a middle ground that both reinforced and gently challenged societal norms.

However, the seemingly attractive business model drew people seeking easy money, leading to the abuse of MLM network partnerships and turning them into pyramid schemes.

Why MLMs Are Associated with Fraud  

When we consider why MLMs have earned such a troubled reputation over the years, we need to take a closer look at some of the fraudulent practices that have plagued the industry. While not all MLMs engage in outright fraud, certain companies have crossed the line from “questionable business practices” into actual criminal activity.

MLMs operate through a sponsorship system where participants earn commissions from recruits. In this model, a “sponsor” doesn’t provide financial backing but instead recruits others into the network. This structure inherently creates problems that contribute to MLMs’ negative image.

Fraud cases in MLMs often attract significant attention because of the large number of people involved. Even more troubling, studies show that very few participants actually make money. Research indicates that fewer than 1% of MLM participants ever earn a profit. Most either earn nothing or lose money after factoring in expenses.

This concentration of earnings is starkly illustrated by company disclosures. For example, a 2015 study by Herbalife revealed that 86% of U.S. members earned zero in commissions, while the top 1% earned over $82,000 that year. Even among the top 10%, earnings averaged just $4,000 annually, with median earnings across all participants sitting at only $245.

Similarly, Young Living, a popular MLM for essential oils, reported that 94% of its 2 million active members made less than $1 in a year, while fewer than 0.1% earned over $1 million. These examples highlight the extreme income inequality within MLM structures.

Beyond these statistics, there are also high-profile fraud cases that further explain the industry’s reputation. One notable example is Herbalife’s targeting of vulnerable communities. The company faced accusations of targeting low-income Latino neighborhoods with false promises of financial success. These communities were particularly vulnerable due to language barriers and limited financial literacy. An investigation by the FTC revealed that Herbalife’s business model primarily incentivized recruits to buy large quantities of product, rather than focusing on retail sales. After a lengthy investigation, Herbalife paid a $200 million settlement in 2016 and was forced to restructure its business model.

A more recent case involved LuLaRoe, a clothing MLM, which required new consultants to make large initial investments, often between $5,000 and $10,000, to purchase starter inventory. The company’s leadership encouraged consultants to take on debt to buy more inventory, even when they already had unsold products. This practice, known as inventory loading, combined with a convoluted return policy, left many consultants stuck with unsellable merchandise. In 2021, LuLaRoe settled for $4.75 million after an investigation showed that only a few people at the top earned significant profits, while thousands were left with debt.

Some MLMs, like TelexFree and OneCoin, took things even further by operating as pyramid schemes. TelexFree, which was supposed to sell internet phone service packages, turned out to be a $3 billion Ponzi scheme that collapsed in 2014. A Ponzi scheme is a type of financial fraud where returns to earlier investors are paid using the capital of newer investors, rather than legitimate profits from an actual business. Similarly, OneCoin, a cryptocurrency MLM, was exposed as a massive fraud operation, claiming to be a legitimate cryptocurrency when in reality, there was no actual blockchain technology behind it. Both companies used the MLM structure to hide what were essentially financial scams.

In addition to these more blatant fraud cases, many MLMs engage in more subtle forms of deception. They often misrepresent the income potential of their business opportunities, showcasing the success stories of a few top earners while ignoring the reality that most participants earn little or nothing. For example, Nu Skin paid a $1.2 million settlement to the FTC after top distributors made deceptive income claims. The company’s lawyer admitted that they “benefited from distributors misrepresentations,” even though they denied wrongdoing.

From a financial standpoint, MLM businesses are highly profitable because they shift the costs and risks of marketing onto the participants. Distributors are responsible for buying materials, sample kits, and inventory, essentially becoming both the sales force and the customer base. This ensures company profitability even when most distributors fail. As long as participants make initial purchases or recruit others who do the same, the company continues to profit.

Understanding this financial reality explains why MLMs are so often associated with fraud. The business model inherently encourages constant recruitment, no matter how saturated the market becomes or how unlikely success is for new participants. The structure ensures that most people will fail, yet this crucial detail is rarely disclosed to recruits.

Many MLMs also use psychological manipulation to keep participants involved despite financial losses. Companies like Young Living have been described as employing cult-like tactics, isolating members from negative influences, creating an “us versus them” mentality, and attributing failure to personal shortcomings rather than the flaws of the system. These tactics make it harder for participants to recognize their losses and exit the scheme.

Regulatory bodies have taken action against several MLM companies, although enforcement often remains limited. In addition to the Herbalife settlement, which required the company to refocus on verifiable retail sales, LuLaRoe was forced to eliminate pyramid-like compensation structures and provide accurate income disclosures.

The fraudulent practices within MLMs are not just bad publicity; they’re backed by documented cases where companies misled participants about income potential, used predatory recruitment tactics, and structured compensation to reward recruitment over actual product sales. While not all MLMs cross the line into fraud, the industry’s history is marked by enough high-profile cases to fuel the skepticism many people feel when approached with an MLM opportunity.

Are There Any Ethical and Successful MLMs? 

But the world wouldn’t be as interesting, and this article wouldn’t exist, if I hadn’t discovered the other side of multi-level marketing. There are actually some great, ethical companies out there that don’t deceive their clients.

One of the best examples of ethical MLM design comes from Atomy, a company founded in South Korea in 2009. Unlike many MLMs, Atomy’s compensation structure is sustainable. Membership is free, with no sign-up or annual fees, and no purchase obligations. This removes the financial trap that catches many participants in traditional MLMs. Atomy focuses on customer satisfaction. Both casual shoppers and business builders join simply to buy products they value. Members earn commissions from authentic sales, not recruitment.

Atomy uses a “binary structure” for its compensation plan. This means that each member is required to recruit two people – one on the left side and one on the right side of their team. These two recruits then build their own teams, creating a balanced, two-sided network. Commissions are earned based on the sales generated from both sides of the network. For example, if one side has a lot of product sales but the other side doesn’t, you’ll earn commissions based on the side with the lower sales volume. This encourages balance and fair sales distribution.

To prevent the focus from shifting too much towards recruitment (which is a common issue in many MLMs), Atomy introduces an “earnings ceiling.” This means there is a limit to how much you can earn from just building your team. The focus is kept on real product sales, ensuring that commissions are primarily generated from the sale of products to actual customers, not just new recruits. This system helps ensure that Atomy operates in a way that prioritizes genuine sales, rather than encouraging a pyramid-like structure based on recruitment alone.

Atomy returns up to 70% of sales volume as commissions – much higher than the typical 40% – which further ensures that income is derived from actual consumer purchases rather than just recruitment efforts.

Another ethical approach comes from Utility Warehouse in the UK, which applies the MLM structure to utility services. Founded in 1996, the company bundles services like energy, broadband, and home insurance. What makes their model ethical is that partners earn commissions based on customer usage – residual income from real bills. They can also earn small overrides on customers recruited by their team members.

Partners in Atomy pay a small fee for marketing materials and training, but there’s no need to purchase product inventory. Their success depends on generating genuine sales from customers, not just on recruiting new members. This ensures the system stays focused on serving consumers rather than pressuring participants to push products they can’t sell.

Another example. Princess House, founded in the US in 1963, shows how the classic “party plan” that I’ve explained previously, can be done right. The company sells home décor, cookware, and housewares through a network of consultants who earn a commission on sales from the parties they organize. The focus is on party sales volume, not recruiting new members. There are no expensive starter kits, and new recruits typically join after experiencing a party and seeing the value of the products firsthand. The company also avoids inventory loading by having consultants submit orders only after they’ve made sales, reducing financial risks for participants. Many consultants stick around for years, building a loyal customer base.

What do these companies have in common? They operate ethically, focusing on legitimate product sales, clear compensation plans, and realistic income expectations. They don’t push expensive starter kits or force purchases. They offer genuine, valuable products, often backed by independent certifications. And they prioritize customer satisfaction, ensuring that their business model is sustainable and fair.

While these ethical MLMs are exceptions in a sea of problematic companies, they show that the MLM model can operate ethically when structured around real product value and customer satisfaction. So, while I remain cautious about the MLM industry as a whole, these examples demonstrate that not all MLMs are the same. It’s important for consumers and potential distributors to understand these differences to make informed decisions.

Key Criteria for Ethical MLMs  

This raises an important question: How can we tell the difference between a pyramid scheme and a legitimate MLM? There’s actually a simple rule, one that even the Federal Trade Commission (FTC) mentions on their website.

First, foremost, and probably the key differentiator is that ethical MLMs focus on legitimate sales, not aggressive recruiting. Thanks to modern technology, it’s now easier to distinguish between sales based on actual product movement and those driven by recruitment.

In other words, a legitimate MLM generates revenue primarily from selling products to end users, rather than requiring product sales as a condition for joining the network. On the other hand, if the company earns money primarily by recruiting people and selling to them – where those sales are not driven by actual demand but are part of the process to join and resell – it is likely a fraudulent MLM.

But there is an even more important factor that allows MLM businesses to operate and prove they are following best practices. It’s called blockchain.

Technology behind MLM  

While blockchain might be a buzzword right now, don’t rush to conclusions. Even though it’s being thrown around by just about anyone even remotely related to technology, blockchain is still a powerful and viable tool that helps businesses prove their legitimacy.

What we’ve discovered so far is that ethical MLMs focus on genuine sales. But they still need a way to link real sales to the ones that might be imitations or questionable.

There are two ways to do that. First, companies can link every client to the sale, which is already possible with modern CRM systems. These are digital platforms that store customer data and everything related to it.

Secondly, companies can ensure the data is redundant and protected from manipulation. Let me explain how that works.

Imagine you and 99 of your friends are recording a loan. Each person writes down the loan details on a piece of paper, so now you all have the same record. But one day, one of your friends loses their paper. No problem – since the other 99 still have copies. All they need to do is compare and confirm the details to restore the lost record. This is like blockchain, where the data isn’t stored in just one place – it’s spread across many people (or computers). So if one copy is lost, it can be restored from the others.

Now, think of each piece of paper as a “block” of information. In blockchain, when new information is added, it doesn’t overwrite what was there before. Instead, it’s added as a new block, linked to the previous one. This creates a continuous chain of records, where nothing gets deleted, and every change is permanently recorded. This makes it easy to track and verify everything that’s happened.

In simple terms, blockchain is like a shared notebook, where everyone’s copies are updated with new information, and no one can alter or erase anything without everyone else noticing. Which brings us to the question – can MLM business models be combined with conventional, traditional businesses?

MLM’s Role in Conventional Business Models

And the short answer is yes. We already see MLM companies combine their MLM business with traditional e-commerce.

For example, the very same Amway operates as a pretty much traditional e-commerce company in countries like Saudi Arabia, where MLMs are almost completely banned. Or they create hybrid models in countries like China where MLMs are highly regulated.

So technically speaking, yes it’s possible, yet a more important question, in my opinion, is whether any business in any industry is suitable for that type of business model.

Now you know the context and the background of how MLM has historically developed. Let me know in the comments after this article what you think: could your company build an MLM in its industry? In the meantime, let me share some facts.

Industries Most Suitable for MLMs  

Based on what I’ve found the key industries where MLM thrives are:

• Health and Wellness, which makes up 31.7% of the global direct selling industry.
• Beauty and Personal Care.
• Household Products.
• Fashion and Accessories.
• Financial Services, Utilities, Telecommunications.
• Travel, Leisure, Real Estate, and Emerging Markets.

These industries have some common traits that make them perfect for person-to-person selling. They generally offer consumable products that encourage repeat purchases, items that benefit from demonstration or explanation, and products with relatively high profit margins, which support the multi-level commission structure.

Health and wellness products – like dietary supplements, vitamins, weight-loss shakes, herbal remedies, and essential oils – are consumable and naturally encourage repeat purchases. Companies like Herbalife, Amway (Nutrilite), Shaklee, USANA, doTERRA, and Young Living dominate this space.

Then, there’s beauty and personal care. Products like makeup, skincare, anti-aging creams, shampoos, and fragrances work especially well in MLM because they’re visual, they require demonstration, and they often need guidance to help consumers choose or use them correctly. Avon, Mary Kay, Natura & Co, Oriflame, Nu Skin, and Younique have all built global businesses in this space.

But this brings another question. Is there anything else we can learn, as traditional businesses, from MLM? And there is. Something that I wish most traditional companies had done with their partners and distributors.

Disruptive Recruitment and Retention Tactics

Beyond technological innovation, MLMs are rethinking their approaches to recruiting and retaining distributors.

High distributor turnover has long plagued MLMs, so modern companies are investing heavily in onboarding and continuous training to improve retention. Surveys show that 60% of ex-distributors felt they didn’t receive enough training, and lack of support was cited as the deciding factor in 90% of distributor dropouts.

To counter this, new MLM models implement structured mentorship – pairing newcomers with experienced mentors – and offer ongoing education through weekly webinars, certifications, and other resources.

Innovative MLMs are tackling the credibility issue head-on by being more transparent with recruits about the business model, earnings potential, and product claims. This addresses two major reasons people quit: misaligned expectations and lost trust.

While preparing this article, I recalled many franchise sellers who often abandon their franchisees, leading to failure and ultimately making franchising a less viable business option.

In contrast, many MLM companies now publish income disclosure statements and avoid overhyping “get rich quick” messages, so recruits join with realistic goals. Product marketing is also becoming more honest – ensuring distributors fully understand the products and avoiding any misrepresentation that could later disappoint them or their customers.

To keep distributors motivated, some MLMs use gamification techniques and frequent recognition in new ways. This might include app-based achievement badges, leaderboards, points for completing training modules, or small perks for hitting weekly goals. This is, by the way, a great way of engaging sales teams in traditional teams.

MLM software now often features gamified dashboards that make building the business feel like progressing in a game, with instant feedback and rewards. These elements keep the experience fun and engaging, especially for younger distributors.

Another recruitment innovation is focusing on turning happy customers into part-time referrers or distributors, thereby creating a more organic growth loop. Rather than pushing every recruit to immediately build a team, some plans now allow customers to earn referral credits or commissions on a limited tier if they refer friends (a hybrid of affiliate and MLM).

This lowers the barrier to entry – someone can start by just sharing products they love, without committing to a full business. Over time, loyal customers may convert to distributors seeing the product demand.

These innovations represent significant departures from traditional MLM recruitment and retention strategies, potentially addressing some of the industry’s most persistent criticisms.

Conclusion: MLM as a Viable Business Model 

So, where does this leave us? In my opinion, MLM is simply the name of a perfectly legitimate business model, but one that inherently creates fertile ground for fraudulent schemes. If done right – ethically and with careful planning – MLM could become an excellent business model.

What’s even more important is that some of the problems, like the motivation of the sales force in the MLM industry, are often exaggerated. This has led the industry to innovate new ways of engaging people, and honestly, I believe this offers valuable lessons that we can all learn from.

But you’re the judge. What do you think? Is MLM a legitimate model or still a scam?