Tag: scam

How to Identify a Network Marketing Scam Before You Join

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How to Identify a Network Marketing Scam Before You Join

Network marketing has a reputation problem.

Mention MLM or network marketing and you’ll often get one of two reactions.

“It’s a fantastic way to build a business.”

Or:

“It’s a pyramid scheme.”

Neither is a particularly useful way to investigate an opportunity.

If you’re considering joining a network marketing company, the better question is:

How do I work out whether this particular opportunity is legitimate before I hand over my money?

There are some surprisingly simple things you can look for.

First: understand what you’re actually looking at

Network marketing and pyramid schemes are not automatically the same thing.

In a legitimate MLM structure, participants can earn from selling products or services to customers. A pyramid scheme, by contrast, is fundamentally based on participants paying money in order to recruit other participants and receive rewards primarily from those recruitments rather than genuine sales to end users.

The UK advertising regulator, the ASA, states that pyramid promotional schemes are illegal in the UK.

The US Federal Trade Commission similarly explains that determining whether an MLM has an unlawful pyramid structure requires looking at how the compensation system actually operates, including its incentives, marketing representations and participant experience.

So don’t stop at the question:

“Does this company call itself an MLM?”

Find out how the money actually flows.

1. Where does the money come from?

This is probably the most important question.

Ask:

If I never recruited anybody, could I still make money by selling the company’s products or services to genuine customers?

If the answer is effectively no, pay very close attention.

The FTC specifically identifies compensation structures that focus on recruiting participants rather than sales to genuine end users as a major issue when assessing pyramid schemes.

Recruitment itself isn’t automatically the problem.

The question is what the recruitment is being rewarded for.

If people are primarily paying to join, buying products to qualify for compensation and recruiting others who do the same, you’ve got a very different situation from a business where products are genuinely being sold to customers.

2. Ignore the lifestyle. Follow the money.

This is one of the easiest traps to fall into.

You see:

  • Luxury cars
  • Holidays
  • Huge houses
  • Screenshots of commissions
  • “Financial freedom”
  • “Quit your job”
  • “Six-figure income”
  • “Passive income”

And you start thinking about what your life could look like.

Stop.

Ask:

What does the typical participant actually make?

Not the top earner.

Not the person presenting the opportunity.

Not the person who recruited your recruiter.

The typical participant.

The FTC says earnings claims should be supported by reliable evidence and should take account of expenses, not simply gross payments from the MLM.

That’s an important distinction.

Someone receiving £1,000 in commissions but spending £1,500 on products, advertising, travel and training hasn’t made £1,000.

They’ve lost £500.

3. Ask to see the income disclosure statement

If the company publishes one, read it.

Don’t just look at the highest earnings.

Look for:

  • The percentage earning nothing
  • The percentage earning very little
  • Whether expenses are included
  • How many participants are represented
  • Whether inactive participants are included
  • How long people typically remain in the business
  • Whether the figures represent revenue or actual profit

The FTC has warned that MLM income disclosures can present a misleading picture if they emphasise high earners while obscuring people who earned nothing or lost money, or if they fail to account properly for expenses.

An impressive top-earner story tells you very little about your likely outcome.

4. Watch for “get rich quickly” language

This is a major warning sign.

Be extremely cautious if you’re told:

“Anyone can do this.”

“You can replace your salary in a few months.”

“All you need to do is find two people.”

“This is passive income.”

“You don’t need to sell anything.”

“You can make money from your phone.”

“The system does everything for you.”

The ASA has specifically highlighted misleading earnings, incentive and job-description claims in MLM recruitment advertising in the UK.

There’s nothing inherently wrong with saying that an opportunity can produce income.

The problem is implying that substantial income is normal when you don’t have evidence to support that impression.

5. Look at what you have to buy

This is another big one.

Ask exactly what you have to spend:

To join?

To remain active?

To qualify for commissions?

To qualify for bonuses?

To attend training?

To attend conferences?

To maintain a particular rank?

To receive particular incentives?

The FTC specifically warns about inventory loading — buying products or services primarily to qualify for compensation or maintain eligibility rather than because there is genuine demand for them.

That’s very different from simply buying something because you genuinely want to use it.

6. What happens if you don’t recruit?

This is a surprisingly revealing question.

Ask the person recruiting you:

“Suppose I never recruit anyone. Can I still build a profitable business selling the products to retail customers?”

Then listen carefully to the answer.

If they immediately change the subject and start explaining how easy it is to build a team, that’s useful information.

A legitimate product doesn’t become legitimate simply because a compensation plan exists.

You want to understand the retail economics.

Who actually buys the product?

Why do they buy it?

What does it cost?

How competitive is the price?

Would they buy it if there were no business opportunity attached?

Those are business questions.

7. Ask about refunds

Before paying anything, read the refund policy yourself.

Don’t rely on:

“Don’t worry, there’s a money-back guarantee.”

Find out:

  • How long you have to claim
  • What can be returned
  • Whether products have to be unopened
  • Whether shipping is refundable
  • Whether membership fees are refundable
  • Whether you have to leave the company
  • Whether there are administrative charges
  • How the refund is actually obtained

The FTC specifically advises prospective participants to understand refund policies in writing, including restrictions and penalties. It also warns that a refund policy does not by itself make an otherwise unlawful compensation structure lawful.

8. Watch the behaviour of the recruiter

This may tell you more than the company presentation.

Be cautious if the person recruiting you:

  • Won’t tell you the company name before the presentation
  • Won’t explain the products
  • Won’t tell you the costs
  • Won’t show you the compensation plan
  • Tells you not to research the company
  • Says critics are simply “haters”
  • Tells you to decide immediately
  • Says the opportunity will disappear if you don’t join today
  • Avoids questions about typical earnings

A genuine business opportunity should survive scrutiny.

You shouldn’t have to be frightened into joining.

The FTC specifically identifies high-pressure tactics and discouraging prospective participants from taking time to investigate as warning signs.

9. Search for the company independently

Don’t only search for information supplied by the person recruiting you.

Search for:

Company name + complaints

Company name + income disclosure

Company name + refund

Company name + regulator

Company name + lawsuit

Company name + compensation plan

Company name + reviews

And look at multiple sources.

One angry former distributor doesn’t prove a company is fraudulent.

Equally, one enthusiastic distributor doesn’t prove that it is legitimate.

You’re looking for patterns.

10. Don’t confuse “MLM” with “scam”

This is important.

There are legitimate MLM structures.

There are illegal pyramid schemes.

There are companies that may be legally structured but have poor economics for participants.

There are companies with products people genuinely want but compensation plans that may be unattractive.

There are legitimate companies whose individual distributors make exaggerated or misleading claims.

And there are outright fraudulent schemes.

These aren’t all the same thing.

Calling everything a scam makes it harder to identify the genuinely dangerous opportunities.

The five-minute test

If you don’t want to spend hours researching an opportunity, start with these five questions:

1. What am I actually selling?

If the answer is vague, stop.

2. Who is the real customer?

If everyone appears to be buying mainly because they want to become a distributor, investigate further.

3. Can I make money without recruiting?

If not, you need to understand exactly why.

4. What does the typical participant actually earn after expenses?

Not the top earner.

Not the recruiter.

The typical participant.

5. What exactly will this cost me?

Joining is only the beginning.

Calculate the likely total cost of operating the business.

The biggest warning sign of all

For me, the biggest warning sign isn’t a particular product.

It isn’t even recruitment.

It’s when someone doesn’t want you to ask questions.

A legitimate business opportunity should be able to withstand questions about:

Products.

Customers.

Costs.

Compensation.

Earnings.

Expenses.

Refunds.

Failure rates.

Regulatory history.

If asking those questions makes the person recruiting you uncomfortable, that’s when I’d become particularly cautious.

Do your homework before you join

Network marketing isn’t automatically a scam.

But neither is every network marketing opportunity automatically a good business.

The sensible approach is somewhere in between.

Don’t believe the hype.

Don’t automatically believe the critics either.

Investigate the economics.

Follow the money.

Find out who the customers are.

Understand the compensation plan.

Look at the typical earnings.

Include the expenses.

Read the contracts.

Check the refund policy.

Research the company independently.

And most importantly:

Don’t make a business decision based on someone’s lifestyle photograph.

Make it based on the numbers.

That’s how you distinguish a business opportunity worth investigating from one that deserves to be avoided.

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If Most People Fail at Network Marketing, Does That Make It a Scam?

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If Most People Fail at Network Marketing, Does That Make It a Scam?

Here’s a question that seems to get people very angry in the network marketing world:

If most people who join don’t make much money, doesn’t that prove network marketing is a scam?

My answer is:

No.

It proves that most people don’t build successful network marketing businesses.

Those are not the same thing.

And I think we’re making a fundamental mistake when we judge network marketing by a standard we don’t apply to entrepreneurship generally.

What does it actually take to build a successful business?

Let’s forget network marketing for a moment.

Imagine you decide to start a traditional business.

You need an idea.

Then you need a product or service.

You need customers.

You need marketing.

You need sales.

You need accounting.

You need cash flow.

You need to understand your competitors.

You need to deal with suppliers.

You need to deal with customers.

You need to solve problems.

You need to make mistakes.

You need to learn.

And you need to keep doing all of this long enough to become good at it.

There is no guarantee that you will succeed.

In fact, most businesses don’t become spectacular successes.

According to the UK’s Office for National Statistics, only 38.4% of businesses born in 2019 survived for five years, meaning more than six out of ten did not.

And becoming a genuinely high-growth company is considerably rarer.

Of approximately 292,000 UK businesses with at least ten employees in 2024, only 14,330 — 4.9% — were classified as high-growth.

So here’s the question:

Do we call traditional business a scam because most businesses don’t become highly successful?

Of course we don’t.

We generally say:

“Business is difficult.”

Now look at the barriers to entering network marketing

This is where things get interesting.

In many network marketing businesses, the barriers to entry are extremely low compared with starting a conventional company.

You may not need:

  • Premises
  • Employees
  • Stock
  • A warehouse
  • Manufacturing equipment
  • A shop
  • A large bank loan
  • A business degree
  • Years of industry experience

You may be able to start with a relatively small amount of money and access an existing product, website, ordering system, training and compensation structure.

That’s one of the attractions of the model.

But there’s a catch.

Lower barriers to entry don’t mean lower barriers to success.

And I think people confuse those two things constantly.

The barrier has simply moved

A traditional business may have a huge financial barrier.

Network marketing can remove much of that.

But then you run into a different problem:

Customer acquisition.

How do you find people?

How do you get their attention?

How do you explain the product?

How do you generate leads?

How do you sell?

How do you follow up?

How do you build trust?

How do you create repeat customers?

How do you recruit and train other people?

How do you retain them?

How do you do all of that consistently?

Those are not trivial skills.

And joining a company doesn’t magically give them to you.

This is the part nobody wants to hear

Joining a business is not the same as knowing how to run one.

Someone can register today and have a business opportunity by lunchtime.

That doesn’t make them an entrepreneur.

It gives them an opportunity to become one.

That’s an enormous difference.

Imagine giving someone the keys to a restaurant.

They now have a restaurant.

But can they cook?

Can they price the menu?

Can they manage staff?

Can they control costs?

Can they attract customers?

Can they market it?

Can they create repeat business?

Probably not without learning.

So why would we expect an entirely inexperienced person to join a network marketing company and immediately know how to generate thousands of pounds in income?

And then comes the failure

The person joins.

They tell a few friends.

Nobody is interested.

They post on Facebook.

Nothing happens.

They try a few messages.

Still nothing.

They perhaps buy some advertising.

Still no meaningful results.

Eventually they quit.

Then they say:

“It’s a scam.”

And sometimes they may be right.

There are certainly network marketing companies and promoters that have attracted serious regulatory scrutiny.

The FTC, for example, reviewed income disclosures from 70 MLMs and found that most participants in those disclosures received $1,000 or less per year, while many received no payments. It also found that expenses were often not properly reflected.

Those are serious findings.

But they don’t establish that every MLM is a scam.

Nor do they establish that someone who failed necessarily failed because the underlying business was fraudulent.

Those are separate questions.

Here’s the distinction I think matters

There are at least three different possibilities.

1. The business model is fundamentally bad

The economics don’t work.

The product has little genuine demand.

The compensation structure depends overwhelmingly on recruitment.

The costs are excessive.

The claims are misleading.

That’s a legitimate reason to walk away.

2. The business may be legitimate, but the opportunity was badly presented

Someone was promised easy money.

They weren’t told about the work involved.

They were shown exceptional earners rather than typical results.

They expected passive income immediately.

They quit when reality arrived.

That’s a problem with the marketing and expectations.

3. The person simply didn’t build the business

They didn’t generate enough leads.

They didn’t learn sales.

They didn’t follow up.

They didn’t understand their market.

They didn’t work consistently.

They tried something for a few weeks and stopped.

That’s not necessarily evidence that the business was a scam.

It may simply be evidence that they didn’t build it.

And this is where I take my side

I think network marketing gets blamed for something that happens in almost every form of entrepreneurship: people start businesses and fail.

I’m not saying the industry is blameless.

Far from it.

The industry deserves criticism when people make unrealistic income claims.

It deserves criticism when exceptional results are presented as normal.

It deserves criticism when costs are hidden.

It deserves criticism when recruitment is prioritised over genuine customer sales.

And it deserves criticism when people are encouraged to spend money they cannot afford.

But saying:

“Most people don’t make money, therefore the business model is a scam”

isn’t logically sufficient.

Most new businesses don’t become successful either.

Becoming a captain of industry is an extreme example

Think about what “captain of industry” actually means.

You’re talking about people who build companies capable of employing hundreds, thousands or sometimes tens of thousands of people.

They don’t get there because they discovered a secret opportunity.

They become exceptionally good at something.

They develop products.

They understand markets.

They acquire customers.

They build distribution.

They recruit talented people.

They create systems.

They manage capital.

They make decisions under uncertainty.

They survive mistakes.

They compete.

They adapt.

And they do it for years.

Sometimes decades.

Nobody looks at someone who opens a shop, fails after eighteen months and says:

“Retail is a scam.”

So why should a person who joins a network marketing company, makes no sales and quits six months later automatically become evidence that network marketing is fraudulent?

But there’s a sting in the other direction

This argument also cuts against network marketers.

You can’t say:

“It’s a real business, so treat it like one.”

and then simultaneously tell prospects:

“It’s easy.”

“Anyone can do it.”

“You don’t need sales skills.”

“You don’t need experience.”

“Just duplicate what I do.”

That’s contradictory.

If it’s genuinely a business, then business skills matter.

Marketing matters.

Sales matter.

Lead generation matters.

Persistence matters.

Numbers matter.

Customer service matters.

Learning matters.

And competition matters.

The low barrier to entry is both the opportunity and the problem

This is perhaps the most interesting thing about network marketing.

The low entry barrier means almost anyone can have a go.

That’s potentially a huge advantage.

But it also means enormous numbers of people can enter without understanding what they’re getting into.

Some will expect instant income.

Some will discover they hate selling.

Some won’t generate enough customers.

Some won’t put in the work.

Some will realise the particular company isn’t right for them.

Some will quit.

And some will actually build something.

That’s what happens when you make entry relatively easy.

So what should we actually ask?

Not:

“How many people fail?”

That’s interesting, but incomplete.

Ask:

“Why do they fail?”

Then ask:

“What does it cost them to fail?”

Then:

“What does the compensation plan actually reward?”

Then:

“Are there genuine retail customers?”

Then:

“What do typical participants actually earn after expenses?”

And finally:

“What would I have to learn and do to build this into a real business?”

Those questions tell you considerably more than simply calling something a scam.

My conclusion

I don’t believe a high failure rate, by itself, proves that network marketing is a scam.

It proves that success is uncommon.

Those aren’t the same thing.

But I also don’t believe network marketers should hide behind that argument.

If you want to call it a business, then treat it like one.

Don’t sell people a fantasy.

Don’t promise easy money.

Don’t pretend everyone is going to become wealthy.

Don’t hide the failure rate.

And don’t blame every failed participant for their own failure without examining the business itself.

The honest position is somewhere much more uncomfortable:

Some network marketing businesses may be poor propositions. Some may be legitimate businesses. Some promoters exaggerate. Some participants don’t put in the work. Some people are simply not suited to the model.

And sometimes all of those things can be true at the same time.

Perhaps the biggest mistake is expecting a business with a low barrier to entry to have a low barrier to success.

Getting in may be easy.

Building something substantial never is.

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