It's important to treat direct selling as seriously as any other business opportunity—even if you think you're only joining to get a good discount. Before you sign up, here are important questions to pose:
Q: How many consultants live in your area?
WHY YOU'RE ASKING: To check for market saturation. "A system with no limit on recruiting is bound to result in the failure of a large number of product distributors," says Douglas Brooks, an attorney in Concord, Massachusetts who specializes in MLM litigation. If there are already several consultants working in your neighborhood (or among your Facebook friends), it may be extremely difficult to find new customers. "If you're all selling the same products to the same people, at some point,you're going to cannibalize each other."
Q: What percent of their consultant base just joined in the past two years—and how many have stayed with the business longer than a year?
WHY YOU'RE ASKING: "MLMs often feature success stories from people who joined early on; they're earning because they've been able to build a huge downline, or team [over a period of years]," explains Robert FitzPatrick, a consumer-rights advocate and author of False Profits. "But when you sign up, you're last on the list."
Q: What is the average monthly income of new recruits (people who have been with the plan for the last year)?
WHY YOU'RE ASKING: This tells you how well your peers are actually doing with the business, and how long it takes them to get profitable. Remember that it's common for new recruits to experience a "honeymoon period" where they make a lot of money right out of the gate, while introducing the product to their friends and family. Ask how they've grown their customer base after the first few months, and how many repeat customers they've been able to retain.
Q: Will most of my income come from recruiting other distributors or selling products?
WHY YOU'RE ASKING: Legitimate direct-selling companies make money by selling products and services to consumers and do not provide compensation that is primarily based on recruiting individuals. When determining what your income will be, consider your level of commitment. You're not going to be able to supplement or replace a full-time income with a few hours of work. "Only about 10 percent of independent sellers are doing this full-time," reports Joseph Mariano, president of the Direct Selling Association, the industry's main trade group. "The vast majority are doing this much more casually, or just join because they want to get products they love at a discount."
But to Dr. Keep and other MLM critics, this poses an ethical dilemma: "A funny thing happens when you become both a buyer and a potential seller of a product," he says. "That natural buyer's skepticism goes away because if at any point you decide to start selling, your starting point will have to be that these are good products for a good price, even if that's not the case."
Q: What are the average monthly expenses, including money spent training and buying products?
WHY YOU'RE ASKING: Most MLM compensation plans don't take into account what you might spend on transportation, party supplies, and even wardrobe (like clothes with the company logo) in order to get your business off the ground, but you'll need to plan how you'll cover those things. "It's absolutely critical that people understand this is a business opportunity and there can be attendant costs to it," says Mariano.
Q: How many hours per week will I need to spend on this business?
WHY YOU'RE ASKING: The promise of a flexible schedule is one of the most compelling perks of a MLM and many initial sales pitches emphasize how easy it is to "work only when you want" and even make "full-time income in part-time hours." But even those who love direct selling say this is a misconception. "People don't think this takes actual work, but it does," says Heather Colon-Smith, who sold nail wraps and other hand-care products with Jamberry.
Q: Will I be encouraged to commit to a purchasing quota?
WHY YOU'RE ASKING: No MLM will require you to commit to a monthly minimum order, auto-ship program, or other type of quote. But there may be intense unofficial pressure to do so if the company's compensation structure pays the best commissions on those types of sales, says Brooks. "You really have to study the compensation plan to figure out how that works. And we often see that people are discouraged from figuring out the compensation plan."
Q: What percentage of this company's products are sold to retail customers?
WHY YOU'RE ASKING: In a legit direct-selling company, all, or at least the vast majority, of the brand's products are sold to retail customers (who are not also sellers). "If the company is unwilling to talk about what percent of products are sold to customers outside the distribution network, that's a problem," says Dr. Keep. "And many companies claim not to track retail sales, which doesn't make any sense. In traditional direct selling, it was always in the company's best interest to know who those customers were."
Q: Has this company ever been sued for deceptive practices?
WHY YOU'RE ASKING: If an MLM has ever been charged with any kind of fraudulent activity, you'll want to steer clear. Visit consumer.ftc.gov/scam-alerts to check whether the company you're considering has been investigated by the Federal Trade Commission. FitzPatrick also tracks ongoing litigation against MLMs at pyramidschemes.org.