What is network marketing?
Network marketing (also called multilevel marketing, or MLM) is a distribution and compensation model in which independent representatives sell a company’s products directly to consumers and are also encouraged to recruit and sponsor other representatives. Representatives earn retail commissions on their own product sales and typically earn overrides or bonuses on sales made by people they recruited (their “downline”). The model leverages personal relationships and word-of-mouth rather than—or in addition to—traditional advertising.
How network marketing typically works
– Sales reps buy product inventory or order product samples and sell to customers (friends, family, social networks, events, online).
– Each rep is incentivized to recruit new reps; the recruiter becomes part of an “upline” and can earn a percentage of sales generated by the recruits.
– Compensation plans vary (binary, unilevel, matrix, etc.) and combine retail profit, commissions, team overrides, rank bonuses and sometimes performance incentives.
– Earnings are therefore tied to two activities: selling products to real customers and recruiting/growing the sales network.
Why network marketing is controversial
– Pyramid-scheme risk: When a business emphasizes recruitment over bona fide product sales, it may resemble an illegal pyramid scheme. The U.S. Federal Trade Commission (FTC) warns that many MLMs can cross that line depending on their practices.
– Income concentration: Because of the structure, most income often flows to people at the top tiers; many participants earn little or no profit once expenses are included.
– Pressure and inventory loading: Reps may be pressured to recruit friends/family or to buy more inventory than they can realistically sell.
Examples and notable cases
– Longstanding MLM/door-to-door/direct-selling companies: Avon (founded 1886), Tupperware (1946), Amway (1959).
– Enforcement example: In 2016 the FTC settled charges with Herbalife, alleging deceptive income claims; Herbalife paid $200 million in consumer relief and restructured some practices.
– Business model change: Rodan + Fields, a skincare company that had operated as an MLM, moved away from the multilevel direct-sales model in 2024 in response to growing online marketplace competition.
Key concepts to understand
– Upline vs. downline: Upline = those who recruited you or are above you; downline = those you recruit and their recruits.
– Compensation plan: The written rules that explain how and when commissions and bonuses are paid.
– Inventory requirements: Some programs require or pressure reps to buy minimum inventory or starter kits; this can create financial risk.
– Buyback provision: A policy (and FTC expectation in many cases) that allows reps to return unsold inventory for at least some refund to prevent “inventory loading.”
Practical due-diligence checklist — how to research a network marketing company
1. Read the company’s official compensation plan and the income disclosure statement
– Look for concrete statistics (median/average earnings, percent of reps who make money). Ask for documentation.
2. Verify buyback/return and refund policies in writing
– Ensure you can return unsold inventory and get a reasonable refund within a defined period.
3. Ask how compensation is earned
– Is compensation primarily tied to retail sales to end customers, or to recruiting and enrollment activity? Prefer models that prioritize real product sales.
4. Check required up-front costs and ongoing fees
– Starter kits, training, website fees, inventory purchase minimums, event fees, autoship/subscription requirements.
5. Ask for independent verification of claims
– Look for audited financials, third-party market research, or independent product reviews.
6. Search for regulatory actions, lawsuits, and complaints
– Check the FTC website, state attorney general announcements, court records, and consumer complaint databases.
7. Speak with current and former reps (not just top earners)
– Ask about realistic earnings, average time to break even, churn, and management support.
8. Try the product yourself
– Use and evaluate whether you’d be comfortable selling it repeatedly. Be skeptical of claims that sound too good or medically miraculous.
9. Evaluate market demand and competition
– Is the product unique, competitively priced, and in demand outside the distributor network (e.g., on retail shelves, online marketplaces)? Heavy dependence on recruiting often signals problems.
10. Consider tax and legal implications
– Determine whether you’ll be treated as an independent contractor, what deductions and recordkeeping you’ll need, and whether state laws affect refunds or licensing.
Practical steps before signing up
– Get all promises in writing (comp plan, refund policy, buyback terms).
– Calculate a realistic “break-even” based on known costs (starter kit, minimum purchase, travel, marketing, taxes).
– Insist on an income disclosure statement and analyze where most reps fall on that distribution.
– Avoid “inventory loading”: don’t buy large amounts of inventory unless you can resell it.
– Consider a trial period: start by selling a few items and recruiting none, then reassess after 30–90 days.
Red flags that suggest a potential pyramid scheme or problematic MLM
– Emphasis on recruiting new reps rather than selling to retail customers.
– Little transparent data on retail sales; most sales are to other reps.
– Promises of easy, high income with minimal effort.
– Fixed or high minimum monthly purchases required to qualify for commissions.
– Pressure to buy large starter kits or inventory.
– No meaningful buyback or refund policy, or restrictive return windows.
– Complex, opaque compensation plans that reward recruitment more than product sales.
Understanding buyback provisions
– Buyback provisions allow reps to return unsold, saleable product within a specified time for a refund (often with some restocking or documentation requirements).
– The FTC expects or encourages such policies to reduce financial harm and inventory-loading abuses. If a company lacks reasonable buyback terms, that’s a warning sign.
What regulators do and what you can do if harmed
– The FTC and state attorneys general monitor MLMs and can bring enforcement actions when a company engages in deceptive practices or operates like a pyramid scheme.
– Notable enforcement: FTC’s action requiring Herbalife to pay $200 million and change business practices (2016).
– If you believe you were harmed: document purchases and communications, request refunds citing the company’s written policies, file complaints with the FTC and your state attorney general, and consult a consumer protection attorney if needed.
Sample realistic earnings question list to ask a sponsor or company rep
– What percentage of your distributors earn a profit after expenses?
– Can you show the company’s official income disclosure statement?
– What are the average and median annual earnings by rank?
– What are all required and typical ongoing monthly expenses for reps?
– What is the buyback/return policy and the timeline for refunds?
– How much of the company’s sales volume is to end consumers versus to reps?
Bottom line
Network marketing can work as a legitimate way to build a business if a company prioritizes real retail sales, provides transparent income data, enforces reasonable buyback policies, and does not require or excessively incentivize inventory purchases or recruiting over selling. However, the model has frequent abuses and risks: many participants earn little or lose money, and some companies have been found to operate as unlawful pyramid schemes. Do careful, document-based due diligence before joining, start small, and make sure your primary route to income is selling products to genuine customers.
Sources and further reading
– Federal Trade Commission (FTC), “Multi-Level Marketing Businesses and Pyramid Schemes”: https://consumer.ftc.gov/articles/multi-level-marketing
– FTC, “Business Guidance Concerning Multi-Level Marketing”: https://www.ftc.gov/business-guidance/resources/multi-level-marketing
– FTC, “Herbalife Refunds”: https://www.ftc.gov/enforcement/cases-proceedings/refunds/herbalife
– Investopedia, “Network Marketing” (Ellen Lindner): https://www.investopedia.com/terms/n/network-marketing.asp
– PR Newswire, “Rodan + Fields Announces New Path to Growth” (2024): https://www.prnewswire.com/news-releases/rodan–fields-announces-new-path-to-growth-301060865.html
– Company histories: Avon, Tupperware, Amway (company “About” pages)
If you want, I can:
– Review a specific company’s compensation plan and highlight red flags.
– Draft questions to ask a recruiter or current reps.
– Help estimate realistic startup costs and a break-even calculation for a particular MLM opportunity.