Are multi-level marketing companies pyramid schemes?

A woman recently wrote in with concerns that her future son-in-law works with a well-known multi-level marketing company. She thinks of these types of companies as pyramid schemes and feels the way they “finesse” people isn’t consistent with the eighth commandment: “You shall not bear false witness against your neighbor.” Her concerns are shared by others, so I’d like to address them here.

There is nothing inherently wrong with a multi-level marketing structure for a business as long as it provides real products and services. It’s just another way to organize a business. These types of businesses provide real opportunities for sellers to create a business of their own by developing a network of other sellers and benefiting from sales made by those in their network. I remember being “recruited” during my college years for a well-known kitchen knife company. I went so far as to attend the initial meetings and purchase the sample knife kit — actually my mom bailed me out and bought the kit from me. While I stopped participating shortly after that, the knives were top notch, and we still use them today.

Overselling is typical

This multi-level approach is what leads some to describe such organizations as pyramid schemes, but long-running organizations that provide reliable products and services are not the same as pyramid schemes, which by their nature can’t be sustained. With that said, there are characteristics of multi-level marketing businesses that I’m not fond of, and these touch on the woman’s concerns about the “finessing” of people.

The first concern is that there is a tendency for multi-level marketers to “oversell,” especially regarding the potential of how much income one can expect to generate. In addition, promoters tend to be vague in describing how the business works, using phrases like: “in just a few hours a week” and “huge” when describing what one can expect. I prefer hearing more tangible descriptions. It is true some promoters will succeed very well, but it’s also true that only a relatively small percentage will achieve such success, and that tends to be downplayed in the recruiting process.

One of my biggest concerns with multi-level marketing is that promoters start looking at friends and acquaintances through a different lens — as a potential client. I’m not fond of that, and those considering becoming a part of such an organization should seriously consider whether they want their relationships with others to be affected in such a manner.

Time consuming

While some choose to participate in such businesses in order to receive discounts on products or provide a modest supplemental income, if one expects to generate more substantive income, the time commitment will be substantial, and probably more than described. I’ve heard from a number of folks who put a great deal of effort into such programs and ultimately gave up based on the amount of income received for the time and commitment involved. In these cases, it also became a detriment to their relationships and family life.

As noted at the beginning of this article, multi-level marketing organizations aren’t inherently problematic. If you or someone you know is interested in working with one, it’s important to be aware of how the structure works and be comfortable with that structure. Before joining such an organization, I recommend visiting with both current and former participants in order to get an objective assessment of what one can expect, and make sure to discuss the pros and cons with your spouse and others whose counsel you value. God love you.

Phil Lenahan is President of Veritas Financial Ministries (www.VeritasFinancialMinistries.com) and author of “7 Steps to Becoming Financially Free” (OSV, $19.95). Submit questions for columns to askphil@osv.com.