Multilevel Marketing: How it Works, Risks, and Red Flags

What is multilevel marketing (MLM)?

Multilevel marketing (MLM), also called network marketing or direct selling, is a business model in which independent distributors sell products directly to consumers and recruit others to join. Distributors earn from personal retail sales and from commissions or bonuses based on sales made by recruits (their “downline”), creating multiple layers of compensation.

How MLMs typically operate

Company creates products and a compensation plan that rewards retail sales and recruitment.
Individuals join as independent distributors, often buying starter kits or inventory and sometimes paying membership fees.
Income streams:
Commissions from direct sales to customers.
Overrides/bonuses based on downline sales.
Distributors advance through ranks (e.g., silver, gold) based on sales volume and team performance.
Training and support are provided by uplines and the company; content may emphasize sales, recruitment, or both.
Compensation plans can be complex; in many MLMs, significant earnings require building and sustaining a large downline.

Key statistics and issues

MLM is a multi–billion-dollar industry, but estimates vary widely.
Federal Trade Commission (FTC) analyses find most MLM participants earn very little. Many income disclosures:
Omit expenses participants incur.
Exclude participants with little or no income.
Highlight a small number of high earners while downplaying the majority’s results.
Reported typical earnings are often under $1,000 per year for most participants; average monthly earnings cited in some analyses are under $84.
Because of compensation structure and required purchases, many participants lose money after expenses.

Examples of MLM companies

Amway — Large global MLM offering health, beauty, and home care products.
Tupperware — Longstanding direct-selling brand known for home parties; faced bankruptcy proceedings in 2024.
Herbalife — Restructured operations and paid a $200 million settlement in 2016 after FTC action; required to base compensation on verifiable retail sales.
LuLaRoe — Clothing MLM that faced lawsuits and settled for millions amid allegations of operating as a pyramid scheme.

How to identify problematic MLMs (red flags)

Emphasis on recruitment over retail sales to real customers.
Income claims that promise easy, high, or quick returns.
Required or frequent purchases to remain “active” with little connection to consumer demand.
Opaque or selective income disclosures that exclude many participants or ignore typical expenses.
High upfront costs or expensive starter kits with low resale potential.
Products priced significantly above comparable non-MLM alternatives.
Training focused primarily on how to recruit new distributors rather than how to sell products to end consumers.
Pressure to buy inventory or attend paid events to advance ranks.

What to check before joining

Ask for full income disclosure statements and confirm they include all participants and account for expenses.
Compare product prices and quality with non-MLM alternatives.
Verify whether commissions are primarily based on verifiable retail sales.
Research the company’s regulatory history and any settlements or lawsuits.
Calculate realistic earnings after costs (starter kits, inventory, travel, event fees).
Consider alternative ways to use your time and capital that have clearer return prospects.

Bottom line

MLM is a legal business model that can be run legitimately, but its structure often concentrates earnings at the top while most participants earn little or lose money. Thorough due diligence—focusing on product demand, compensation transparency, and actual retail sales versus recruitment—is essential before joining.

Sources (selected)

U.S. Federal Trade Commission — analyses of MLM income disclosures and enforcement actions
Direct Selling Education Foundation — participant estimates and industry facts
Public reporting on major MLM cases (Herbalife, LuLaRoe, Tupperware, Amway)