MLM Scams? – What Constitutes a Pyramid Scheme?

MLM Scams?  Are they or not?

(if 90% Fail, network marketing must be a scam … or is it?)

There’s a lot of talk on the internet about MLM scams and whether network marketing is a pyramid scheme or not.  Hopefully this article will shed some light on the subject (yes, it’s long, but smart people will read the whole thing and they will be much more discerning as a result).

Having said that, I don’t want to waste your time, so here’s who this article is for …

network marketing skepticIf you are a skeptic or a critic of the network marketing business model, my hope is that this post will enlighten you and give you some new perspective (if you have an open mind, that is).  

If you are a network marketer yourself, my goal is that this post will help you to overcome some common objections with your prospects, and serve as a resource that you can point people to in order to help them understand the business model (so yes, feel free to share it with others).

And finally, if you’re looking to get started in network marketing, this article will help you to judge what is and is NOT a pyramid scheme so you know what MLM scams to avoid and what you actually should look for when selecting a network marketing company.

So here are some of the common objections that people often give about the network marketing business model:

“The majority of people who join MLMs don’t make any real life changing money so it doesn’t work”

“Only 1% ever make the BIG BUCKS so it’s only the people at the top that succeed”

“It’s a Pyramid Scheme”

“You’re told to make money off of your family members and friends … that’s totally unethical”

“The commission structure drives the price of the products up so they’re overpriced and non-competitive”

mlm scamsIf you’re in network marketing, I’m sure you’ve heard some of these.  If you’re a critic who believes the MLM scams rumors to be true, I’m sure you’ve thought some of these things. Hopefully the interview I’m about to share with you will dispel a few of these myths and put them into perspective.

Before I share this interview with you, I’d like to ask you a question.  Do you believe the insurance industry is a scam?  Have you ever heard anyone say that insurance sales is a pyramid scheme or that insurance sales just doesn’t work for most agents and therefore should be shut down by the FTC?  I’ve not heard anyone say that, have you?

Well, here’s a real interview that I did with a very close friend of mine who worked as a sales manager for a large life insurance company from 2005-2014 (see if you see any parallels between the insurance industry and network marketing … in fact, if you didn’t know I was asking these questions about insurance and you only read the answers, you might think I was interviewing a network marketer, but I’m not.)

Remember, this is an interview with a life insurance sales manager


————— Start of Interview —————

Me: “What did recruiters at your company typically tell potential agents (regarding income) when trying to recruit them?”
My Insurance Friend: “We told them what was possible if they worked hard and stuck with the company … a 6-figure annual income is definitely attainable as an insurance salesman and we often shared success stories with them to inspire their belief of the income possibility”

Me: “Out of every 100 agents, how many would actually make 6-figures?”
My Insurance Friend: “Maaaaybe one 6-figure producer out of every 100 agents … and that’s a big MAYBE”

Me: “Out of those 100 agents, how many were still around in 6 months to a year”
Insurance Friend: “90% don’t make it past 3 months”

Me: “Do insurance agents have any out-of-pocket expense when signing on with the company?”
Insurance Friend: “I had to pay for my own study material for the test, I had to cover the cost of the test. The training was mandatory based on compliance. If the training is not done at the office, the agent is responsible for covering travel, meals and lodging if they want their own room. If they share a room with another agent, the company will cover it, but they still have to pay their own travel expense”

Me: “How much would you say the average agent at your company spent out of pocket to get started?”
Insurance Friend: “Study material: $89.95. Cost of test (Missouri): $71. Fee after getting licensed $105. Business cards: $21 for 1000. Training, probably $100 in gas, another $150 for the hotel, and about another $80 or so on meals”. (for those of you pulling out a calculator right now, I’ve done the math for you.  That adds up to $616.95)

Me: “What percentage of those agents do you think ever re-cooperated that entire initial investment?”
Insurance Friend: “I would roughly guess about half – we had an achievement called SNA (successful new agent). They hit that if they did $3000 commission in their first 3 months.”

Me: “Are insurance agents ever encouraged to call their family members and friends to sell them policies when first starting out at the company?”
Insurance Friend: “Most insurance companies will have you make a list of 100 friends/family members that you could solicit to. It’s not required, but strongly encouraged.”

Me: “Did you make money off of those friends and family members if they purchased a policy?”
Insurance friend: (Laughs) “If I sold it to them, of course. I was paid the commission for moving the product”

Me: “When a policy is sold, how many people make a commission on that sale? Is it a solo commission structure and if not, how many other individuals (not corporate, but actual individuals) make a commission or over-ride on that sale?”
Insurance Friend: “The agent obviously makes a commission, the field trainer makes a small over-ride, there’s a sales manager who has a team underneath him and he makes a larger % over-ride than the field trainer does, then the branch manager gets an over-ride and the regional director gets an over-ride on each office in his region”

Me: “So, as a sales manager, you had a financial incentive to help the people underneath you succeed. Is that correct?”
Insurance Friend: “Yes, absolutely. The more I could help my team succeed, the more money I would make. That’s the way a lot of corporate America works.”

Me: “As a sales manager who was trying to build a team, did you ever make money for recruiting agents?”
Insurance Friend: “No – we were never paid for recruiting people, but obviously the more people you had on your team, the higher your chances of success. The only time commissions are paid is when a policy is sold. However I did learn to look at the law of averages. I wanted to help all of my agents succeed, but it became obvious after a while, that not everyone was going to. So you started to look at the numbers and you realized that some people would be rock stars and write a lot of volume … others would do nothing. In the end, it averaged out that each agent was worth about $3,000 to the company. Essentially the motto was ‘some will, some won’t, so what, next’. The truth is you really have to have an entrepreneurial mindset and really work on developing your skills to make good money as an insurance agent.”

Me: “Are you required to buy your own policies or can you just be an agent?”
Insurance Friend: “No – you’re not required to buy the policies for yourself, but it’s STRONGLY encouraged. You’re told how difficult it is to sell a product that you don’t own and use yourself”

————— End of Interview —————-

is insurance a scamI don’t know about you all, but that sounds a lot like these so called “MLM scams” to me.

So to the critics who believe that network marketing should be shut down or be made an illegal business model, I would ask … do you also believe that the insurance industry should be reformed and/or shut down?

According to the interview above, only 1% of insurance agents recruited ever make the big money.  90% don’t make it past 3 months.  About half of the agents recruited lose their investment they spent on getting trained and licensed … and the ones that did make their money back, it sounds like the initial sales volume for most new reps was made off of selling to family members and friends.

So if you want to call MLM scams or network marketing a pyramid scheme based on these points, then I think you also have to apply the same rules to the insurance industry (and while you’re at it, what about other industries that are structured similarly with team growth incentives like real estate and automobile sales… should they all be shut down if they pay commissions on more than one level?)

Critics Rebuttal #1

Now … as any good debater should do, I will also consider the opposing stance to this comparison.  Perhaps the critic might say, “Well, it’s different because insurance agents aren’t asked to recruit their friends and family to become agents.  They only sell them a product and no commissions are ever paid for recruiting like it is in these MLM scams”.

To this I would say a few things.  #1 – legitmate MLM companies do NOT pay for recruiting.  This is illegal and the FTC will shut down any companies that do pay commissions for recruiting.  If you are looking at joining any network marketing opportunity, make sure you pick one that only pays commissions when a product is moved … not when a new distributor is recruited.

Additionally, it is my personal belief that friends and family are NOT for the purpose of leading with the business opportunity.  Some network marketers might disagree with me on this, but personally, I believe that friends and family are for the purpose of sharing the product with.  If you have a product that you really love and believe in, why would you not share it with the ones you know and love? … and why is it a problem for an average, every day person to earn a little extra money and get paid by the company for helping them to get the word out about their product.  Nobody is making money from their friends and family.  They’re making money from the company.  The company is going to have to pay somebody to get the word out about their product (no product markets itself) … what’s the difference if an everyday average person is rewarded for that distribution process instead of some TV network or advertising agency?

Now some friends and family members may show an interest in the business opportunity … to which I would say this.  If they’ve tried the product, and they love it, and then they want to become a distributor to make some additional income, I don’t see why anyone should have a problem with that.  It’s just that I don’t look to my friends and family for the sole purpose of recruiting them into a business opportunity.  I share the product with them and when it comes to finding additional distributors to build a team, I use attraction marketing on the internet to attract other like-minded and motivated entrepreneurs to me.  If you want me to show you my simple 3-step formula for how I do that, you might want to Attend my Free Attraction Marketing Web Class.

Critics Rebuttal #2

The other argument that many critics bring up is this … “aren’t MLM products overpriced due to the commission structure of how many individuals have to get paid from a single sale?  Doesn’t this mean that you have people buying overpriced products that they can’t afford which clearly makes MLM scams”

To this argument, I would bring up a few different points.  First, don’t you think insurance policies would be cheaper if the field trainer, sales manager, branch manager and regional director weren’t getting a cut?  Or then again, maybe not.  Perhaps without this incentivized commission model in place, the company wouldn’t have as much leverage (or revenue) because now there’s no financial motivation for good agents to help other people succeed.  In that instance, the company would now potentially incur a larger expense in hiring dedicated trainers for each new agent.  And without the mentorship of a manager who is financially motivated to help his team underneath him succeed, perhaps there would be less production by all and the company would have to raise the price of their policies in order to make up the added cost incurred from training their new agents and the potential lowered production.

In my experience, I haven’t found MLM products to be unreasonably priced.  For example, my wife owns products from Pampered Chef (a network marketing company which Warren Buffet, by the way says is one of the best investments he’s ever made) and we love the products we got from Pampered Chef and use them in our kitchen every day.  They were well worth the price.  I own home workout products like P90x and Insanity from (also a network marketing company).  I did not find these products to be ridiculously priced (and no, I am not and never have been a distributor for Pampered Chef or BeachBody).

rolls royce ghostUltimately, I don’t think the “overpriced” argument really holds much weight anyway.  It’s a moot point because price is subjective based on one’s own personal feelings and opinions.  For example, some people will gladly spend $250,000 – $300,000 on a Rolls Royce Ghost while others would say that’s ridiculously overpriced when you can purchase a BMW 750 LI for a third of the cost of the Rolls Royce.  They both get you from point A to point B.  They’re both dependable cars.  They both have nice leather and ride well.  And on top of that BMW owns Rolls Royce.  The ghost is actually built on the same chassis as the BMW 7 series.  They’re essentially the same car and yet one is 3 times more expensive than the other.  And some people gladly pay it.  Personally, you may not think the Ghost is worth the price tag, and guess what?  You don’t have to buy it (but some want to and do … that’s the way a free market economy works).  The same is true for network marketing products.  If you think a product is overpriced and you see no value in it for yourself, you simply don’t buy the product, but why do you care if other people do buy it any more than you should care if somebody wants to buy a $300,000 car?  It certainly doesn’t make MLM scams because some people feel the products are overpriced.

My 5 Core Beliefs About Network Marketing


In the end, here’s what I believe about network marketing and why I believe they are not MLM scams.

1. I believe that people should NOT be incentivized in MLM to earn commissions from recruiting new reps, but rather on moving products ONLY.

2. I believe that a rep should NOT be required to purchase the product in order to promote it. If they want to be a distributor only, they should NOT be penalized for doing so (fortunately, most legitimate companies are structured this way and the ones that are not, will soon be since the FTC made an example out of Vemma in 2015 for this very reason).  If you are looking at joining a network marketing company, you should make sure that buying the product is not mandatory in order to also be a distributor.  This is one surefire way to tell MLM scams from legitimate opportunities. In fact, to be extra safe and compliant, I think you should stay away from any company that gives any kind of financial earning incentive for purchasing larger volumes of product for yourself (with that said, I do believe you should personally use any product that plan on promoting because it’s much easier to sell something you own and believe in yourself, but you should make sure the company does not make it mandatory)

3. I believe that it’s ok to inspire people with stories of what’s possible in terms of income, but I believe that new reps should also be made well aware of the income disclaimers and made to understand that the people who have created success did so not because of the opportunity in and of itself. They did so because of their own drive and motivation and skill acquisition and determination to succeed and never quit. (by the way, if you want some help developing the skills required, be sure to Register for my Free Attraction Marketing Webclass)

4. I believe that network marketing and traditional businesses both require a lot of hard work to create success.  The difference is that traditional businesses usually cost more to get started than MLM. For example, think about all of the equipment and physical expenses you would have if you wanted to open up a pizza shop.  Traditional business owners usually have to develop their own product or service … get proper permits … set up proper entities and legal structures … figure out how to accept credit card payments … deal with refunds and customer service all in house on their own. These things are a huge barrier that keep many people from getting into business for themselves (and prevent many people from creating success at a much higher price tag and risk level than network marketing). I believe that Network Marketing is a low cost opportunity for the average person to start their own business without having to go through all of the hurdles that might prevent them from starting a business otherwise.  No, I don’t believe network marketing is for everyone and no, I don’t believe that it’s the ONLY financial vehicle that can help people in this way, but it is certainly one option.

5. I believe that one of the main reasons there’s such a high drop out rate in MLM is because of the low cost of entry. Consider this, if somebody purchases a restaurant franchise, for example, they are financially motivated to make that business work no matter the hurdles encountered. On the other hand, most people can start their own network marketing business for a few hundred dollars (keep in mind, the interview with my insurance friend reveals that most new agents are going to be out of pocket $500-$700 to get trained and licensed as an agent), but when the going gets rough, a few hundred dollars is not enough financial motivation (for most people) to stick it out and force themselves to make it work. Additionally, most people are not relying on MLM to make a full time income. They’re doing it on the side while they continue to rely on their full time job (not that I think people should quit their job and go full time in MLM when they start … in fact, I don’t think ANYONE should do that). My point is that most people are pretty comfortable at their jobs. They’d LIKE to make more income. It would be NICE to create a better life. But for most people, the idea of sitting down after work to drink a beer and watch TV sounds way more appealing to them than getting uncomfortable and learning some new skills. Personally, I have found that human beings are most hungry and motivated when their back is against the wall.  The truth is most people do NOT have their back against the wall (in other words, they don’t HAVE to make network marketing work in order to keep living their current lifestyle), and therefore most people quit instead of taking the time to overcome the hurdles and learn the skills required for success.

If you’d like to acquire the skills for success, feel free to Register for my Free Upcoming Attraction Marketing Webinar

webinar registration blog-image

Did you like this article on MLM scams?  Do you have an opinion on whether network marketing is a pyramid scheme?   If so, make sure you comment below and share this post with your friends …

To your success!

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Tyson’s Marketing and Success Blog
Skype: tzahner
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Email: tyson [at]

P.S. If you have trouble overcoming objections and closing sales in your business, This is the course you should get.


  • Tyson Zahner

    Reply Reply March 11, 2016

    give us your thoughts on this somewhat controversial subject …

  • James Thomp

    Reply Reply March 11, 2016

    I’ve spent almost 20 years in Executive Search, the high end of the recruiting industry. Like you, I don’t see much difference between a well-run MLM business & “traditional” bricks & mortar businesses. Your comparison with the insurance industry is very apt, especially so because as you note, life insurance reps have traditionally paid for their own training.
    In most other industries, though, reps are employees and training is paid time. But the rest of the model is no different: reps are recruited and trained by sales managers who are paid to manage, train, and motivate their reps. A Manager’s pay is invariably linked to performance of their business unit, either through a direct commission or through a performance bonus plan. Pay for Area/District or General Managers above them is similarly linked to performance.
    I like the insurance comparison, but you might try comparing MLM to the franchise industry. I think you’d find it even more clear how normal the business structure of MLM is. Like a Pizza Pizza franchise owner, an MLM rep purchases the right to run their own business selling a nationally-marketed product/service. They get a “business as a kit”, with purchasing, product supply, promotions and advertising all provided by the franchise owner, but they must adhere to corporate procedures & standards so product/service quality & delivery are standardized. That way, when I go to McDonalds I know what to expect, even though the local McDonalds is almost invariably a franchise owner who runs his own business.
    Compared to franchising as I see it two things set MLM apart: 1) the up-front cost of buying an MLM “franchise” is exceedingly low. Most franchise businesses will cost $10,000+ per location, plus a percentage of sales, whereas most MLM “franchises” cost a few hundred dollars. And of course, MLM businesses are not required to invest in land, buildings, fixtures & inventory. 2) An MLM agreement resembles a “master franchise” agreement, which provides the franchise holder the rights to “recruit” or sell sub-franchise agreements within, typically, a geographic area. George Cohon, for example, bought a master franchise for McDonalds in Canada, giving him the right to recruit – sell franchises – across Canada (smart move – looks like he’s done well). Similarly, MLM reps can recruit their own sales team, though usually without geographic boundaries, though unlike franchising, in MLM you don’t pay extra for that. Other than that, I can’t see much difference between franchising & MLM.
    As with anything else in the market, risk/reward and investment are all linked. A McDonalds franchise may be a pretty sure bet (no longer a guaranteed success) but the up-front cost is reputedly well over $250,000 per location, & has been for decades. Pizza Pizza locations will produce less revenue & may be more risky, but they cost less to purchase & set up. MLM requires minimal financial investment, no location costs or geographic constraints, but the returns will be smaller “per location”/rep, and will require more personal effort to produce results. And unlike a typical franchise owner, you can compensate for that by recruiting & building your own team. If you can help them be successful, you get successful. To me this seems highly normal, and ethical.

  • Tyson Zahner

    Reply Reply March 11, 2016

    Great comparison to franchises James. And thanks for the input! It’s a very intelligent comparison.

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