Multi-level marketing and pyramid schemes, which create a ‘downline’ model of investors, offer schedule flexibility and financial freedom to attract college students
By LAILA AZHAR — [email protected]
Brandon Nguyen, a second-year managerial economics major at UC Davis, had just begun a new job in Davis when a coworker approached him about an opportunity. Connecting over their shared interest in business, she told him about a “business club” she was a part of.
“I was trying to do club stuff and get more involved and [gain] more experiences,” Nguyen said.
He attended a meeting with his coworker and her supervisor, where they discussed the world of business, lamenting the corporate cycle of eat, sleep, work, repeat.
“They were saying, ‘We want to start our own businesses, be our own people,’” Nguyen said.
After the first meeting, Nguyen decided to attend a second, in which he connected with the supervisor over shared experiences regarding immigration.
“She came from a very similar background as my parents,” Nguyen said. “I could see so many different people that I’ve talked to in her.”
It wasn’t until the third meeting that he heard any details about the business itself. The uniquely structured organization was pitched as a way for entrepreneurs to “be their own boss” and escape the trap of the corporate world. At the end of this meeting, Nguyen was asked to share the contact information of other potential recruits — a request to which he did not comply.
While he had initially enjoyed discussing the business world with people in the field, he began to notice red flags.
“My gut was telling me something’s wrong,” Nguyen said. “But I felt so bad — they’ve spent like three weeks talking to me and I’m just gonna tell them I’m not gonna do it?”
A month and a half after he was initially approached, he attended a fourth meeting. It was only then that he was finally told the name of this organization: Amway. Nguyen researched the group online and found a normal-appearing website. But when he checked Reddit, he read post after post accusing the group of unscrupulous business practices.
“I was reading some of the comments and I was like, you know what, I agree,” Ngyuen said. “I can see how they’re using some of those tactics.”
Trusting his instincts, he decided not to join the group. Were Nguyen to have accepted the offer to join the multi-level marketing (MLM) business, he would have been authorized to sell the company’s health, beauty and home care products and earned money through his direct sales to customers. He would have been encouraged to bring his family and friends into the business, forming a “downline.” His downline — anyone he managed to recruit — would have also received products to sell, and he would receive a portion of money from their sales.
Nguyen himself would be part of the downline of the person who recruited him. This recruiter would earn money off of not only Nguyen’s sales but also anyone recruited as part of Nguyen’s downline.
Multi-level marketing and pyramid schemes
Multi-level marketing schemes, known widely as pyramid schemes, reflect a business model that creates a “downline” of sellers who then recruit more sellers. These schemes tend to target closely-knit groups including religious organizations, sports groups and college students to increase pressure toward members to get involved.
This business structure is the defining feature of multi-level marketing. When visualized, this structure resembles a triangular, pyramid shape — someone at the top forms a downline, which branches out as they recruit their own downlines, which branches out even more as those downlines recruit their own downlines.
As defined by the Federal Trade Commission (FTC), there is a distinction between (legal) multi-level marketing and (prohibited) pyramid schemes. In multi-level marketing, the company sells a legitimate product, while in a pyramid scheme, the sale of products is merely a front for the actual goal of recruiting new members.
While this is a seemingly simple distinction, in practice the line between MLMs and pyramid schemes is often blurred.
Many MLMs, for example, sell overpriced or low-quality products — products that would not succeed in a typical retail market. While this may legally count as selling a legitimate product, it is evident that the real draw of the company is the network behind it.
Additionally, some businesses are able to pay away their legal troubles. Amway serves as an example of this — the company has paid millions of dollars in settlementsmeaning that cases that could have resulted in the company being classified as illegal haven’t been litigated.
Ultimately, the distinction between the two isn’t indicative of much; an MLM isn’t a particularly safer investment than a pyramid scheme. In fact, a study found that on average, less than 1% of MLM participants turn a profit, and 99.6% end up losing money.
Despite these statistics, organizations attract potential members through clever marketing strategies. Historically, their promises of financial freedom have appealed to suburban mothers. “Tupperware parties” of the 1950s encouraged women to sell tupperware through a multi-level marketing strategy, allowing them to earn an income while remaining within the domestic sphere.
“The direct-sales pitch is that this woman can run a cottage industry from home in her spare time, on her own terms, without having to pay for a babysitter or a business degree, and surrounded by a like-minded community of effusive salespeople and instant friends,” Jessica Winter said in an article by The New Yorker.
MLMs often present making money on a flexible schedule, rather than working a traditional 9-to-5 job, as part of their sales pitch — useful both if you’re a stay-at-home mother taking care of a household around the clock or a college student working around a busy school schedule.
College students often feel pressured to earn more money, gain more work experience and make more friends — three promises made by MLMs.
Nguyen found himself considering these factors when first hearing about Amway.
“At the time I was still unsure of what I wanted to do in the future,” Ngyuen said. “I felt like I didn’t do a lot of extracurricular activities. I was still a new face at work. I felt like this was also an opportunity to connect with a coworker. And part of it was trying to find a community, because I felt like I didn’t know that many people in the business world.”
At UC Davis, email scams have exploited similar undergraduate anxieties and aspirations, claiming to offer job opportunities in order to acquire user information.
Students face a wide variety of monetary struggles. But MLMs and pyramid schemes, although they may portray themselves as the key to financial freedom, only benefit the people at the very top of the business chain. UC Davis students in need of work have alternatives to MLMs to turn to, alongside plenty of resources to help them get started.
The ASUCD Pantryfor example, provides students and faculty with necessities such as food and hygiene supplies.
“Our main goal is to make sure no one is worried about spending all their money on these necessities or meeting their needs and is instead focusing on their academic and professional goals at Davis,” Andie Tarabzooni, a third-year economics and communications double major and The Pantry’s unit director, said. “A lot of people stray away from our resource since they don’t think they fit the criteria, but we’re open to anyone who would want to use it.”
Jenny Le, a second-year managerial economics major, shared other on-campus resources available to students seeking job or internship options.
“We have the Internship and Career Center on campus which could be really helpful to students,” Le said. “In-person things like career fairs are also probably helpful to make sure that you’re not being scammed by what seems like a good opportunity.”
Written by: Laila Azhar — [email protected]