Your friend or colleague is probably involved in a multi-level marketing scheme. Unfortunately this type of selling can look very similar to illegal pyramid schemes and it can be difficult to distinguish between the two. The difference lies in how the participants primarily earn their money. If it's mostly from selling products and the products sold by those you've recruited, it's likely to be a legitimate business using multi-level marketing. If it's mostly from the act of recruiting new members and any product sold is significantly overpriced and of minimal value, it's more likely to be a pyramid scheme.

Has a friend ever approached you to host a get-together to help them sell plastic kitchen containers or perfumes? Maybe a colleague has surreptitiously left an Avon catalogue on your desk with a Post-It asking you to pass it on to the next cubicle when you're done with your order? Or perhaps you've been invited to a Jamberry nail wrap party on Facebook, featuring online games and prizes?

In this article:

What is multi-level marketing?

Multi-level marketing is a form of direct selling where the people selling a brand's product receive some of their income from recruiting new members. Consultants are typically plying their wares independently away from a retail store and might be selling door-to-door, from a catalogue, organising in-home parties or just promoting the products through their network of friends.

According to a December 2013 Deloitte Access Economics report commissioned by Direct Selling Australia, at that time there were an estimated 478,000 independent sales consultants engaging in direct selling across Australia. The main types of items sold are wellness products such as nutritional supplements and weight-loss products, and personal care items such as cosmetics and jewellery.

It's worth noting that the majority of salespeople in the industry are women, with the 2013 Deloitte report indicating 95% of consultants are female. According to Direct Selling Australia's internal analysis the industry is evolving and this rate is now closer to 75%.

Learn more about pyramid schemes, Ponzi schemes and dodgy multi-level marketing schemes, and how to tell the difference.

How consultants build their business

Multi-level marketing schemes encourage the people selling their product to contact their existing network of friends, family and colleagues to establish initial sales leads. Consultants generally make money both from a commission on the products they sell, plus some income from the other consultants they've introduced to the business.

Traditionally, you'd hear about them through word of mouth and friendly get-togethers. As Dr Rohan Miller, senior lecturer in marketing at the University of Sydney, explains, "Many baby showers or kitchen teas or the launch of a new type of product (e.g. a kitchen mixer) can become an excuse for a seller to provide potential consumers the opportunity to see, feel, touch and smell products."

This type of personal approach can have a powerfully persuasive effect. "The group dynamics of these sales events, sometimes combined with alcohol, may help influence unwitting consumers into purchasing products," he adds.

You might also encounter a multi-level marketer seeking to recruit new members by placing signs in supermarkets and on traffic light poles, offering the wonderful opportunity to run your own business from home and choose your own hours, with outstanding earning potential.

These days you'll often hear about these kinds of businesses via social media as well. A friend might approach you on Facebook to buy Isagenix dietary supplements or you might seek out and like your favourite brands and then receive ongoing information in your feed.

Gillian Stapleton, executive director of Direct Selling Australia, says social media is another channel for consultants and brands to engage with consumers. "We see member companies and consultants using social media not only to educate and engage with consumers on this platform but also offer ongoing support and training for use of the products. Many of the consultants use social media as the new face-to-face and build solid relationships through this medium."

Benefits to the consultant

Advocates in the industry such as Direct Selling Australia argue the benefits for the consultants selling the products include increased social interaction, improved self-confidence, flexible working hours, and the ability to supplement their income.

This has certainly proved to be the case for Nikki Morris, who'd had short stints selling cosmetics brands Avon and Younique in the past before really hitting her stride in the past year selling Jamberry products, which include nail wraps, gel polishes and accessories. "I get to work my own hours from home, around the busy schedule of my children. I have made lifelong friends, learned something new every day and feel like I am part of a community with common goals. Plus, I am continually supported by Jamberry and within my team."

Morris joined as a consultant on 15 September 2015, the day Jamberry launched in Australia. She says there was an initial outlay of $143 to buy a kit that included product samples, catalogues and other materials to help her run online and in-home parties.

Since then, her earnings have far exceeded her expectations and she's enjoyed the ongoing training Jamberry offers through social media. "Pre-launch, Jamberry offered a fortnightly webinar on everything from understanding the compensation plan to team building and party planning and they continue to offer amazing training on social media every week. There is a structured online course, with excellent leadership training that you can complete in your own time."

Can you make money?

While consultants like Nikki have thrived in the multi-level marketing industry, not everyone agrees that the financial rewards are worth the effort.

Christine Luxton is a former Thermomix consultant who joined after going to a demonstration, buying one of their kitchen appliances and absolutely falling in love with it. She didn't sign up to become a consultant immediately, but around the same time she was becoming less and less satisfied with her day job as a lawyer and eventually decided to give selling a go as a sideline.

She lasted 18 months as a consultant before deciding it wasn't for her. "It was a lot of work for very little reward and I think I realised that very, very quickly. Your preparation for a demonstration could take hours because you've got to do all the packing, you have to get in contact with the person who's going to host it, you have to make sure that they've got all the food that they're supposed to provide … Hours of preparation."

When she added these efforts up with the two hours it took to do a demonstration and the travel time involved, plus washing everything when she got home, the money she was earning didn't look too impressive. She estimated she was putting in around 10 hours in total for each demonstration. "I sat down and I worked out this is crazy as an hourly rate."

The money improved as you worked your way up the chain of command, but Christine says there was limited opportunity to score one of those roles. She decided it was time to bow out of selling the product and just enjoy using it at home.

If a product turns out to be dodgy, the consultant may bear the brunt, as some found out when Thermomix came under fire for safety concerns and bad service.

How easy is it to walk away?

Many of us are wary of businesses using the multi-level marketing approach because of the way they blur the lines between commerce and friendship, but what are the risks once you actually become involved? Can you easily get out if, like Christine, you decide this type of selling isn't for you?

Stapleton points out that like other types of commercial ventures, a portion of these businesses will fail, but says consultants don't need to sink much money into their business initially, so they don't have much to lose if they decide to close up shop. "As with other entrepreneurial and micro business enterprises there is failure, however risk is minimal due to the lower entry costs than franchising or other similar models."

Thankfully, it should also be easy to walk away. According to Dr Miller, most reputable multi-level marketing businesses wouldn't see any benefit in keeping you ensnared either as a customer or a sales consultant if you're no longer interested. The worry lies more in the number of people who eagerly sign up to become a consultant and then grow disillusioned soon after when their earnings fail to meet their expectations.

"Students and young ambitious people, as well as stay-at-home parents are often lured by the opportunity of easy money and discretionary hours," says Miller. "Many successful direct sellers are true sales professionals, and if you don't consider yourself as a professional salesperson or have the requisite characteristics and be willing to make the sacrifices to be a professional sales person in a very competitive and difficult market place, then direct selling is probably not for you."