Are MLMs Trustworthy

When sandbox friends suddenly sell junk on Facebook

As soon as you open your social media profile, a new message from your former elementary school friend pops up. Cosmetics, protein shakes, clothing or even financial advice: Suddenly the messenger chat becomes a marketplace and you (mostly involuntarily) become a potential customer. And in the news feed, "experiences" with the new product, which is always great according to the information provided by the acquaintance, are always shared.

Multi-level marketing (MLM), also known as network marketing or simply (multi-level) direct sales, has mainly shifted to social media - keyword Facebook - in recent years. The concept behind it is nothing more than a pyramid game: the original company recruits person A to sell a product. She does that, at least in part, but for the most part she recruits people B, C, D and E to sell something herself and to give A a share of the income in return. And in order to be able to participate in the venture at all, you often have to pay in money yourself, often in the range of several hundred euros.

Serious companies vs. pyramid scheme

Peter Krasser, chairman of the direct sales committee of the Chamber of Commerce, explains on request that not all companies on the market can be classified as serious. If you are considering making money through direct sales, you should check whether the company is, for example, based in the EU, charges prices in line with the market and offers approved products. If commissions are being considered for recruiting new members, it should be a pyramid scheme.

And if the company does not require a trade license, you could run into legal problems. According to the Chamber of Commerce, serious MLMs are about selling the respective product, whereas pyramid schemes are about recruiting as many people as possible.

WKO expert doubts Facebook's usefulness

There are two models in the area of ​​direct sales, explains Krasser. One is single level, i.e. exclusively direct sales, mostly through parties. "The best-known example of this is probably Tupperware, but such home parties also take place with jewelry, candles and lingerie," he says. With multi-level marketing, on the other hand, a network is built up. According to a study published in the industry report of the Chamber of Commerce, serious companies earn an average of 1,035 euros a month as a part-time untaxed, full-time work 6,415 euros per month.

"Basically, I would like to say that direct sales is a completely normal, serious trade route and that there are therefore no other guidelines than for any other branch of the economy," says Krasser. Therefore, distribution via social media is also permitted if the provisions of the General Data Protection Regulation (GDPR) and the Telecommunications Act are complied with. "I doubt whether it makes economic sense to offer products for sale on Facebook," notes Krasser. A trade license is necessary.

The switch to sales via social media - a trend that developed primarily in the USA and is now also reaching Europe - should nevertheless offer certain advantages for sellers: At Tupperware parties, the sellers first have to visit their potential customers Facebook users are on the go every day. The direct sales committee has a total of 20,818 members, 75 percent of whom are women. The largest companies that rely on it are the cosmetics manufacturers Amway and Avon, Herbalife and the German manufacturer Vorwerk. Tupperware is in tenth place.

"Internet cheaper, but not a legal vacuum"

Christian Prantner, employee in the consumer policy department at the Vienna Chamber of Labor, explains MLM using the example of financial sales. This is namely particularly pronounced. "It is not surprising that 'salespeople' are currently betting on Facebook. The cheap possibility of dissemination via Facebook's mechanisms - sharing, liking, groups and so on - is tempting," says Prantner. However, the consultants actually need a trade license and would have to adhere to legal advice and advertising standards, such as the Securities Supervision Act. In addition, there are information requirements for contracts that are concluded on the Internet. In addition, consumers would still have a right of withdrawal. "Conclusion: The Internet may make sales easier and cheaper, but not a legal vacuum."

In Austria there was a likely case of fraud with a cryptocurrency model around last year. "Salespeople" had sold a crypto package on Facebook. When that was revealed, the chats were partly gone. "The problem: If 'sales talks' with promises made by an intermediary are incomprehensible, the liability of the consultant becomes difficult - because a court needs tangible statements in order to be able to identify and evaluate incorrect information and incorrect advice," says Prantner.

The fact that in multi-level marketing the paying customer himself becomes the sales organ often creates pyramids. Because there are often commissions for new recruits and products sold. "The AK advocates comprehensive, competent advice in the financial sector - and not for MLM in financial sales. This has resulted in countless problem cases in the past," says Prantner. The new Securities Supervision Act brought some innovations that are supposed to improve consumer protection. For example, more transparency is required before the contract is signed - especially with regard to costs. The effects are still to be seen, however. (Muzayen Al-Youssef, February 17, 2020)