Few business models attract as much misunderstanding as direct selling. After 6 years working corporate-side in marketing communications across companies that operate this model, I want to share an honest look at how it works, where it gets confused with something else, and what the difference really is.
Direct selling and MLM
Direct selling is a retail distribution channel where independent sellers buy products at a discount and resell them to consumers, usually face-to-face, in someone’s home or workplace. The seller’s income is the margin between what they pay the company and what they sell for.
Multilevel marketing, or MLM, is not a separate business model. According to the World Federation of Direct Selling Associations, it is a compensation method within direct selling, where a seller can earn from their own sales and from a percentage of what people they bring into the business go on to sell. Income flows from real product moving through real customers, with the network adding leverage to that flow.
Globally, direct selling generates roughly US$163 billion a year. In countries where formal employment is harder to access, it provides meaningful supplemental income for millions of people, the majority of them women. Most countries have a national chamber that represents the legitimate operators and aligns local practice with the WFDSA’s code of ethics; that body is CAPEVEDI for Peru, and Direct Selling Australia for Australia, for example.
The pyramid scheme test
A pyramid scheme is something else entirely. The legal definition most regulators rely on comes from a 1975 FTC case called Koscot. It has two parts: participants pay for the right to sell a product, and they receive rewards for recruiting others that are unrelated to retail sales. The second part is the dispositive one. A real product does not save a company. Several MLMs with legitimate catalogues have been ruled pyramid schemes because their compensation flowed primarily from recruitment.
So the real test is where the money comes from. If a distributor’s income tracks the products their downline sells to genuine customers, the model works. If it tracks the people they recruit, regardless of whether anyone is buying, the model is a pyramid.
Most of the public anger at this industry doesn’t come from how the companies are structured. It comes from how some distributors talk about them. Exaggerated income claims, miracle-product promises, screenshots of cars and beach holidays, recruitment pitches that frame joining as the product. These are bad practice on top of the model.
The short, the feud, and the settlement
The most public version of this argument played out over 5 years in the United States. In 2012, hedge fund manager Bill Ackman opened a billion-dollar short on Herbalife and called it a pyramid scheme.
The bet became a documentary, a public feud with Carl Icahn, and a 2-year FTC investigation. The 2016 settlement landed in an interesting place. Herbalife paid US$200 million in consumer redress and was ordered to fundamentally restructure its compensation plan, with at least 80% of sales required to go to legitimate end-users. The FTC did not declare Herbalife a pyramid scheme, but it forced a reset on the messaging across the industry, away from recruitment and toward the product. Ackman exited his short in 2018 with losses around US$760 million.
That settlement is now the modern industry’s centre of gravity. Every serious operator has tightened its compensation, claims, and training in the years since.
A view from inside
Companies sit at the top of a long chain of accountability. They write the compensation plan, train the sales force, and publish the official claims. When the plan is honest and training is good, most distributors stay in line.
What companies cannot do is personally control hundreds of thousands of independent contractors operating in homes and small offices around the world. The sales force isn’t on payroll; they run their own businesses. So when a leader oversells the income or quotes internal materials they were told not to share, the company can sanction them but cannot prevent them. You can open code-of-ethics cases all day and still not catch up.
I had a useful version of this conversation in 2017 with Alina Vicol, a Romanian-born network marketing professional I had worked alongside earlier in my career. Alina spent years on the corporate side of MLM companies before crossing over to the distributor side, where she now runs a successful Nu Skin business. Few people see the model from both vantage points the way she does.
Her clearest framing on the pyramid question:
In a fraudulent scheme, the people at the top always earn more than anyone joining later. In legitimate direct selling, someone who joins late and works harder can outperform someone above them.
Income tracks the work, not the position.
She is also clear about the model itself. It is a Plan B that rewards consistency. It is an equaliser that does not care about your degree, background, or location. It takes 2 to 5 years to build into anything serious. Most people who try it stop within a year, which is how most small businesses work.
None of that makes the model a fraud. It has worked for decades and continues to work for millions of people. Where it fails is the trifecta of bad actors: a company whose compensation plan rewards recruitment over retail, a leadership culture that lets the line drift, and individual distributors who exaggerate what nobody told them they could. All three have to be working in the wrong direction for the model to fail.
The interesting question is what happens next. As AI absorbs a meaningful share of conventional jobs in the next decade, demand for flexible supplemental income will climb. Direct selling was built for that demand and may turn out to be more relevant in the era arriving than the era it came up in.
Not the model that promises a lifestyle. Not the model that gets rich quick. The model that gives a fair shot to anyone willing to do the work.