Advertiser Disclosure

Small Business

How Tariffs Affect Small Businesses

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Tariffs are duties charged on imports, and U.S. buyers pay the costs. Small businesses that bring in imported products can either absorb the expense or pass it along to their customers. When tariffs increase, as they have on certain goods imported from China, as well as the import of steel and aluminum products, countries often retaliate by increasing their own tariffs on American goods arriving on international shores.

Small businesses bear the brunt of tariff hikes and the resulting trade wars. “Small businesses are especially hard-pressed because they don’t have the reserves to tap into to wait for more stable circumstances,” said Davidson College economics professor Shyam Gouri Suresh.

We’ll help you understand how tariffs affect small businesses and what you can do to protect your firm when unexpected costs threaten growth.

What is a tariff?

A tariff is a tax that a country levies on imported goods and services. Tariffs increase the price of imports, potentially making them less competitive or desirable compared to domestic goods and services. 

A tariff is typically charged as a percentage of the value of the product that a buyer must pay a foreign exporter. In the U.S., importers must pay tariffs at 328 ports of entry, which the U.S. Customs and Border Protection controls. Companies that pay the tariffs to bring goods into the country likely pass that cost on to customers. The paid tariff goes to the Department of Treasury and makes up a portion of the federal government’s revenue.

Tariff increases

A country may introduce a new tariff or increase existing ones in order to restrict trade from particular countries or reduce imports of specific types of products, which is what the U.S. Trade Representative decided to do to combat unfair trade practices with China. The U.S. Chamber of Commerce implemented tariffs of its own on certain imports of aluminum and steel for national security reasons. Trade talks continue between the United States and China as of press time, but at least $300 billion worth of Chinese imports face tariffs, some as high as 25%.

The effects tariffs have on small business

These increased tariffs and resulting trade wars have cost American businesses big and small $38 billion, according to Tariffs Hurt the Heartland, a coalition of businesses and trade groups that oppose the tariffs. Automakers, tech companies and agricultural producers have been especially hard hit, but the National Retail Federation has also compiled profiles of affected small business owners from music teachers to gift shop owners.

“They have to either swallow this increase in price, or they have to pass that price increase on to the end consumer,” Gouri Suresh said.

Passing on the costs of tariffs: A closer look

Big businesses are in a better position to absorb higher costs than small businesses. Large companies can operate on smaller margins, while small businesses don’t have as much of a cushion and eventually must raise prices.

“As they increase prices, they may start losing their customer base,” Gouri Suresh said. “It’s a really difficult bind to be in. It favors bigger businesses that have deeper pockets who can ride out this trade war.”

Some firms may not be able to pass costs onto customers if they compete with businesses unaffected by high tariffs, said Katheryn Russ, an economics professor at the University of California, Davis. Small businesses likely have to take a blow to their profit margins if competitors don’t have to make similar price increases because of tariffs.

“If all businesses are having to raise their prices in a particular product space, then that’s different,” Russ said. “And this does seem to be a broad-based cost increase for U.S. firms.”

U.S. producers facing Chinese tariffs conversely have had to drop prices to remain competitive in China. For instance, soy farmers in the U.S. significantly reduced prices to avoid passing on cost increases to Chinese consumers.

Businesses that stand to benefit from tariffs

Tariffs on foreign goods should benefit domestic producers making similar products, as their products would be less expensive than those taxed at a high rate. Those producers may be able to raise their prices knowing the demand is higher, Gouri Suresh said.

For instance, American steelmakers are reportedly seeing bigger profits from higher demand, increased prices and a boost in production. But the rush to production may backfire as it meets a global economic slowdown.

How to prepare your business for economic changes

The U.S. government’s actions have been unpredictable, which makes it challenging to plan and prepare for increased tariffs, Gouri Suresh said. Tariffs have historically been implemented slowly, but the recent increases have not reflected the gradual nature of past rate hikes.

“The problem with what’s happening with the most recent trade war is the numbers are flying every day,” he said.

Tariffs have also affected industries differently, making it difficult to compare the impact across companies, Russ said. “It’s hard to offer specific advice. We just don’t know right now what’s going to happen,” she said. “I guess…just be ready for anything.”

Despite the unpredictability of the trade war, there are steps you could take to better position your business for economic changes.

Cut back where you can.

To minimize the price increases that you’d have to pass on to customers, consider cutting back your operating costs as much as possible. This could allow you to run the business on a tight budget when needed.

Consider an industry change.

If you can easily alter your business concept, you may find that an adjacent industry is less affected by tariffs than the one in which you currently operate.

“Being nimble is going to be a really big boon for businesses if they can turn on a dime and reconsider what they’re buying and what they’re selling,” Gouri Suresh said.

Apply for a tariff exemption

Several categories of goods are exempt from tariffs, such as items that are necessary for health and safety. Goods are exempt on an industry-wide basis, and large groups of lobbyists and business owners must typically work together to seek exemptions.

Companies affected by recent tariffs may request to be excluded from Section 301 tariffs on Chinese goods and Section 232 steel and aluminum tariffs. Thousands of companies have filed exemption requests with the Office of U.S. Trade Representative, claiming they are unable to find comparable goods outside of China or that it would be extremely costly to do so. Approvals for these requests, so far, have been low.

The bottom line on how tariffs affect small businesses

U.S. tariffs on Chinese goods are hurting some American firms more than the intended target, Gouri Suresh said. The widespread impact on U.S. businesses and consumers may not be sustainable and tariffs could soon decrease. But if not, high prices on imported goods may become the new normal.

“In the long run, either the tariffs end and the trade war ends…or everybody learns to live in this new world,” he said.

In the meantime, small businesses will likely continue to feel the effects of tariff increases. It may be best for entrepreneurs to hunker down and operate as efficiently as possible until stable conditions return, Gouri Suresh said.

“When things go bad, they’re the ones who are going to suffer first,” he said. “But they are also the ones who will benefit the most when things turn for the better.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Melissa Wylie
Melissa Wylie |

Melissa Wylie is a writer at MagnifyMoney. You can email Melissa at [email protected]

Advertiser Disclosure

Small Business

Etsy Alternatives: 5 Options for Creative Businesses

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Etsy is an online marketplace for independent sellers of handmade, vintage and craft products. For a fee, creative entrepreneurs can open their own ecommerce shop on the Etsy platform to sell goods and services. But it’s not the only platform artists and craft makers can use to sell their wares. Amazon Handmade, Depop and Zibbett offer similar marketplaces, while eBay is for sellers of all types of goods, not just handmade ones, and has size on its side. Or, you could rely on your own ecommerce site through a provider like Shopify.

We’ll break down the Etsy alternatives so you can determine the best way to share your handmade products.

Selling on Etsy: When to stay and when to go

Stay: Business owners who don’t yet have a customer base.

Etsy has more than 2,300 active sellers on the platform and more than 42,000 buyers; according to Jesse Tyler, marketing director of Classy Llama, an ecommerce agency based in Springfield, Missouri, entrepreneurs just starting out can benefit from that built-in audience that Etsy provides.

Sellers have the opportunity to be featured on the site, as Etsy handpicks shops to highlight throughout the marketplace. If selected, you could benefit from being exposed to hundreds of potential customers. Sellers could also promote their listings through paid ads on the site.

However, Etsy’s sellers are also bound to its policies and must keep up with changing rules to rank high in search results on the site. For instance, Etsy announced in July that it would encourage sellers to offer free shipping for orders totaling at least $35. Shops that don’t make the change to offer free shipping won’t receive priority placement in Etsy search results.

Stay: Those with limited time for site setup.

For creative entrepreneurs looking to sell goods online, Etsy could be an attractive starting point. Etsy provides tools to set up an online store, taking the burden off the business owner to build a site from scratch, Tyler said.

“If you’re using Etsy, it’s about leveraging what already exists,” he said. “There’s a lot less responsibility and a lot less work to get set up.”

If you’re not tech savvy or don’t want the hassle of constructing an ecommerce site, Etsy provides tools to quickly set up a shop. You’d need to provide information about your business and products, as well as how you want to accept payments, and Etsy would populate a website for you to manage. From there, you could rearrange items on your page to customize your store.

Etsy charges fees for listing and selling items — a $0.20 listing fee, 5% transaction fee and 3% plus $0.25 for payment processing — but in exchange Etsy takes on the technical aspects of running an ecommerce site.

Sellers must also adhere to Etsy’s policies, including restrictions on the type of products you can sell and shipping requirements, as mentioned earlier.

Stay: Entrepreneurs with limited marketing budgets.

Generating an audience for a new ecommerce site can be challenging, Tyler noted, especially if you don’t invest in advertising. Selling on Etsy would give you access to the high volume of people who visit the marketplace.

“If you’re a small seller and you’re not spending money on ads, you’re going to be better off sending them to Etsy and letting Etsy do the work,” he said.

Associating the business with Etsy could also increase the credibility of your brand, Tyler said. People may be more willing to interact with a business that appears on a trusted platform, like Etsy. Kickstarter would be a similar example, he said, and these platforms are often an effective “marketing engine” for new businesses.

The longer you sell on Etsy, the more reviews you would collect from customers. Positive reviews can boost your ranking within the Etsy marketplace, increasing the exposure of your shop, said Tyler. A positive reputation on Etsy can be immensely valuable to sellers.

“If you’re doing well on Etsy, it might not ever make sense to leave,” he said. “Your reviews and repeat customers, those are things that are kind of hard to replace if you go.”

Consider an Etsy alternative: Small businesses with greater ad budgets.

If you want to invest in advertisements, it would be best to direct customers to your own website rather than an Etsy domain, Tyler said. Instead of using Etsy’s paid ad campaigns, consider other, free ways to increase your Etsy ranking.

A new site would require you to make a significant marketing investment to gain traction. But if you were already planning to advertise your business, it could make sense.

Consider an Etsy alternative: Own your customer base.

When selling through your own ecommerce business, you could collect valuable information from your customers, such as email addresses. Etsy doesn’t allow sellers to collect email addresses from buyers to conduct further communication. But as a business owner, obtaining addresses allows you to directly connect with customers and generate new leads.

Operating outside of a marketplace like Etsy would allow you to control your communication with current and potential clients.

5 Etsy alternatives for crafty entrepreneurs

Etsy is considered a consumer to consumer (C2C) marketplace, meaning it serves as a neutral platform to sell goods. Etsy facilitates transactions and takes a percentage of sales, and other marketplace platforms do the same. On the other hand, software as a service (SaaS) providers give users their own URL and control of their domain in exchange for an ongoing fee.

Whether you’re looking for another marketplace in which to sell your products or a site to host your own store, here are a few Etsy alternatives to check out for your small business.

 EtsyShopifyAmazon HandmadeDepopZibbeteBay
Subscription feeNoYesNo, for 40 items or lessNoYesYes
Starting costListing fee: 20 cents/item

Transaction fee: 5%

Payment processing fee: 3% plus 25 cents
Subscription: $29 to $299/month

Credit card fee: Starting at: 2.7% plus 0 cents (in-person rate); 2.9% + 30 cents (online rate)
Referral fee: $1 or 15% of the total sale price, whichever is higherFlat fee: 10% on each item sold

Payment fee: 2.9% plus 20 cents
Subscription: $5 or $6 per month, per channel (2 minimum), plus channel feesSubscription: $4.95 to $349.95/month

Insertion fee: 5 cents to 30 cents/item

Final value fee: 2% to 10%
Free trialNoYesNoNoYesNo
Choice of payment optionYesYes, for a feeYesNo (PayPal only)YesYes

1. Shopify

Shopify is an ecommerce platform that allows business owners to create a cloud-based online store. Users can buy their own domain name or connect an existing URL to their store. Shopify’s store builder tool makes it easy to design a site if you don’t have web development experience.

New users can try Shopify for free for 14 days. Shopify requires users to purchase a monthly subscription, offered starting with its entry plan:

  • Basic Shopify subscriptions start at $29 per month and include an ecommerce website and blog, space for unlimited products and full-time customer support. Basic plans include account access for two people and a 64% shipping discount. Shopify charges a fee to accept online credit card payments — 2.9% plus $0.30 for the Basic plan.

As you advance to more expensive subscription tiers, available site features increase, and credit card processing fees decrease.

2. Amazon Handmade

The Amazon Handmade marketplace is designed for artisans and craft makers who sell products online. Sellers must submit an application before setting up a shop. Upon receiving approval, you would choose your business name, payment method and provide your credit card information. You can then list products in categories such as artwork, beauty and personal care, clothing, jewelry and watches, among others.

You would need to register for a Professional selling plan, which is free, though if you plan to list more than 40 items in your shop, you would be subject to a $39.99 monthly fee. All sellers would owe a fee on each item sold. Amazon charges either 15% of the total sale price or $1, whichever is higher.

3. Depop

Depop is an app-based marketplace for creatives with a social component. Users can see what products others are liking, buying and selling. As a seller, you would create a Depop profile that would be featured in the app. You would need to provide a description of what you’re selling and your policy on shipping and returns. Sellers need at least four items to list when launching an account. Depop uses PayPal to facilitate transactions and you would need to connect a PayPal account for Depop to verify before you can accept payments.

Although sellers don’t have to pay listing or subscription fees, Depop charges a 10% flat rate on each item sold. Because Depop partners with PayPal to conduct secure transactions, sellers are also subject to a fee of 2.9%, plus $0.20 for payments. You can ship through Depop and choose whether you or the buyer would be covering shipping costs. You can generate a shipping label through the app, then drop off the item at a post office or with another courier.

4. Zibbet

Zibbet allows creative entrepreneurs to sell in the Zibbet marketplace, as well as through other sales channels — for example, Zibbet can connect to other platforms, including Etsy, letting you manage your sales in one place. Zibbet gives users the ability to customize their shop, list unlimited products and run sales and promotions. If you’ve connected your Zibbet store to other sales channels, all order details would be imported to Zibbet for you to manage, and any changes made to your store through your Zibbet dashboard would be updated on all channels.

Zibbet offers a 14-day free trial for new users. After that, the platform costs $5 per month if you choose to receive a yearly bill, or $6 per month if you’re billed monthly. Each channel that’s connected to your Zibbet account — there’s a two-channel minimum — would cost an additional $5 or $6, depending on your billing schedule. Zibbet doesn’t charge listing or transaction fees, but you would be subject to fees from other channels. For example, if you connect your Zibbet store to Etsy, you would owe Etsy’s fees.

5. eBay

eBay offers a personal or business account, depending on what you plan to sell. A business account is best if you want to sell large amounts of items, handmade products or items that you bought with the intention to resell. Similar to other platforms, eBay allows you to create listings for items you want to sell, including shipping options and how customers will pay you. eBay’s Seller Hub provides tools like sales tracking to help business owners manage and grow their online store.

eBay charges a monthly subscription to run a store, which offers more listings and lower fees than selling without a store. There are a range of subscription tiers, including its entry plan:

  • Starter subscriptions costs $7.95 per month, or $4.95 per month if you sign up for a yearlong plan. The Starter plan also comes with 100 free listings, with each additional listing costing $0.30 per month. eBay also charges all sellers a percentage of each final sale. The final value fee ranges from 2-12% for Starter subscribers. Sellers also get a monthly allocation of “zero insertion fee listings,” which are items you could list for free.

Combining Etsy and alternatives

You can open both an Etsy shop and an ecommerce store on another platform, and it could be a smart strategy to do so, said Tyler. For instance, large enterprise companies typically sell through multiple channels, such as retail stores and their own store or website, he said.

You could take advantage of Etsy’s built-in audience while working on your own ecommerce site. You would likely have more freedom to design and customize your own domain, though you would need to make sure it appeals to customers. People can be hesitant to trust a new site, Tyler said, and it could help if you also have a presence on Etsy.

“If you set up a shop yourself and it doesn’t look great and there’s not a lot of reviews, people might be apprehensive about buying from it,” he said.

The bottom line

There are several places for business owners who want to sell handmade or craft products online to set up shop.

Creating your own ecommerce site on a hosting platform like Shopify would give you an independent domain for your business. You wouldn’t be associated with a larger marketplace and you wouldn’t need to compete with other sellers on the same platform.

But it takes time and commitment to bring people to a new website, and you may find that consumers can be wary of a startup ecommerce brand.

“A Shopify site might bring disappointment,” Tyler said. “You have to do a lot of work to bring traffic and build an audience.”

A marketplace with name recognition, like Etsy, could be a better starting point for new entrepreneurs. Etsy provides tools to simplify the process of setting up an online store. Though you would have to pay listing fees and face high competition, your brand could benefit from the exposure that Etsy provides, Tyler said: “If you haven’t built an audience, this is a great, safe place to do that.”

Still, keep in mind that you could sell products through Etsy and a secondary ecommerce site to see which is best for your small business. As Tyler put it, “it doesn’t hurt to have both.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Melissa Wylie
Melissa Wylie |

Melissa Wylie is a writer at MagnifyMoney. You can email Melissa at [email protected]

Advertiser Disclosure

Small Business

How to Avoid Pyramid Schemes

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Getty Images

Direct selling can provide a flexible way for you to run your own sales business from home or online, but it’s important to distinguish legitimate companies from pyramid schemes. The red flag is when such a system depends on recruiting an ever-increasing number of “investors” than the selling of a product. We’ll help you avoid pyramid schemes and identify legal direct selling companies worthy of your research.

Direct selling vs. pyramid schemes

Direct selling is a legal business practice conducted through single-level sales (think door-to-door salesperson), host or party-plan sales and multilevel marketing companies, which depend on individual distributors to sell products to the public, often in a group, party-like setting or through catalogs or online stores. Distributors often have the opportunity to earn commission on their sales and those of the salespeople they recruit.

A pyramid scheme may be disguised as a multilevel marketing business, but it is actually an illegal scam that emphasizes recruitment rather than the sale of actual products. Instead of earning most of their income through selling, distributors are heavily rewarded for bringing on new sellers, who may have to pay an entry fee.

“It’s going to take some healthy skepticism and research for someone to recognize that difference,” said Stacie Bosley, associate economics professor at Hamline University in St. Paul, Minn.

As of 2018, direct selling represents $35.4 billion in retail sales in the U.S. and 6.2 million people work full-time or part-time in the industry, according to the Direct Selling Association. Continue reading to find out how to avoid a pyramid scheme if you’re thinking about pursuing a multilevel marketing opportunity.

What is a pyramid scheme?

A pyramid scheme can be defined as a company that requires participants to make an investment in the business in exchange for the opportunity to sell products to consumers. Oftentimes, sellers are highly rewarded for recruiting newcomers, who then make a similar investment in the company.

Many types of businesses provide rewards for referrals, giving customers a small incentive to suggest a product or service to others, Bosley said. But if the recruitment model is the central feature of the company, it may be a pyramid scheme.

“Look for a really strong pay-and-recruit structure,” Bosley said. “If that’s there, I would worry about its legality.”

How pyramid schemes work

Here’s an example of a formula that a pyramid scheme could follow. Let’s say a seller makes a $500 investment to join the business. She is told she would be rewarded $150 per person if she recruits three more sellers, who would also make a $500 investment in the business.

From there, she would earn $30 for each new member that her recruits bring on. All of her recruits are given the same offer.

The original seller stands to make an increasing profit on her $500 investment, depending on how many people her recruits bring into the company. But each new member would make $450 at the first level, $50 short of their break-even point if they only recruit three more people. If they can’t pass the first level, they won’t get a return on their investment. Meanwhile, the company would continue to collect $500 from every new recruit, although it would have to pay commission to those who recruit more new members.

There could be instances where legitimate companies follow a similar model of rewarding recruitment. But if new member recruitment earns you more money than selling actual products or services, then the company would likely be a pyramid scheme.

Why are pyramid schemes illegal?

Pyramid schemes are illegal because they defraud investors who are promised their money back. In reality, money from bottom-level investors is used to pay other investors farther up the pyramid. And products in these schemes are often unsellable.

Pyramid schemes took off in the U.S. in the 1970s. One-on-one selling became popular for consumer items, such as cosmetics, kitchen tools and branded items like Tupperware, and pyramid schemes took advantage of the trend. The Federal Trade Commission began cracking down on scams that emphasized networking over selling actual goods, and the organization has continued to monitor the direct sales industry.

Another wave of pyramid schemes swept through the U.S. in the 1990s with the rise of email and internet access. Such scams still pop up today, though the FTC continues to bring cases against deceitful companies.

“Fraud goes in cycles, just like economies,” said Cheryl Jarvis, marketing professor and department head at Florida Atlantic University in Boca Raton, Fla.

The problem with pyramid schemes is the people at the top of the chain are the only ones who make money, Jarvis said. The majority of participants don’t see a return on their investment and ultimately lose money. Pyramid schemes are often short-lived because eventually, distributors run out of people to recruit and the operation stops growing.

“Mathematically, they’re unsustainable,” Jarvis said.

Report suspicious behavior. In addition to the FTC, state agencies investigate pyramid schemes. For instance, any fraudulent activity in New York should be reported to The New York State Attorney General’s Office. You could also file complaints with the Better Business Bureau.

How to avoid pyramid schemes

In addition to an emphasis on recruitment, here are other indicators that a direct sales opportunity may be a scam.

It’s sold as a passive income or easy money opportunity. As a recruitment strategy, distributors often emphasize how little effort is needed to make an income. In any business, selling enough product to turn a profit takes hard work, so be cautious if the company makes it sound simple.

Promise of unrealistic returns in a short amount of time. If you’re earning fast cash despite low sales, you’re likely receiving returns on people getting recruited to the company. Generating revenue too quickly could be a red flag.

No buy-back system. Pyramid schemes and legitimate multilevel marketing companies both typically require new members to purchase product to sell to consumers. However, reputable companies should offer a buy-back option if you want to leave the business. A company that doesn’t refund members for unsold product may be a part of a pyramid scheme.

High upfront fees. Be wary if the buy-in fee or initial investment seems high or exceeds the value of the products. High upfront fees combined with the lack of a buy-back program could indicate the business is a scam. Legitimate direct selling companies have a median startup fee of $99, according to the Direct Selling Association.

Abstract language. Take note if the company is unclear about processes or structures within the business. Product descriptions, prices and claims may also be vague or questionable. Recruiters could make inflated income claims as well to attract new sellers.

Do your own research rather than relying on what you hear from distributors, Bosley said. They are incentivized to recruit you and may not objectively present information.

“Of course, scheme operators aren’t going to make it easy for you,” she said. “There are layers of rhetoric and that makes it difficult to see the bones of the scheme.”

One way to quickly check a company’s legitimacy would be searching the Direct Selling Association’s database. Although not all existing direct sales companies are listed, a company that is a member of the DSA could be considered a reputable multilevel marketing business.

How to say ‘no’ to a direct sales recruiter

Social media has become a conduit for pyramid schemes. When people are approached about multilevel marketing opportunities, the sales pitch is often coming from someone they know, which can make it difficult to turn down, Bosley said.

“There’s feelings of obligation, allegiance, [of] not wanting to let someone down,” Bosley said. “We underestimate how powerful those kinds of emotions can be.”

The person asking you to join the company could be unknowingly participating in a pyramid scheme. If you’re skeptical about the operation, it’s best to reject them outright in a way you feel comfortable, Bosley said.

“If you give them any room, their incentives just keep coming,” she said.

First, you should be honest about your suspicions that there may be something illegal in the structure of the company. You could take a more thoughtful approach, communicating that you’re concerned about their involvement and well-being. You may want to point out that they could potentially harm others in the recruitment process.

“It doesn’t just affect you; it affects the person who recruited you and it affects the people you pass it on to,” Bosley said.

Request documentation. You could then ask for company documents, such as marketing plans or audited financial statements. The recruiter may not be able to provide this information, but if they can’t get such forms from someone else in the company, you could use that as a reason to reject their offer, Jarvis said.

“Whenever you get strong-arm social pressure, I’d say that’s a red flag,” she said.

Pyramid schemes vs. multi-level marketing companies

If you’re considering getting into the direct sales industry, here’s how to spot a pyramid scheme compared to a multilevel marketing company.

MLM company

Pyramid scheme

Recruitment rewards may be offered, but product sales drive income.

Recruitment is the primary revenue driver.

Buy-back program and exit strategy available for sellers.

No repurchase plan for unused inventory.

Initial investment cost is relative to the value of products.

Steep fees to join the business and receive products.

There is an actual consumer demand for products.

Product descriptions and claims are vague or misleading.

When direct selling could pay off

Not all multilevel marketing companies are pyramid schemes in disguise. A direct sales business could have a lower startup risk and lower cost of entry compared to other business opportunities, like buying a franchise, said Joseph Aquilina, ethics and compliance counsel for the Direct Selling Association. Although the payoff could be miniscule — as low as 70 cents or less per hour — sellers are usually independent contractors and can work on their own schedule.

“This is a very low-cost and low-risk opportunity for people to build their own businesses,” he said.

People often fall prey to pyramid schemes because of a need to supplement their household income, Aquilina said. While direct selling could provide a solution, scams and illegitimate businesses could turn people off the entire industry.

“It can take only a few bad apples to present a reputation challenge for the whole bunch,” he said.

You could also start a hobby-based business to monetize a personal interest. You would be able to follow your entrepreneurial instincts without answering to a larger organization. But getting a business up and running — and reaching profitability — takes time and commitment, even more so than direct selling.

Keep in mind that multilevel marketing depends on sales, and you have to be willing to put in effort to become successful, Jarvis said. Chasing a quick-fix or easy way to make income would likely land you in a pyramid scheme rather than a legitimate company.

“You’re going to be spending a lot more time than you think to make sales,” she said. “Those who are successful are the ones who make it a full-time job.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Melissa Wylie
Melissa Wylie |

Melissa Wylie is a writer at MagnifyMoney. You can email Melissa at [email protected]