MLM and Pyramid Schemes - How To Tell The Difference

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The big difference between MLM and a pyramid scheme is in the business' operations. The entire purpose of a pyramid scheme is to get your money and then use you to recruit other suckers (ahem - distributors). The entire purpose of MLM is to move product. The theory behind MLM is that the larger the network of distributors, the more product the business will be able to sell.

Use these questions as an acid test if you're in the least doubt as to whether the opportunity you're considering is MLM or a pyramid scheme:

1) Are you required to "invest" a large amount of money up front to become a distributor? This investment request may be disguised as an inventory charge. Legitimate MLM businesses do NOT require large start up costs.

2) If you do have to pay for inventory, will the company buy back unsold inventory? Legitimate MLM companies will offer and stick to inventory buy-backs for at least 80% of what you paid.

3) Is there any mention of or attention paid to a market for the product or service? MLM depends on establishing a market for the company's products.
 If the company doesn't seem to have any interest in the consumer demand for its products, don't sign up.

4) Is there more emphasis on recruitment than on selling the product or service? Remember, the difference between MLM and a pyramid scheme is in the focus. The pyramid scheme focuses on fast profits from signing people up and getting their money. If recruitment seems to be the focus of the plan, run. These next two questions will help you determine what the focus of the company is:

5) Is the plan designed so that you make more money by recruiting new members rather than through sales that you make yourself?

6) Are you offered commissions for recruiting new members?

As always, when you're investigating a potential business opportunity, you'll want to gather all the information you can about the MLM company's products and operations.

Get (and read) written copies of the company's sales literature, business plan and/or marketing plan. Talk to other people who have experience with the MLM company and the products, to determine whether the products are actually being sold and if they are of high quality. Check with the Better Business Bureau to see if there have been any complaints about the company. And listen carefully when you're at that MLM recruitment meeting. Inflated claims for the amazing amounts of money you're going to make should set your alarm bells ringing.

Multilevel or "network" marketing plans are a way of selling goods or services through distributors. These plans typically promise that if you sign up as a distributor, you'll receive commissions - for your sales and those of the people you recruit to become distributors. These recruits sometimes are referred to as your "downline."

Some multilevel marketing plans are legitimate. However, others are illegal pyramid schemes. In pyramids, commissions are based on the number of distributors recruited. Most of the product sales are made to these distributors - not to consumers in general. The underlying goods and services, which vary from vitamins to car leases, serve only to make the schemes look legitimate.

Joining a pyramid is risky because the vast majority of participants lose money to pay for the rewards of a lucky few. Most people end up with nothing to show for their money except the expensive products or marketing materials they're pressured to buy.

If you're thinking about joining what appears to be a legitimate multilevel marketing plan, take time to learn about the plan. What's the company's track record? What products does it sell? Does it sell products to the public-at-large? Does it have the evidence to back up the claims it makes about its product? Is the product competitively priced? Is it likely to appeal to a large customer base? How much is the investment to join the plan? Is there a minimum monthly sales commitment to earn a commission? Will you be required to recruit new distributors to earn your commission?

Be skeptical if a distributor tells you that for the price of a "start-up kit" of inventory and sales literature - and sometimes a commitment to sell a specific amount of the product or service each month - you'll be on the road to riches. Often consumers spend a lot of money to "build their business" by participating in training programs, buying sales leads or purchasing the products themselves. Too often, these purchases are all they ever see for their investments.

If you decide to become a distributor, you are legally responsible for the claims you make about the company, its product and the business opportunities it offers. That applies even if you're repeating claims you read in a company brochure or advertising flyer. The Federal Trade Commission advises you to verify the research behind any claims about a product's performance before repeating those claims to a potential customer.

In addition, if you solicit new distributors, you are responsible for the claims you make about a distributor's earnings potential. Be sure to represent the opportunity honestly and avoid making unrealistic promises. If those promises fall through, remember that you could be held liable.

The FTC suggests that you use common sense when evaluating a multilevel marketing opportunity and consider these tips as you make your decision:

~Avoid any plan that includes commissions for recruiting additional distributors. It may be an illegal pyramid.

~Beware of plans that ask new distributors to purchase expensive products and marketing materials. These plans may be pyramids in disguise.

~Be cautious of plans that claim you will make money through continued growth of your downline, that is, the number of distributors you recruit.

~Beware of plans that claim to sell miracle products or promise enormous earnings. Ask the promoter to substantiate claims.

~Beware of shills - "decoy" references paid by a plan's promoter to lie about their earnings through the plan.

~Don't pay or sign any contracts in an "opportunity meeting" or any other pressure-filled situation. Insist on taking your time to think over your decision. Talk it over with a family member, friend, accountant or lawyer.

~Do your homework! Check with your local Better Business Bureau and state Attorney General about any plan you're considering - especially when the claims about the product or your potential earnings seem too good to be true.

~Remember that no matter how good a product and how solid a multilevel marketing plan may be, you'll need to invest sweat equity as well as dollars for your investment to pay off.

The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues , visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel , a secure online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.