Multi-Level Marketing v. Pyramid Schemes
What is multi-level marketing?
Multi-level marketing (MLM) is a selling method in which agents earn commissions on the sales they personally make, as well as the sales of other agents that they have recruited to the company. Example? The Mary Kay rep who comes to your house trying to sell you beauty products and attempting to sign you up to become a Mary Kay seller with her.
Are all MLM companies legitimate?
NO. Some MLM companies are actually running pyramid schemes. Pyramid schemes promise you payment primarily for recruiting others to join the program. The sale of products or services is either not involved at all or simply used as a distraction from what’s really going on. These schemes are dangerous because they inevitably collapse when they run out of new recruits, which means you’ll likely end-up empty handed. They’re also illegal. In fact, while the method of regulation varies, all 50 states have laws that prohibit pyramid schemes.
Here’s how MLM companies and pyramid schemes compare:
|Multi-Level Marketing||Pyramid Scheme|
|Majority of commissions paid
when a product or service is sold
|Majority of commissions paid when
new members are recruited
|Members given real, marketable products or
services that they can actually sell
|Members are sometimes subject to “inventory loading,” where they are forced to buy more products than they could ever sell, sometimes at inflated prices. Other times, there is no product or service to sell at all.|
|Low start-up costs||High start-up costs|
You may have also heard of Ponzi Schemes, which are closely related to pyramid schemes. A Ponzi scheme is a fraudulent investment operation. Rather than pay investors from profits earned by the individual or organization, the organization pays investors from their own money or the money paid by subsequent investors. The payments tend to be very high, but to keep the high returns going, there would need to be an infinite flow of money from new investors. So, much like pyramid schemes, Ponzi schemes inevitably collapse when they run out of new investors.
How can you avoid the pyramid scheme trap?
Ask lots of questions before you sign-up. For example,
- What is the company’s history? (i.e., When did it open? What is its track record?)
- What products or services does the company sell?
- Can the company back-up its claims about the products or services it sells?
- Is the product or service competitively priced?
- What upfront investment do you have to make to join the plan?
- Will you be required to recruit new people to be successful in the plan?
- Are the commissions based on the recruitment of new participants or on the sale of the company’s products or services?
If you get answers you like and you’re considering joining, ask for the seller’s promises in writing before you sign-up.
For more information on questionable MLMs and actions taken against pyramid schemes click here.
Multi-Level Marketing – a way of distributing products or services in which the distributors earn income from their own retail sales and from retail sales made by their direct and indirect recruits.
An inherently deceptive form of multi-level marketing where participants are told they’ll get paid for recruiting other participants, and not necessarily for selling products or services. Typically, participants must pay some sort of initial investment in order to join, and will then earn a commission for each participant they recruit. Unfortunately for the unsuspecting consumers, pyramid schemes are doomed to collapse because the number of potential participants is limited.
A fraudulent investment operation that tricks investors into thinking that they will earn lots of money on a short-term investment, when, in reality, there isn’t any investment opportunity at all. Rather, the promoter just uses the money from new recruits to pay off the older investors. In other words, stealing from Peter to give to Paul.