How to Distinguish Between a Pyramid Scheme and Multi-Level Marketing

Many people are unaware of a distinction between multi-level marketing (MLM) and pyramid schemes. To be successful in either system you have to recruit new members from your network and form a downline. In MLMs you earn by selling consumable products and by receiving commissions from the sales of your downline. In pyramid schemes the commission comes from the recruiting since, often, no products are involved. MLMs, although subject to constant debate, are legal but pyramid schemes are illegal. Read on to learn how to distinguish between a pyramid scheme and multi-level marketing.

Difficulty: Moderate

Instructions

1. Ask the person attempting to recruit you directly whether the commission money comes from product marketing or from recruiting. Even if some of the commission comes from recruiting your network then the system is defined as a pyramid scheme.

2. Investigate what the system emphasizes. If the emphasis is on recruitment and not marketing of a product line then it is an illegal pyramid scheme.

3. Ask if the system charges a fee for the right to recruit. There should be no "headhunting" fees and this is one of the red flags that will expose a pyramid scheme.

4. Ask if the purported MLM has an 100 percent money back guarantee within the first 60 days of signing. By law the MLM has to accept returned inventory (except if it is perishable) deducting a restocking fee of 10 percent.

5. Find out what percent of the inventory bought each month by the distributor is required to be sold. For a company to be legally defined as an MLM a distributor is required to sell a minimum of 70 percent of what they buy to their network of friends and family.

Tips & Warnings

• Perhaps the best known MLM companies are Amway and Herbalife.
• MLM recruiters are frequently well groomed, smooth talking and will approach potential new members in places that are considered unlikely for work-related discussions.
• MLMs have the characteristics of a cult religion and their members can be fanatical.
• During the recruitment interview the earning potential is often inflated. Promises of earnings exceeding $10,000 a month in a marketing venture for doing little work are not uncommon. Most people who make the necessary efforts do not make worthwhile earnings and many even end up losing money.

Resources

• Latest Info About Telephone Marketing Networks

[bethany1202]

on 4/14/2009 Great info.

[hlthychoclitnut]

on 1/26/2009 There IS a difference between a Pyramid Scheme and Multi-Level Marketing.But one of the reasons why people fail in MLMs are simply because of the little investment is made people give up to soon whereas if they paid $100,000 for a franchise they wouldn't expect to be rich in the 1st 6 months

[Justinmad]

on 3/11/2008 Very helpful, simple, cear, easy to understand, and best of all, it's true. Thanks for posting this!