Is Multi Level Marketing a Pyramid Scheme?

May 28th, 2008 by Cristina Favreau

Continuing our discussion on multi level marketing (MLM), I will attempt to answer one of the most common questions that come up  — Are all MLMs pyramid schemes?

The quick answer to this is no. MLM and pyramid schemes are 2 different business models. One is definitely illegal (pyramid scheme) while the other CAN be, but is not automatically considered illegal (unfortunately, not all MLMs are legitimate business opportunities).

When bringing up this objection asking this question (”So, is this a pyramid scheme or what?”) to someone trying to get you to join their company, the most common answer you’ll hear is something like:

Look at any corporation’s org chart. [Taking out a sheet of paper, they start drawing] You have the CEO at the top [big circle at the top of the page] with his minions underneath [more little circles, to form a pyramid an org chart]. The very company you are employed by is, in effect, the epitome of a pyramid.

Clever reasoning, but what makes an opportunity illegal has nothing to do with how its org chart looks on paper. You’re not stupid. Yes, a corporation’s org chart DOES look like a pyramid, but it’s obviously NOT a pyramid scheme. An MLM’s commission structure most often has some form of a pyramid, but that doesn’t make it illegal. So, don’t be fooled by this line of reasoning.

The real issue is understanding the definition of “pyramid scheme.” In part, Wikipedia describes Pyramid scheme as:

A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered.

The difference between a legitimate MLM opportunity and a scam is this: PRODUCT/SERVICE, PURPOSE and FOCUS. Here are some questions to help you figure it out:

  • What are you selling? An idea (opportunity) or something tangible like a product or service? Its a sure scam if you’re expected to shell out a whole lot of cash for the “honor” of recruiting other people? (See point 1 below. One company I know of called this a “licensing fee.”)
  • Is there more attention given to recruiting or selling products/services? Red lights should immediately go off if you’re pressured expected to do more recruiting than distributing.
  • Where does the bulk of your commissions come from? Will you make more money selling a product or service or recruiting (sponsoring, signing up, etc) new members? Same as above.

Here are more questions to consider before signing up for anything:

  1. How much are you expected to invest up front (sometimes masked as an inventory charge or distributor fee)? A legitimate MLM will not require a large start-up investment.
  2. Will the company buy back unsold inventory? A legitimate MLM will buy back 80-90% of what you paid in unsold inventory.
  3. What is the company’s main focus? What attention does the company put on the market (consumer, end user)? A legitimate MLM’s main goal is to extend its market reach by getting their product in the hands of (or their service used by) as many consumers as possible . Pyramid schemes give little to no attention to the consumer or end user.

I have only scratched the surface. Other points to factor in is the quality of the product, the company’s track record, the commission structure, etc. But I don’t have the expertise (nor desire) to go into too much more depth.

Despite everything I’ve told you here, some pyramid promoters try to make their “opportunity” look like an MLM.

The best advice I can give you is do your due diligence. Never assume what you’re being told is the truth. If you’re considering joining a MLM, don’t do so under pressure, even if it’s from someone you know and trust. If it’s a legitimate and feasible business, the opportunity will still be there next week, next month and next year.

Read EVERYTHING you can about the company and get your hands on all company literature. Find out all you can about their products or services. Look at actual pay stubs. Ask tons of questions. Check with the Better Business Bureau, Federal Trade Commission, National Fraud Information Center, Competition Bureau of Canada, your local chamber of commerce, and anywhere else you can think of.

Don’t be fooled by promises of making quick, easy money. An MLM is like any other business, it takes time, hard work and money to build and grow.

If you liked this post, consider treating me to a Tim Hortons' French Vanilla coffee.

Category Marketing Lingo Defined, Multi Level Marketing, Question of the Month |

Viewing 5 Comments

Trackbacks

close Reblog this comment
Powered by Disqus · Learn more
blog comments powered by Disqus