A man builds pyramids from money.

Pyramid Scheme Versus MLM

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Are you thinking of joining a multilevel marketing company?

Maybe you’re a new mom looking for a flexible option that allows you to work from home and spend more time with your kids. Or, perhaps you’re looking for your next side hustle, a new way to make some extra cash. Multilevel marketing companies might be able to help you do that.

Before you dive into the multilevel marketing (MLM) world, make sure you do your research. There are a lot of scams out there and you want to be sure that you are investing your time and money into something that has the potential to benefit you.

There have been too many people that get sucked into MLMs and pyramid schemes only to lose money and are left feeling angry and embarrassed (even though it’s not their fault).

One of the most important things you want to distinguish before joining an MLM is whether or not it’s a legitimate MLM and not an illegal pyramid scheme.

How a pyramid scheme works

“Pyramid schemes are scams,” according to the Federal Trade Commission.

Pyramid schemes are based on an unsustainable business model in which the founder gets a group of people to buy in and promote the scheme. Then that group of people is responsible for recruiting new members and so on. Each time a new member is recruited, their investment is divided up among all of the people above them in the scheme. This results in the people at the top making money at the expense of the people on the bottom.

The reason this business model is unsustainable is because the only way for the people on the bottom to make money is by recruiting more people. As the pyramid grows, it becomes increasingly more difficult to make money because, at a certain point, you run out of people. There are a finite number of humans on the planet and I can assure you that not everyone is interested in joining a scheme. As a result, the people on the bottom are likely to lose money, while the people at the top make a lot.

It can often be tough to tell a legitimate MLM company from ones that are scams. Any company using an MLM program will involve direct selling. That’s a business model that’s also sometimes called network marketing. You, are acting as an independent contractor doing direct selling.

Generally, this will involve product sales where you sell the company’s products to people you know or go out and meet. That can be a business opportunity or it can be a scam.

What makes a pyramid scheme illegal?

Pyramid schemes are illegal in the U.S. and in many countries around the world. Pyramid schemes are illegal for the simple fact that they are unsustainable. They are designed to fall apart. There’s only so many people in the world, so there’s an inevitable end to how many people can be recruited. When there’s no one left to recruit, the people on the bottom are left with less money then they started with.

Characteristics of a pyramid scheme

If you are trying to decipher whether or not someone is trying to sell you on a pyramid scheme, there are certain warning signs you can look for.

If they use misleading marketing strategies like “this is a super quick and easy way to make tons of money.”

  • If they promise that you can make life-altering amounts of money
  • If they use intense sales tactics like “it’s now or never, don’t miss your opportunity…”
  • If you have to pay in order to sell a product or service
  • If the primary focus is on recruiting other members

These are major red flags. So, if it sounds way too good to be true remember, it almost always is.

How multi-level marketing (MLM) businesses work

Multilevel marketing businesses work by selling products or services directly to consumers. This means that instead of a product being sold in a store, it’s sold through a network of distributors (MLM members) to other people (friends, family members, strangers).

How to make money through an MLM?

There are two ways you can make money through an MLM:

  • Commission through sales: MLM distributors make a commission when they sell the company’s product or service.
  • Commission through recruitment. Distributors in an MLM can also earn commission by
  • recruiting new members: The people you recruit are called your “downline,” and when they make sales, you get a piece of their commission.

These are companies where you use network marketing — getting other people in your network to buy things. Another red flag or sign that you’re looking at scam marketing companies is when the MLM company wants you to not only engage in direct selling of its merchandise but expects you to buy a large inventory from the company. In those cases, the company generally does not care if you actually make any direct sales. It makes its money from selling to its salespeople and it’s very hard to see that MLM business model as a legitimate business.

Why are MLMs legal?

Even though members of an MLM can make money through recruitment, the reason they are not illegal is because the primary form of compensation comes from the sale of a reliable product or service to a consumer.

Primary differences between legitimate MLMs and pyramid schemes

It can be difficult to navigate the murky waters of what is considered a legitimate MLM and what is considered an illegal pyramid scheme. The biggest differentiator is how sellers (distributors) make money.

Members of a legitimate MLM primarily earn money by selling a reliable product or service, distributors are not required to recruit other members. Members of a pyramid scheme garner their primary source of income through recruitment.

One of the reasons that it’s so hard to distinguish between a legitimate MLM and an illegal pyramid scheme is because many pyramid schemes claim to sell a product or service. This is one of the ways in which they attempt to be seen as legitimate. However, the real motivation with a pyramid scheme is to recruit more members and make money off of their investments into the scheme.

How to find legitimate MLM companies

There are things you can do to try and verify if a company is a legitimate MLM. You can start by reaching out to your state’s attorney general’s office, the Federal Trade Commission or the Better Business Bureau to inquire about the company.

You can also see if the MLM you are interested in is a member of the Direct Selling Association (DSA). The DSA works with direct sales companies (including MLMs) and holds its members to a certain ethical standard. The DSA also provides a member directory which you can find here.

The Federal Trade Commission also recommends speaking with current and past distributors of the company and asking about their experience. They suggest asking questions like:

  • How long have you been with the MLM?
  • How much money did you make last year (after expenses)?
  • How much of the money you made came from selling products or services?
  • How much inventory did you have to buy? Were you able to sell all of it?
  • Do you need to recruit other people in order to make money?

Examples of legitimate MLM companies

According to the DSA member directory, some legitimate MLMs that you might have heard of before include:

  • Cutco (knives)
  • Isagenix (health/fitness)
  • Mary Kay (cosmetics)
  • Avon (cosmetics)
  • Young Living (nutritional supplements)
  • Herbalife (health/fitness/wellness)

You can go to the DSA website to search their list of member companies.

It’s also a good idea to check social media. You may dream about that perfect home-based business but check with people already trying various MLM programs to see if they feel they are legitimate.

Don’t get caught in an illegal pyramid scheme

If you’re looking at different MLMs as your next potential side job be sure to do your homework. Yes, there are many legitimate MLMs that you can participate in if you choose to do so. However, there are many illegal pyramid schemes that are doing their best to pass as legit MLMs — don’t be their next victim.

As a quick rule of thumb, remember — if the main moneymaker is selling useful products and services that people actually want to buy — it’s probably an MLM (but still do your homework). However, if the main way to make money is by recruiting other people and the benefits seem too good to be true, it’s probably an illegal pyramid scheme, turn and run the other way.

MLMs — don’t be their next victim.

As a quick rule of thumb, remember — if the main moneymaker is selling useful products and services that people actually want to buy — it’s probably an MLM (but still do your homework). However, if the main way to make money is by recruiting other people and the benefits seem too good to be true, it’s probably an illegal pyramid scheme, turn and run the other way.

If you join an MLM business look for one that offers a real marketing plan — a blueprint that helps you make retail sales to actual customers. Be very wary — pyramid selling may sound nicer than “pyramid scheme” but there are a lot of bad actors in this space.

–By Jessica Martel

 

Hey, I’m Ashleigh!

I am a former teacher turned SAHM. I’ve been working from home for the past 4 years with my 3 boys ages 3, 5, and 7. Now I help moms find smart ways to work at home so you can create a life you love!

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