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Multi-Level Marketing: Pyramid Scheme or Legit Business Opportunity?

by Thomas R. Kaiser Sr.

With the prolonged down economy many individuals and families are continuing their search for ways to bring home extra cash to pay bills. If you are not living under a rock, then at some point you have received a phone call from a friend or relative begging you to consider a new business “opportunity.” Enter Multi-Level Marketing (MLM) businesses. These are the programs where participants sell exclusive products and recruit others to do the same; the participants collect product commissions, override commissions from downlines and bonuses for recruiting. Pyramid schemes, much like Ponzi schemes, eventually collapse like a house of cards. By its nature a pyramid scheme will leave those at the bottom levels broke and unable to recoup their initial investments; all the while the top of the pyramid (1-2%) will make the majority of the money. With this in mind, could you tell the difference between a legitimate retail MLM (i.e., Mary Kay) or a bogus recruiting MLM, which is a pyramid scheme in disguise?

First things first, a legal MLM involves being recruited in order to sell a product or service that has some inherent value. As a recruit you make a profit by selling the product or service without the need to recruit others. While you can recruit others to sell with you to increase your profit, it is not required. Under a pyramid MLM (or a “recruiting” MLM), the products have no inherent value and you are required to recruit others in order to make your money back.

Now that you understand the primary difference between a legit MLM and a pyramid MLM, how can you spot the pyramid MLM? Here are some of the most common red flags associated with pyramid MLM schemes:

• Since the main premise of a pyramid MLM is recruiting, new members are told that there is unlimited recruiting potential.
• Pyramid MLMs will often have the back story of the rich founder who just wants to help others realize their dream of having their own business and the associated wealth. Let’s face it; no legit business owner is in business to help others get rich, they are in the business to make a profit.
• There is always a fee to become a licensed distributor. Additionally new recruits are often told they must buy large quantities of the products in order to join the business.
• The commissions for product sales are lower than bonuses paid for bringing in new recruits.
• Pyramid MLM are viral and as a consequence extremely predatory. Most pyramid MLM schemes will target minorities, the working poor, and the uneducated and will primarily be concentrated in more rural areas.

In the end, a pyramid MLM scheme will eventually run out of potential recruits and will be doomed to bankrupt itself; leaving you with lost time and lost money. It is important to not allow yourself to be victimized by a pyramid MLM scheme. Here are some tips for avoiding pyramid MLM schemes:

• Avoid MLM plans that pay commissions for recruiting new distributors.
• Take your time evaluating the MLM plan before signing up. Don’t buy into the hype that many pyramid MLMs portray. Learn about the company, its products, and product pricing and any upfront costs.
• Demand the promoter to substantiate their claims with hard facts, if they cannot or refuse, run don’t walk.
• If the MLM promoters try to reassure you that the MLM is legal or it’s not a pyramid scheme, ask yourself if such statements are necessary for a supposed legit MLM.
• Watch out for endorsements from government agencies, officials or celebrities. In most cases these endorsements are either false or paid advertisements.

If you are confronted with, or suspect, a pyramid MLM scheme contact your state attorney general’s office and/or you can file a complaint with your state’s Better Business Bureau and the Federal Trade Commission.

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Thomas R Kaiser Sr. is a Certified Identity Theft Risk Management Specialist in the financial services industry in mortgage banking, identity theft, check fraud and insurance.