How to Spot MLM Pyramid Schemes

I’m a huge fan of multi-leveled marketing (MLM), AKA network marketing or direct sales networks. MLM has proven itself to be at the very top of business opportunity possibilities for average individuals who desire to develop both immediate as well as long term passive residual income where they do not have to punch a clock or be tied to a particular vocation or career path indefinitely.

I have been in a dozen MLM companies over the years, and even been the founder of one personally. I have made a great living being involved in the industry, and I have nothing but great things to say about them and about most of the people I have met while in them; HOWEVER, not all marketing opportunities are legal and are considered to be illegal pyramid schemes.

Those who participate in MLM businesses are by far some of the most positive and enthusiastic people I know. It is an ‘up’ sort of business.  You can’t stay down, depressed or pessimistic for very long if you are in one either. There are some counselors who even recommend that their clients who suffer from depression enroll in a MLM company just for the therapy of being around positive and uplifting people.  However, with the industry of multi-leveled marketing comes the usual ‘get-rich-quick schemers that give the industry a bad name and take advantage of a great deal many well-meaning howbeit naive people.

For those of you who are not sure what I am talking about or who are new to this industry, multilevel or “network” marketing plans are ways to sell goods or services through distributors.  Typically, these plans promise that if you sign up as a distributor, you’ll get commissions not only from the sales you make, but also from the sales of the people you recruit to become distributors. These recruits are called your “downline.”

And as I have said, not all multilevel marketing plans are legitimate. Some are pyramid schemes. It’s best not to get involved in plans where the money you make is based on the number of distributors you recruit, rather than on your sales to people outside the plan who intend to use the products or services. Joining a pyramid is risky because the vast majority of participants lose money or at best just break even while only a few people at the top make the lions share of the money that changes hands.

How can you tell the difference between a bonified multilevel marketing plan and a pyramid scheme? According to the Federal Trade Commission, the nation’s consumer protection agency against pyramid schemes, it takes research, some business sense and a healthy share of skepticism.

Evaluating Network Marketing Plans

What’s involved in doing research? Asking your sponsor and other distributors tough questions, and digging for details. Don’t consider it nosy or intrusive: you are on a mission to check out a potential opportunity that will require your money and your time.

Find — and study — the company’s track record. Look for newspaper or magazine articles about the company. Do an internet search. Look through several pages of search results to get a good idea of the information available about the company. Some of the questions to ask are:

• How long has the company been in business?
• Does it have a positive reputation for customer satisfaction?
• Is the product or service clearly defined and does it meet a legitimate need?
• What’s the buzz about the company and the product on blogs and websites?
• Has anyone sued the company for deceptive business practices?
• Does the company have complaints filed with your local Better Business Bureau, Chamber of Commerce, and/or state Attorney General for complaints about the company?

All of this said, as with any business or enterprise that you find that seems like a good opportunity, not all companies are legitimate even if they do not have complaints filed against them. Most of the time though, you can tell the type of busines it is by the type of people that the business attracts. As it concerns online marketing opportunities, be very skeptical if those who are inviting you to get into the company are living in a third world or developed country as there is usually no recourse in the event you invest money into it and the operators of it decide to take the money and run. The Internet is especially fertile with this sort of activity. If the individual gettign you into a company is not widely known as someone with a track record in MLM or who is not associated with a legitimate brick and mortar based business in a country where law enforcement can take action against that individual, stay clear of it.

Learn about the product. What will you be selling? Are similar products on the market? Is the product priced competitively? Is it safe? Can your sponsor — the distributor who is recruiting you — support claims about the product’s performance?

Ask questions. Ask your sponsor for the terms and conditions of the plan: the compensation structure, your potential expenses, support for claims about how much money you can make and the name and contact information of someone at the company who has details about the terms and conditions and can tell you how much the average distributor makes before and after expenses. Get this information in writing. Avoid any plan where the reward for recruiting new distributors is more than it is for selling products to the public. That’s a time tested tip-off to a pyramid scheme.

Multilevel marketing plans usually base at least part of your monthly income and bonuses on the sales of the distributors you recruit. Keep in mind that if you solicit new distributors, you are responsible for the claims you make about how much money they can earn. Be honest, and avoid making unrealistic promises. If the promises fall through, you could be held liable, even if you are simply repeating claims you read in a company brochure or advertising flyer, or heard from another distributor.

If you don’t understand something, ask for more information until it is absolutely clear to you. Your sponsor and other distributors should be willing to answer your questions. Be skeptical and carefully evaluate the information you get. Remember that your sponsor and other distributors above you likely will make money if you join the program. So take your time, and don’t yield to pressure to join.

Understand any restrictions. Get the company’s refund policy in writing. Make sure it includes the process for returns as well as restrictions on — or penalties for — returning unused products if you choose to leave the plan. It may seem like you’re minimizing your risk if you can return products for a reimbursement, but policies vary on getting full refunds — and how long it could take. Many plans require you to buy training or marketing materials or pay for seminars if you want to get product discounts or create your own network of distributors. Find out how much time and money other distributors spent on training, marketing materials and seminars when they joined the plan, and whether the plan requires you to participate in periodic training. What happens if you opt out of the training?

Talk to other distributors. Ask your sponsor for the names and contact information for distributors at all levels of the plan. Get in touch with them to ask the same questions you asked your sponsor. In most plans, “upline” distributors stand to benefit when you buy into the system, so they should be willing to answer your questions with specifics. If you get vague answers or guesses, ask follow-up questions until you hear — and understand — the information you need to make your decision. Be aware that there may be shills — “decoy” references paid by the company or distributor to pretend they had success earning money through the plan.

Consider using a friend or adviser as a neutral sounding board or for a gut check. You may want to consult with an accountant, a lawyer or another person you trust who is not affiliated with the plan to review the terms of compensation, determine whether the plan can back up any claims about the amount of money you can make, and analyze the information you’ve gathered and the answers to your questions.

Take your time. Don’t pay or sign any contracts in an “opportunity meeting.” Take your time to think over your decision. Your investment requires real money, so talk to the distributors in settings that make you comfortable and when there’s the opportunity to take your time.

Think about whether this plan suits your talents and goals. Ask yourself whether you would enjoy selling products to the public. Find out how many hours a week your sponsor and other distributors spent on the business when they joined the plan and how much time they spend now. Remember that no matter how good a product and how solid a multilevel marketing plan may be, you’ll need to invest sweat equity and money for your investment to pay off. Consider the other demands of the business — for example, training, recruiting new distributors, managing paperwork, inventory and shipping — and factor how much time it could take to achieve the amount of money you anticipate.

Questions for your Sponsor

Here are some important questions to ask your sponsor and distributors at different levels of the organization. Their responses can help you detect false claims about the amount of money you may make and whether the business is a pyramid scheme.

• What are your annual sales of the product?
• How much product did you sell to distributors?
• What percentage of your sales were made to distributors? NOTE: One sign of a pyramid scheme is if distributors sell more product to other distributors than they do to the public.
• What were your expenses last year, including money you spent on training and purchasing products?
• How much money did you make last year — that is, your income and bonuses minus your expenses?
• How much time did you spend last year on the business? How long have you been in the business?
• How many people are in your downline?
• What percentage of the money you made — income and bonuses minus your expenses — came from recruiting other distributors and selling them inventory or other items to get started?

It’s important to get a complete picture of how the plan works: not just how much money distributors make, but also how much time and money they spend on the plan, how long it takes to make money and how big a downline is needed to make money. Another sign of a pyramid scheme is if the money you make depends more on recruiting — getting new distributors to pay for the right to participate in the plan — than on sales to the public.

The FTC works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. Watch a new video, How to File a Complaint, at ftc.gov/video to learn more. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.