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Educational Consumer Tips

Is it a Legitimate Opportunity or a Pyramid Scheme?

Author: Better Business Bureau
Published:
Category: Retail

Millions of people have found success in direct selling for companies using a multi-level compensation plan. Unfortunately, not all opportunities are legitimate and it easy to get caught up in the enthusiasm and big promises of a pyramid scheme posing as a trustworthy company. So how do you tell the difference? Answer the following questions:

Does your compensation come from selling products and services or from recruiting others? The money-making potential in a legitimate multi-level marketing company will rely primarily on selling products be it from your own sales or the sales made by your recruits. In a pyramid scheme, the recruiter makes money from the fees paid by new recruits regardless of whether they sell anything. Additionally, be sure products and services are being sold to the ultimate consumer of those products instead of passing large quantities of product from seller to seller.

Is the start-up cost reasonable? A legitimate company will generally offer a startup kit that includes product samples, catalogs, order forms and other essentials that you need to get started selling. The median cost of a kit is $99, but can range from free to several hundred dollars depending on the type of product being sold. A pyramid scheme on the other hand will often require a large upfront investment of several thousand dollars for which you get little more than the right to recruit others.

Will the company buy back sales kits and unsold inventory? Most direct selling companies do not require large inventory purchases, but if one does, be sure to check out the buyback policy. All Direct Selling Association member companies are required to repurchase, at no less than 90 percent of the purchase price, any marketable inventory and sales aids purchased in the past 12 months if you decide to quit the business. You should not risk financial loss by trying direct selling. Pyramid schemes often try to disguise their deception by offering a sham product, so beware of a company that requires a large inventory purchase with no return policy.

The bottom line is that a legitimate company will portray an honest picture of the opportunity, including the possible risks, rewards, and challenges. A pyramid schemer, however, will enthusiastically sell you on the promise of making tons of money with little effort. Successful direct sellers treat the experience like running a small business. There are no short cuts to success. Keep a level head and evaluate all opportunities objectively. If you feel pressured to make a decision with which you are not comfortable, or if the opportunity sounds too good to be true, just walk away.

Before signing up with a direct selling company, check the company out with your BBB at bbb.org or the Direct Selling Association’s website www.dsa.org.