Better Business Bureaus report a recent increase in inquiries about “network” or “matrix” marketing plans. These plans, also known as multilevel marketing, involve selling goods or services through distributors. If you sign up as a distributor, you are promised commissions -- for your sales of the plan's goods or services and those of other people you recruit as distributors. The promised commissions can extend through two or more levels of recruits, known as your "downline."
According to the Federal Trade Commission, any plan that offers to pay commissions for recruiting new distributors should be avoided. Most states outlaw this “pyramid” practice. Such plans inevitably collapse when no new distributors can be recruited and most people lose all of their investment.
- Neither the Federal Trade Commission nor the Better Business Bureau can offer legal advice about whether you should join such a plan. You must make that decision yourself. The FTC and BBB do suggest you use common sense, and consider these tips when making your decision:
- Is the focus on lining up recruits or selling the product? Be cautious of plans that claim you will make money through continued growth of new distributors you recruit -- rather than through your direct sales of the product to customers. Avoid any plan that includes commissions for recruiting more distributors.
- What is the product? Is it competitively priced and likely to appeal to a large customer base? Plans that require you to purchase expensive inventory can collapse quickly.
- Are the claims believable? Beware of plans that claim to sell miracle products or promise enormous earnings. Ask the promoter to substantiate such claims with hard evidence.
- Beware of shills. Promoters can pay "decoy" references to boast of their fictional success.
- Don't pay or sign any contracts in a high-pressure situation. Take your time and talk it over with your spouse, a knowledgeable friend, an accountant or lawyer before making your decision.
- Recognize your responsibilities. If you decide to become a distributor, you are legally responsible for the claims you make about the company, its product and related business opportunities. That applies even if you simply repeat claims you read in a brochure or flyer.
- Check with your local BBB (www.bbb.org) and state Attorney General -- especially when the claims about the product or your potential earnings seem "too good to be true."