Opportunity or Scam? Multi-Level Marketing vs. Pyramid Schemes

  
     
March 02, 2015

As the convenience of working from home, having your own schedule, and being your own boss becomes more attractive, so do the opportunities to work for a multi-level marketing company. However, not all opportunities are created equal and some might even be scams or pyramid schemes. To help consumers make wise decisions when it comes to work-from-home opportunities, Better Business Bureau (BBB) offers tips for understanding the difference between multi-level marketing and pyramid schemes.

What is Multi-Level Marketing (MLM)?

Also known as network marketing, MLM is a system of retailing in which consumer products are sold by independent salespeople (distributors). Earnings in MLM are based on effort and ability to sell consumer products supplied to the distributor by the company. A MLM company will also encourage distributors to build their own sales force by recruiting, motivating, supplying and training others to sell products, earning a percentage of the sales from the sales force.

Red Flags of a Questionable MLM Opportunity:

  • Promises of high earnings, especially with little effort, time or serious commitment.

  • Requirement to purchase a large amount of inventory to start, with no written guarantee that unsold products will be bought back for a certain percentage of the original price.

  • Request for payment in cash, via wire transfer, or money order for initial investment.

What are Pyramid Schemes?

Pyramid schemes concentrate mainly on making quick profits earned by selling the right to recruit others. Pyramid schemes focus more on recruiting other participants than selling the product or service, making little to no mention about the market for the item. Pyramid scheme participants try to recoup their investment in products by recruiting potential investors.

Red Flags of a Pyramid Scheme:

  • Promises to make thousands or even millions of dollars with little effort.

  • Long anecdotes of how many people have made a fortune with the company without providing concrete facts.

  • Large start-up costs and substantial hidden fees to become a distributor.

  • Revenue is generated from selling the opportunity not the product.  

Checklist Before Investing in a Job Opportunity:

  • Obtain and verify all company information, including name, address, phone number, website, and principals.

  • Find out start-up costs and the expected return on investment.

  • Review all marketing material and sales plans.

  • Verify earnings of other independent distributors that have worked for or are currently employed by the company.

  • Clarify contract cancellation and product buy-back policies.

Start with trust by researching any company at bbb.org.  

Victims of pyramid schemes are encouraged to submit a formal complaint with BBB at bbb.org/complaints, the Arizona Attorney General’s Office at azag.gov, and the Federal Trade Commission at ftc.gov.