Consumer Handbook: Avoiding Pyramid Schemes

Jan 27, 2021

Being able to sit in your PJs all day while you work from home with a schedule you set for yourself sounds great, right? Today, there are more and more opportunities to work for a multi-level marketing company and do just that. 

Many of us are getting our social media news feeds bogged down with these opportunities: “Check out this New Skincare Line, it’s All Natural!” or “Looking to Make Some Extra Money?” However, be careful when thinking about taking the leap and signing up for the convenience of being your own boss. The products may be good and you may want to support your friend, but not all opportunities are created equal, and some might just be scams designed to steal your money.

It’s important to understand the difference between multi-level marketing and illegal pyramid schemes. Multi-Level Marketing (MLM) is a system of retailing in which consumer products are sold by independent sales people. The earnings are determined by effort and the ability to sell consumer products that are supplied by the company. 

According to the Federal Trade Commission, typically, distributors earn commissions, not only for their own sales, but also for sales made by the people they recruit. MLM companies also encourage distributors to build their own sales teams by recruiting, motivating and training others to sell products. A well run MLM is like being part of an extra large family. Pyramid schemes focus on making quick profits that are earned by selling the right to recruit others. The entire purpose of the scheme is to get your money up front. There is no real product to be sold as it’s a scam. 

Are you required to "invest" a large amount of money up front to become a distributor? Legitimate MLM businesses do not require a large start up cost. If you do have to pay for inventory, will the company buy back unsold inventory? Legitimate MLM companies will offer and stick to inventory - usually 80%. Is there any market demand for the product or service? MLM depends on establishing a market for the company's products. If the company doesn't seem to have any interest in consumer demand for its products, don't sign up. 

Is there more emphasis on recruitment than on selling the product or service? If recruitment seems to be the focus of the plan, don't sign up. Is the plan designed so that you make more money by recruiting new members rather than through sales that you make yourself? This is the signature of a pyramid scheme operation.