How to Spot a Pyramid Scheme

In the age of the Internet, multi-level marketing has been thriving. Multi-level marketing (MLM) presents the opportunity for its distributors to work from home, promoting and selling products via social media. While this is an attractive job for many, some MLM companies are dishonest businesses that prey on their distributors and consumers (and, oftentimes, these two roles become synonymous). These MLMs are called pyramid schemes. If you’ve been approached by a distributor - whether they are trying to recruit you or sell you product - and you’re considering buying in, it is important to be able to spot the difference between a genuine MLM and a pyramid scheme. Here’s how. 

 

A Pyramid Scheme Will Ask You to Invest Your Own Money

A legitimate MLM company is already an established business. Therefore, if your sole job is to distribute products, the company shouldn’t require you to purchase a “starter kit” to kickstart your sales. Some pyramid schemes will require a monthly quota in sales to be made in order for you to remain a partner; consequently, if you don’t sell enough product that month and want to remain a distributor, you must purchase and stockpile the difference. Just like that, you’ve gone from distributor to investor.

 

person holding money

 

Check Income Disclosure Statements

Becoming an “investor” may not sound so bad, except you’re highly unlikely to turn a profit. According to mlmstatistics.org, up to 94.04% of distributors will lose money, 5% will make just enough to turn a profit and just 0.2% make a livable wage. Of course, every MLM has its own statistics; seek out these statements to see if you’re likely to make money. If the statements are not available, and the distributor who approached you won’t disclose the amount they make, you may be at risk of falling for a pyramid scheme.

 

Check the Product Ingredients

What makes this product better than the rest? Are the health claims the company is making true? Are the products they’re selling FDA approved? Is the company facing any lawsuits because of unfulfilled promises of benefits? This information is readily available on the Internet; don’t rely on your distributor for it! Some are misinformed, while others may be maliciously withholding information.

business women working together with coffee

And Speaking of Products - 

If these products sell themselves, and you’re simply meant to promote and distribute them, there should be no need to recruit others into the business. If you’re offered commission for recruiting new distributors, beware - this is typical of pyramid schemes. Many distributors will deny that their MLM opportunities are pyramid schemes based on the fact that their companies do sell a product, and “typical” pyramid schemes do not. But according to the Federal Trade Commission, pyramid schemes “may purport to sell a product, but they often simply use the product to hide their pyramid structure.” If the majority of income seems to be made by recruitment, and you are encouraged to recruit, this is a red flag; not only is this a sign of a pyramid scheme, but by recruiting your friends and family, you are automatically shrinking your own pool of potential customers. This is a taboo practice in legitimate businesses.

 

The Bottom Line:

If you are passionate about social media and want to make money off of it, explore your options thoroughly; do a lot of research about the MLM you’re considering, or cut out the middleman and start your own business. Whatever you choose, be sure to protect your assets and make educated decisions - you owe it to yourself.