You’re in business to earn money — but sometimes it’s hard to tell if the multi-level marketing company (MLM) you’re considering is operating as a pyramid scheme. Even if it’s not a pyramid scheme, most people who join MLMs make little to no money, and some people lose money.
Know the red flags of an MLM operating as a pyramid scheme. Multi-level marketing is sometimes called network or direct marketing. Participants sell products directly to “retail” customers and recruit new participants (who can be called distributors or independent contractors). Your recruits, the people they recruit, and so on, become your sales network, or “downline.” The money you make in an MLM should come from your sales to retail customers, without having to recruit new participants. In a pyramid scheme, the money you make is driven by the number of people you recruit, not how much product you sell.
Pyramid schemes are set up to encourage everyone to keep recruiting people, which keeps a constant stream of new participants — and their money — flowing into the business. Often in a pyramid scheme, you might be encouraged to periodically buy a certain amount of products, even if you already have more inventory than you can use or sell. You may have to buy products or services before you’re eligible to be paid or get certain bonuses. You also may have to pay repeated fees for things like training sessions or expensive marketing materials.
Eventually, most participants in pyramid schemes find that no matter how hard they work, they can’t sell enough inventory or recruit enough people to make money. They also can’t keep up with the required fees or purchases they need to qualify for rewards, and they can’t earn enough money to cover their expenses. In the end, most people run out of money, have to quit, and lose everything they invested.
Here are some warning signs of a pyramid scheme:
- Promoters make extravagant promises about your earning potential. Stop. These promises are false.
- Promoters emphasize recruiting new participants for your sales network as the real way to make money. But in legit MLMs, you should be able to make money just by selling the product.
- Promoters play on your emotions or use high-pressure sales tactics. Even if they say you’ll lose out if you don’t act now, a real deal will still be there later. Take your time. Any company that tries to pressure you to join is one to avoid.
- Participants buy more products or services than they want to use or can resell, just to stay active in the company or to qualify for bonuses or other rewards. If you see this happening, keep your money.
Know that some MLMs — even ones that aren’t pyramid schemes — may not be a wise investment. Other MLMs may not be a good fit for your interests and lifestyle. Before joining any MLM, do some digging before you sign anything or pay money:
- Research the company online, using the name of the company and words like “review,” “scam,” or “complaint.”
- Search online to see what participants are saying — do they say you need to recruit others to make money?
- Consider the product. Some MLMs sell quality items at competitive prices. But some offer goods that are overpriced, have questionable benefits, or are unsafe.
- Understand the costs. Do you have to buy training or marketing materials, book travel or hotels, routinely purchase products, or pay for seminars? If any fees are optional, find out if you’ll become ineligible for bonuses or rewards if you opt out of them.
- Ask about refunds and get the company’s refund policy in writing. Make sure it includes information about returning any unused products.
- Read the paperwork and have a friend or advisor who’s not affiliated with the company review it. Get their honest opinion on whether this is right for you.
- Ask current and former participants about their experiences. The FTC has a list of important questions to ask.
