Avoiding Illegal Pyramid Schemes
The Difference Between Legal Multi-level Marketing and Pyramid Scams
Jan 14, 2008
You probably know someone who has sold knives, cosmetics, or nutritional supplements as a source of supplemental income. In fact, this person may have encouraged—or even pressured—you to buy products or become a distributor yourself. Before embarking on a new sales venture, it helps to familiarize yourself with the classic traits of a pyramid scheme.
First, it helps to distinguish between a multi-level marketing (MLM) enterprise and a pyramid scam. The most important distinction is that pyramid schemes are illegal; however, many masquerade as legitimate MLMs in order to remain below law enforcement radar. MLMs typically focus their marketing on the products themselves, while pyramid ventures promote a recruitment-centric system that turns friends into potential foes with high-pressure sales pitches. Keep in mind, however, that even legal MLMs will require a certain amount of recruitment in order to sell products.
How to Spot a Pyramid Scheme
- Watch out for steep start-up fees. Legal MLMs require minimal initial investment.
- A legitimate MLM enterprise will include a fair buy-back policy for unsold inventory.
- Research, research, research. Flex some Google search engine muscle to track online customer complaints. The Ripoff Report contains an extensive database of grievances against various companies.
Keep in mind that no company will admit to being a pyramid scheme. See MLM legal's article for a detailed summary of pyramid tactics and red flags.
Multi-level Sales Methods
Prepare yourself for the following obligations before joining any MLM:
- You will have to present the company sales pitch to family, friends, and colleagues—many of whom will probably be none too receptive to your recruitment attempts.
- Building up a client base will require a great deal of time and commitment. Unless you are well known within your community or a national celebrity, you will need to be creative to reach beyond your immediate social circle.
- As a distributor, you will need to attend conference calls and sales meetings regularly to learn about company news, sales techniques, and new products.
The Risks of Falling for a Sales Scam
Because multi-level marketing ventures entail recruitment of close friends, business associates, and family, there is more at stake than just your wallet. When weighing the pros and cons of even the most legitimate of multi-level marketing ventures, keep the following scenarios in mind:
- If the product you are selling proves to be hazardous or defective, you could face lawsuits from your customers.
- You could face criminal charges if the company turns out to be an illegal pyramid scam.
- If friends and family lose money trying to sell the product, your personal relationships may be at risk.
- You yourself may end up bankrupt. Illegal scams typically benefit only those executives at the top of the pyramid.
As hockey legend Wayne Gretzky once said, “You miss 100 percent of the shots you never take.” However, before investing your life savings in kitchen cutlery or designer vitamin inventories, think long and hard about the financial risk and time commitment involved.
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