Network Marketing Scams and Ponzi Schemes Defined

 How Can You Tell the Difference Between a Legitimate MLM Business and a Scam or Ponzi Scheme?

From the DSA: "Multilevel marketing is a popular way of retailing in which consumer products are sold, not in stores by sales clerks, but by independent businessmen and women (distributors), usually in customers' homes. As a distributor you can set your own hours and earn money by selling consumer products supplied by an established company. In a multilevel structure you can also build and manage your own sales force by recruiting, motivating, supplying and training others to sell those products. Your compensation then includes a percentage of the sales of your entire sales group as well as earning on your own sales to retail customers. This opportunity has made multilevel marketing an attractive way of starting a business with comparatively little money." 

 Pyramid schemes seek to make money from you (and quickly).  Multilevel marketing companies seek to make money with you as you build your business (and theirs) selling consumer products.  Before you sign up with a company, investigate carefully. A good way to begin is to ask yourself these three questions:


How much are you required to pay to become a distributor?

Will the company buy back unsold inventory?

Are the company's products sold to consumers?"


The products or services sold through network marketing have value, whereas in a pyramid scheme, they don't.  And, in network marketing, you can make profit from the sale of the product or service, even if you don't recruit any other distributors. 

The DSA advises that you watch for these warning signs:


Pressure to sign a contract quickly and agree to pay a large sum of money before sales claims can be investigated or legal advice obtained.

Promises of extraordinarily high or guaranteed profits.

Claims that profits can be achieved easily.

A required initial fee which greatly exceeds the fair market value of any products, kits or training.

A large fee payable before you receive anything in return.

Evasive answers by the salesperson or unwillingness to give disclosure documents required by law.

Another thing to watch out for is claims that the opportunity is perfectly legal. If it is, they shouldn't have to say that!

  The DSA also suggests that you should "avoid dealing with salespeople who:


Disparage other products or firms.

Confuse you, abuse your trust, or exploit your lack of experience or knowledge.

Try to make you cancel a contract made with another salesperson.

Falsely tell you they're taking a survey or you've just won a contest."


Avoid dealing with companies that:


Charge a substantial entry fee (more than the cost of a sales kit).

Pressure you to purchase large quantities of products.

Do not repurchase inventory if you decide to leave the business.

Sell few or no products to consumers.

Make sure to get the company's literature, information on the compensation plan and their policies and procedures and take time to review them. 

Legitimate network marketing companies, incorporate the 70% rule (70% of the product purchased by a distributor must be sold or consumed before more is purchased, thus preventing inventory loading) and the buy-back rule (the company buys back currently marketable products and sales aids from distributors who leave the company). These are based on the Amway decision.  Learn More