1. Avoiding Pyramid Schemes
2. How Pyramid Schemes Work
3. Guidelines for Investors

Have you ever thought about becoming a distributor for a multi-level marketing company to make a little extra money or build a business working on your own? Multi-level marketing is a retail system in which consumer products are sold by independent businessmen and women (distributors) usually in customers' homes. You can set your own hours and earn money based on your efforts and ability to sell consumer products or services supplied to you, the distributor, by an established multi-level marketing (MLM) company.

The multi-level company also will encourage you to build and manage your own sales force by recruiting, motivating, supplying, and training others to sell the products or services. A percentage based on the sales of your sales force would be your compensation, in addition to personal sales.

Although it is possible to build a successful multilevel business with comparatively little start-up money, keep in mind that it is not a means of getting rich quickly or easily. Successful distributors who have recruited and trained a large number of sellers also have to assume ongoing wholesaling and managing responsibilities and make sales to their own retail customers. Managing such a large network can be lucrative, but it is hard work and can become a full-time job.

Avoiding Pyramid Schemes

"Pyramid" schemes concentrate mainly on the quick profits to be earned by selling the right to recruit others. The merchandise or service to be sold is largely ignored, and little or no mention is made of a market for the products. Pyramid scheme participants attempt to recoup their investments in products by recruiting from the ever-decreasing number of potential investors in a given area.

Unless you recognize the tactics of a pyramid scheme, you may find yourself tempted to become involved. Here's a typical example:

You have just been invited by a friend, neighbor or colleague to attend an "opportunity meeting" to find out how you can earn lots of extra money. You go, thinking this may be a way to build a business on your own. In a frenzied, enthusiastic atmosphere you are told how easy it is to realize a fabulous return on your investment. A smooth-talking organizer may try to convince you that his plan is an exciting shortcut to riches, easy living, and early retirement. To invest, you usually have to pay a large fee. The organizer may tell you that you don't have to invest (buy products, courses, etc.), but indicates that you would be foolish not to do so.

You are confused. You are not really sure what the product or service is, or how it's going to be sold. Instead, the emphasis of the meeting has been on the fact that all you have to do, aside from investing your money in the program, is to get others to invest. The plan focuses more on the recruiting of other participants than on selling the product or service.

How Pyramid Schemes Work

Consider the results if one person recruited six distributors, each of whom, in turn, recruited six others, and carry the process through nine steps as follows:

1. 6
2. 36
3. 216
4. 1,296
5. 7,776
6. 46,656
7. 279,936
8. 1,679,616
9. 10,077,696

At more than 10 million people for every nine steps in the distribution program, the distributors soon would be recruiting one another. For everyone to profit in a pyramid scheme would require a never-ending supply of potential (and willing) participants. Obviously, there isn't one. When the supply runs out the pyramid collapses and most participants lose their investment.

The tragic aspect of pyramid schemes is that they concentrate on and exploit people with limited means and limited knowledge of business--people who can ill afford to lose the investment they put into the program. Thousands of unsuspecting and trusting investors have lost millions of dollars by investing in pyramid schemes. Even worse, the schemes have robbed some retired persons of their life savings.

Pyramid schemes are illegal throughout the United States. Keep in mind, however, that it is difficult to prosecute these schemes; most often the money invested is lost.

It's always a good idea to check your Better Business Bureau for a reliability report on any company in which you are thinking about investing. Also, if you feel you have been defrauded, your state attorney general may be able to advise you of some possible recourse.

Guidelines for Investors

  • Be wary if the start-up cost for the investment is substantial. Legitimate multi-level marketing companies usually require a small start-up cost. Pyramid schemes, on the other hand, pressure you to pay a large amount to become a "distributor." The promoters behind the scheme make most of their profit on the signing up of new recruits.
  • Find out if the company will buy back inventory. If not, watch out--you could be saddled with unsold inventory. Keep in mind that legitimate companies that require you to purchase an inventory should offer and stick to inventory buybacks for at least 80 percent of what you paid. Some state laws require 90 percent buy-backs.
  • What is the consumer market for the products? If the company seems to be making money by recruiting alone, you will want to stay away! Remember, multi-level marketing depends on selling to consumers and establishing a market for quality products. Pyramid schemes, however, are not concerned with sales of the products. Rather, they focus on profits to be made on volume sales to new recruits who buy the products in order to participate in the scheme.
  • Before investing, get all the facts about the company, its officers, and its products. Find out the start-up cost and the company's buy-back policy.
  • Get written copies of the company's marketing plan, sales literature, and other documentation.
  • Check with others who have experience with the company and its products. Are the products actually being sold to consumers?

To check on a company, contact your local Better Business Bureau, district attorney, or state attorney general's office. Also, you may want to contact the Direct Selling Association (1776 K Street, N.W., Washington, D.C. 20006), a national trade association representing legitimate in-home sales companies, many of which engage in multi-level marketing.