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Pyramid Schemes and MLMs

Pyramid Schemes and MLMs

If you’ve seen a baby pink Cadillac on the road or a smoothie place with no prices on the menu, you’re familiar with MLMs and pyramid schemes. However, the line between the two is often blurred especially when scandals and tales of financial woe abound. So, what is the difference between a pyramid scheme and an MLM? Keep reading to find out.

MLMs Defined

A multilevel marketing company, or MLM, uses a person-to-person business sales model. That means you’re selling directly to other people, maybe from your home, a customer’s home, or online.

If you join an MLM program, the company may refer to you as an independent “distributor,” “participant,” or “contractor.” Most MLMs say you can make money two ways:

  • By selling the MLM’s products yourself to “retail” customers who are not involved in the MLM
  • By recruiting new distributors and earning commissions based on what they buy and their sales to retail customers

Your recruits, the people they recruit, and so on, become your sales network, or “downline.” If the MLM is not a pyramid scheme, it will pay you based on your sales to retail customers, without having to recruit new distributors. Most people who join legitimate MLMs make little or no money. Some of them lose money. In some cases, people believe they’ve joined a legitimate MLM, but it turns out to be an illegal pyramid scheme that steals everything they invest and leaves them deeply in debt.

Examples of MLMs

Multilevel marketing companies are legitimate businesses that rely on direct sales to sell products and services. However, it can be difficult to distinguish the legitimate from the illegitimate when there are rumors about MLM companies being poorly disguised pyramid schemes.

Below is a list of legitimate MLMs that you may recognize:

  • Mary Kay
  • Tupperware
  • Primerica
  • Young Living
  • Avon

Multilevel marketing is controversial and often compared to pyramid schemes. While some multilevel marketing operations are legal, others have come under investigation. This typically occurs when the majority of the operation’s profits funnel up to the top, leaving little for the rest of its members.

When an organization focuses primarily on recruitment, rather than selling products, this may also signal that it is operating under a pyramid scheme. Sometimes, members of these schemes will number in the hundreds or even thousands.

What Is a Pyramid Scheme?

Pyramid schemes are scams. They can look remarkably like legitimate MLM business opportunities and often sell actual products, maybe even ones you've heard of. But if you become a distributor for a pyramid scheme, it can cost you and your recruits — often your family and friends — a lot of time and money that you won’t get back.

The promoters of a pyramid scheme may try to recruit you with pitches about what you’ll earn. They may say you can change your life — quit your job and even get rich — by selling the company’s products. That’s a lie. Your income would be based mostly on how many people you recruit, not how much product you sell. Pyramid schemes are set up to encourage everyone to keep recruiting people to keep a constant stream of new distributors — and their money — flowing into the business.

Often in a pyramid scheme, you’ll be encouraged or even required to buy a certain amount of product at regular intervals, even if you already have more inventory than you can use or sell.

You may even have to buy products before you’re eligible to be paid or get certain bonuses. You also may have to pay repeated fees for other items, like training sessions or expensive marketing materials. In addition, the company may say you can earn lavish rewards, like prizes, bonuses, exotic vacations, and luxury cars. However, it often turns out that you have to meet certain product purchase, recruitment, training, or other goals to qualify for the rewards, and only a handful of distributors ever qualify.

Eventually, most distributors 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 required fees or the inventory purchases they need to make 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 distributors for your sales network as the real way to make money. Walk away. In a legitimate MLM program, you should be able to make money just by selling the product.
  • Promoters play on your emotions or use high-pressure sales tactics, maybe saying you’ll lose the opportunity if you don’t act now and discouraging you from taking time to study the company. Leave by the nearest exit. Any company that tries to pressure you to join is one to avoid.
  • Distributors buy more products 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.

Pyramid schemes like eAdGear and Herbalife are pyramid schemes that rely on recruitment and downlines to turn a profit. Not only are they a scam, but they are illegal.

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