How to tell the difference between a pyramid scheme and MLM
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Raise your hand if you have a DM promising you an opportunity to have your “own business” because they are looking for “like-minded people looking for extra income”? Oh and you can also try the latest products?
You’re not alone. Times are tough and while it’s tempting to hit the answer button and jump at the opportunity to be your own boss, you better err on the side of caution.
While some of these businesses are legitimate, there are people who will do whatever it takes to take advantage of those who need to put food on the table.
What is the difference between pyramid scheme and multilevel marketing?
At first, it can be difficult to distinguish a pyramid scheme from a multi-level marketing (MLM). After all, both have business models that rely on multiple levels of distributors and rookies.
However, there are ways to tell them apart.
A pyramid scheme is a fraudulent scheme to earn money by recruiting an ever-increasing number of so-called “investors”. Initial promoters recruit investors, who in turn recruit other investors – and so on.
You and your Facebook feed may be familiar with NuSkin, Herbalife, and Avon. These are examples of MLMs and they sell products directly to consumers without using any middleman retail stores.
MLMs often sell genuine products (LumiSpa, anyone?), Whereas a pyramid scheme usually doesn’t have a product in place.
MLM recruits can make a profit by selling the company’s products as well as recruiting salespeople below them.
Another way to spot the difference is the money you are asked to donate at the start. If you have to “invest” a large amount of money up front to become a distributor, it is most likely a pyramid scheme. Legitimate MLM businesses don’t require big start-up costs.
With that, be careful if you have to register to participate. These could be expensive courses, training kits, or marketing materials.
Don’t register if the company doesn’t seem to be interested in consumer demand for their products. Multi-level marketing depends on establishing a market for the company’s products.
It is worth taking note of what the emphasis is. Is the emphasis more on recruiting or is the emphasis on selling the product or service? Pyramid schemes focus on the quick profits that result from recruiting people and getting their money. Therefore, if the company is focusing more on recruiting than selling the product, it might be time to reconsider its decision.
The business model should also be easy to understand. It’s a huge red flag if the model is made up of complex commission structures, bonus points, and complicated sales targets.
How Do MLM and Pyramid Systems Work?
It’s all in the numbers. The success of the business, whether it is an MLM or a pyramid scheme, depends on the number of people who can be recruited into the network.
Pyramid schemes and MLMs promise potential recruits easy money and passive income in exchange for very little work – sounds like the dream life, doesn’t it? Not exactly.
According to research, 95% of network marketers or multilevel marketing hires fail and successful people are in the minority.
Those people they show in MLM meetings who were on the verge of losing their homes but now own multiple cars and go on vacation every month? They are the top 2% of sellers.
What to check if you want to register
If you’re still considering signing up, here are a few things to consider or question.
– What is the history and reputation of the company?
– Does the company respect ethical requirements?
– Is there a strong demand for the product?
– What is the competition?
– How much should you invest upstream?
– What happens to unsold stocks? How are you going to get out?
And remember, if it’s too good to be true, it probably is.