MLM and Pyramid Scheme posing as MLM: What’s the difference?

Probably, at least once in your life, you had been invited by your friend, relative, or even a stranger that you’d met in a park, mall, street, anywhere to join what he/ she called business opportunity. Perhaps he/ she enticed you to join in their business by presenting you with their compensation plan and promised you to earn huge profit within a shorter period of time if you will also be able to encourage everyone to join in their business. But before you can join he/she required you to put your money in the business as an investment and of course as an exchange of a package that shall be given to you as a distributor to their products. This is the common activity of a networker in a networking/ MLM company to recruit as many as they can because they earn so much by recruiting. As observable, someone became a millionaire by joining a networking/ MLM company but many people also lost their hard-earned money by accidentally joined a pyramid scheme posing as MLM. How do we differentiate and determine MLM and pyramid schemes posing as MLM?

Multilevel Marketing Programs are known as MLM’s, and it has a real product to sell. MLM’s actually sell their products to members of the general public, without requiring these consumers to pay anything extra to join the MLM system. MLM’s may pay commissions to a long string of distributors, but these commissions are paid for real retail sales, not for new recruits.(1)

Pyramid scheme that posing as MLM, on the other hand, also have products to sell but their primary focus is on recruitment. They may offer different packages a composition of different products that they give their recruits as an exchange of their investment. Often, the amount invested is higher enough than the package that recruits received. Their compensation’s derived primarily from recruitment, they encourage many people to join in their business with the promises to earn huge profit in a shorter period of time. Unfortunately, only earlier investors earn huge profit, as the amount invested by new recruits are used as a commission of their uplines and someone who joined earlier. According to Debra A. Valentine, there are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. Inventory loading occurs when a company’s incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company’s distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to the market. A lack of retail sales is also a red flag that a pyramid exists, especially if the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.(1)

To determine, whether the MLM is a legitimate or pyramid scheme. The DSAP (Direct Selling Association of the Philippines) presents their 8 point test.

1. Is there a product?

2. Are commissions paid on the sale of products and not on registration/ entry fees?

3. Is the intent to sell a product, not a position?

4. Is there no direct correlation between the number of recruits and compensation?

5. If recruitment were to be stopped today, will the participants still make money?

6. Is there a reasonable product return policy?

7. Do products have a fair market value?

8. Is there a compelling reason to buy?(2)

DSAP concluded that if the answer to all these questions is YES then the company being evaluated is legitimate but if the answer is NO even to one question then there is a high probability that it is a pyramid scam.

MLM is a form of business wherein products from manufacturers sell directly to consumers. It is a legit business wherein profits/ income derived primarily on the sale of products and not on the number of people recruited to join the business. Pyramid scheme, on the other hand, is an illegal form of business, they may have products but these products are simply used to conceal their fraudulent activities which are to recruit people and used their money to sustain their business. To avoid being a victim of a pyramid scheme it’s very important to know the differences between MLM and pyramid schemes. Using the 8 point test of DSAP is recommended to determine whether the MLM company is legit or just a pyramid scam. You may also seek advice from finance and business experts to be guided to the decision to be made of joining a networking/ MLM business.

References

1. Valentine, Debra A. (1998, May 13). Pyramid Scheme, from http://www.ftc.gov/public-statements/1998/05/pyramid-schemes

2. DSAP 8 point test available at http://www.dsap.ph/wp-content/uploads/2018/08/8-Point-Test-POSTER-HIRES-FILE-WFDSA-edited.jpg