Multi-Level Marketing (MLM) is a legitimate business strategy. However, many scammers have been disguising their pyramid scams as MLM companies . How can a potential investor distinguish between a legitimate networking company and an illegal Ponzi scheme?
Gotcha! If the word “investment” is used by the company, and you are called an “investor”, those are initial clues that it might be a Ponzi scheme. What are the other things you need to watch out for?
The Direct Selling Association of the Philippines (go see their website here) has come up with an eight-point test in distinguishing between a legitimate MLM company and an illegal pyramid scheme (most likely disguised as an MLM). ALL eight questions must have “YES” answers for a company to be evaluated as legitimate.
Here are the eight questions:
1. Is there a product?
If there is no product, then where is the money coming from? Duh, from the recruits of course. Beware, most scams actually have products, which is why a “yes” to this one question is not enough. However, most scams will probably have this as their only “yes”. Sadly, many potential recruits will instantly equate having a product with legitimacy. Not so fast! Remember, there are seven other questions you need to answer with yes.
The company’s facebook page provides a clue. If the photos featured are bundles of cash, fans of cheques, brand new cars, and not the products, then you likely have a scam at work. In legitimate companies, the products will be the focus, since they are the ones being sold.
In scams, the products are hardly available. Many distributors will probably never see the actual products. If the company has too little products but boasts that they are earning millions quickly, where is the money coming from? Clue: Fees from recruits
2. Are commission paid on sales of products and not on registration/ entry fees?
It is the product sales that should make money, so the commission must be paid from them. Scams pay a very large portion of the commissions from the entry fees. Many scams will work around this by disguising the registration/ membership fees as “sales” to distributors, or product “vouchers” or “rebates”. If the sales are mostly to the distributors themselves and not to the consumer public in general, that is a red flag. Beware of the term “Pay-in” because that is highly suggestive that someone is actually paying to be a member.
Another big red flag is when companies require a minimum number of recruits before you are eligible for commissions.
3. Is the intent to sell a product and not a position?
If you go into an MLM orientation and the company personnel talk mostly about recruitment then you’re in big trouble. Are the products even being discussed? Beware of terms like “Matrix”, “Exit”, “Slot” because they are highly suggestive that positions are being sold. Come to think of it, why would a legitimate company ask a distributor to “exit” if the company has products to sell.
4. Is there no direct correlation between the number of recruits and compensation?
If the money is coming from sales of the product to the general public (as in a legitimate company), then the commissions should be paid from that. If you sell many products but have no recruits, you should still earn a lot from a legitimate company.
In a scam, an upline will get paid even if his recruits don’t sell any product. Beware if the recruiter tells you “You Don’t Need to Sell” or “Selling is Optional”
One of the signs of a legitimate networking company is when the downlines actually make more money than their uplines when these downlines (even if they have no recruits of their own) are successful in selling the products.
In a scam, the uplines make more money than their downlines because the uplines make most of their money from the fees paid by their downlines.
5. If recruitment were to be stopped today, will the participants still make money?
A legitimate company will continue to earn even without new recruits since it makes money from product sales. In a pyramid scam, money paid to the uplines comes from the fees of recruits. A pyramid scam will start to collapse (as it is expected to) when there are no more recruits to sustain the scheme.
Come to think of it, if a company receives a SEC cease and desist order to stop “soliciting investments”, a legitimate company (it won’t receive this advisory obviously, but let’s assume this scenario for the sake of discussion) will not panic because it will still earn from selling products. A legitimate company may even shift from network marketing to traditional retail if it has to.
Beware if the company advises you to “reassure the potential recruits” when it becomes subject of a SEC advisory. That means that recruitment is the major thing that keeps the business afloat.
6. Is there a reasonable product return policy?
As I mentioned in item no, 2, many scams will disguise the membership fees as “product sales” to distributors. By the scam design, the payment is disproportionate to the value of the product being received. Obviously, the scammers will not allow the return of the products for a refund of the fees. The products are just decoys after all, and the scammers know very well that these products have very little real value.
In a legitimate company, if a distributor is not successful in not selling the products, it is in the best interest of the company to take the products back from that distributor and give it to another one that can actually sell products. The reason why a legitimate company would go into network marketing is to get their products in the hands of as many consumers as possible and not just gathering dust in the houses of its distributors.
7. Do products have fair market value?
A legitimate company will price the products competitively in order to sell them to the public. Even though the company will pay a large amount in sellers’ commissions, it would have saved a lot of money by not putting up their products via traditional retail (the company will save on rent, utilities, salaries, delivery costs, advertisements, etc ), so there is no reason for the products to be overpriced.
In a scam, the products are overpriced compared to alternatives available in the market since many levels of uplines have to get their cut. Again, scammers disguise the high registration fees as “product sales” to distributors. The prices will be disproportionately high compared to the actual value of the product since the very high mark ups are actually concealed registration fees.
8. Is there a compelling reason to buy (the product)
For any product to sell, it must give value to consumers. There must be a reason why a consumer will choose that particular product over other alternatives. Legitimate companies make money because there is market demand for their products.
If most people buying the products are the distributors, the business will eventually die down as the new distributor recruits dry up.
If you are being invited to join a multi-level or network marketing company, ask yourself the above eight questions. Yes responses to ALL of them are required for you to conclude that the company is not running an illegal pyramid scheme.
Unfortunately, many people, despite realizing that a company is running an illegal pyramid scheme by using the eight-point test above, will still join and even recruit zealously for that company. They will have no problems being part of a scam and will have no guilt in scamming others… just as long as they earn and get paid ahead of the others.
After all, just as legitimate network marketing is effective because of the concerted efforts of its many levels of members, a pyramid scam is effective because of the concerted efforts of its many levels of scammers.