The question comes up all of the time for network marketers, “Is this one of those MLM pyramid deals?”
The fact is, most people do not really understand the difference between a pyramid scheme and a legal MLM or network marketing business opportunity. Even most journalists writing on the subject do not understand the differences.
The reason is that it is not as simple as one might first expect. I used to think that if there were products changing hands, it was legal. If there was only money changing hands, it was illegal. While the latter is certainly illegal, a product alone will not necessarily legitimatize an illegal scheme.
On this page is a recording of a live webcast I did a while back not only explains the difference in a way anyone can understand, but it also explains a concept that can help you quantify the “grey areas.”
I guarantee that you have never seen it explained like this…
The rest of the content on this page is for Premium Members only.
A lifetime membership for Premium content is available as a bonus with a purchase of the Special Report/Course, MLM The Whole Truth.
Watch in full screen mode here: http://csf5.6scoach.com
(If you have a slower connection speed and you find that the presentation starts and stops, you can pause presentation by clicking on the Pause ‘||‘ button. It will continue to load while paused so you can come back in 10 or 15 minutes, then click on the play button ‘>‘ with better results. The video will then be finished downloading and you can watch it play through without skipping.)
Watch the 20 minute video presentation carefully, it will help you more fully understand and explain what is legal and what is not, what is profitable and what is not.
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{ 10 comments… read them below or add one }
I am getting sick and tired of people overemphasizing on what is the difference between a pyramid and a legitimate MLM opportunity. There are network companies that are promoting health and wellness products and selling them to distributors at prices like $120 a month in autoship. But what about those same juice products that are sold on ebay for a fraction of the cost. I am not going to name any companies and I can pretty much bet that you know what company I am talking about. I bought a case of their health and wellness products on Ebay (four bottles of this juice in wine bottle) for only $70. Can you believe this? Who is getting ripped off here. The MLM distributor? This needs to be looked into. What is not going to stop other companies to do the same thing to rip off the hard working distributor who is trying so hard to sell the darn product to regular customers like me. But unfortunately, people like me found a cheaper way to buy the product. Now is this a scam. Please reply. I need some answers on this.
Hi “Straight Line DL”
It is very important to understand the difference between an illegal pyramid and a legitimate MLM. Not only will all pyramids ultimately fail, but if you are very successful and become a top leader, you may be prosecuted with the principals of the company. Additionally, what kind of person wants to put friends, family or even strangers into an illegal business?
That said, you make a valid point about the pricing of products being an important factor. Oh, it’s easy if you are selling pencils for $10 each. Not so easy with exotic juices. It easily gets into gray areas as pricing and opinions about the value of products can differ greatly.
Here’s the practical test: Is the product retailable? And, is it, in fact, being retailed?
If the only people who are buying the product are also participants in the compensation plan, the legal authorities will no doubt step in at some point and question the legality of the plan. There must exist at least a certain percentage of real end user customers who are only buying because they value the products at the price offered, not because they are participants in the comp plan.
By that standard, there are far more illegal MLMs than most of us would like to admit.
Enough of the scare tactics already. There are crooked car dealers, lawyers, teachers, priests, contractors, manufacturers, and probably even MLM companies. But you can’t stay locked up in your house all day for fear you might cross the path of a crook. M O S T people in A L L these industries are HONEST. Even those working at Law firms, Universities, & MLM companies. If you’re really that paranoid, just stay with ones that are BBB, DSA, D&B, & USChamber of Comerce members and you’ll be just fine.
I think the unfounded fears about “illegal pyramid schemes” could be put to rest quickly if one would simply look at the details of how ALL products & services are distributed. Should Rolls-Royce stockholders be put in prison for selling a $500k sedan when the exact same engine, transmission & quality can be purchased for $80k in a BMW 750iL ?? Or for $30k in a 5-yr old 750 iL??? Why is a Picasso worth $10 million when a better (newer, clearer, better-looking) origional painting can be had for $50? Why is a plane ticket to Reno sometimes worth $750 and sometimes $125? Is everybody who sells anyting a crook? The ignorant would say yes. But that’s hardly fair–or accurate. Just because you don’t know the details–or don’t understand the complexities of something it doesn’t mean there’s something wrong with it. Mabey there’s something wrong with you–like your ability to comprehend complex thoughts! If a company–ANY company– is a member of both the BBB & Chamber of Commerce; they’re generally legit. Especially if they’ve been members for a decade or more. And if they’re a member of the DSA it means they’ve repeatedly allowed the DSA to audit their books at will; and the DSA has determined that they’re honest & solid. These are MUCH better measures of a Company’s stability than the opinions on the internet written by people you have no way of checking out. Or the opinions of friends who, in the end, just plain don’t know what they’re talking about. If you need more, look up the Company in question on D&B (Dunn & Bradstreet) They rate every (real) Company from GM to GE to Sears to AVON to Amway. If you can’t find a favorable D&B rating; or if they’re not approved by the BBB, DSA, & USChamber of Commerce– skip them an try something else! And remember — you get what you pay for! Good Luck.
Craig,
I am trying to understand your reaction to this information. Are you trying to say that it is not important to understand the difference between an illegal pyramid scheme and a completely legal mulitilevel marketing company?
You know Lou, along those same lines .. very rarely will you get a positive answer if you ask a distributor “Would you be a customer of this company if you had to pay full retail for their product and there was no business opportunity connected with it?”
When you DO find a company with a product ( or product line) that good, THAT is one to explore more. While I may help a client to see the strong and the weak points in a company’s business plan, it is unusual for me to say “I think you need to do this company.” ( I rarely say “run away from this company” also) Most of the time they will make a wise decision on their own after weighing the pros and the cons of a company.
Dear Lou Abbott,
I used to clarify this concept by asking myself: If I join the company and don’t refer a single person, am I at a loss? If the answer was yes, then it seemed to be a pyramid scheme, and if not, then it appeared to be legitimate. I know this is a very basic and simple approach. Is my idea correct in terms of differentiating a pramid scheme and a legitimate MLM business?
Yes. That is a very good question. It’s not the whole answer, but it’s a very good place to start. If you would buy the product or service without the business opportunity attached, you probably can’t get hurt if you make no sales or no recruits. (As long as you also do not incur a lot of additional expenses to make no sales or no recruits.)
I would ask it this way to be more complete. Are there a significant percentage of people joining who just want the product or service and that are NO part of the comp plan? If that is true. The company is probably on a strong foundation for legality and good business. And, they have met at least one of my “12 Critical Success Factors” in my special report and course.
Craig states “If you’re really that paranoid, just stay with ones that are BBB, DSA, D&B, & USChamber of Comerce members and you’ll be just fine.”
You fail to address the fact that YourTravelBiz.com and Trek Alliance – both illegal pyramid schemes were in fact DSA members.
Let’s not forget the DSA’s more infamous member, Amway – the most controversial of MLM’s where the secret tools business generated more profits from it’s own sales force than from the sales of Amway tools, the company which was fined $25million in Canada for customs evasions, convicted of price fixing AND where the losses amongst distributors continues to remain within the vicinity of 99%.
The FTC alone provides some useful information which helps consumers identify a legitimate opportunity from a pyramid scheme or a cleverly disguised pyramid scheme.
http://www.ftc.gov/bcp/edu/pubs/consumer/invest/inv08.shtm or http://www.ftc.gov/speeches/other/dvimf16.shtm
MLM attorney, Kevin Thompson has developed the GOALIE test to help consumers also.
http://www.investopedia.com/articles/04/042104.asp, http://www.themlmattorney.com/kevin-thompson-law/
The red flags include recruitment being the primary focus of activities (which is as stated by the FTC – “a time tested tip-off to a pyramid scheme”), over-priced products and a lack of retail sales by distributors to anyone outside the scheme, rewards which are far more lucrative for recruiting a huge downline than from actual sales and a compensation plan which clearly enriches only a very few at the top such as is the case with pyramid schemes.
Just because a scheme hasn’t been identified by authorities as an illegal pyramid scheme (keeping in mind authorities are reactive rather than proactive), doesn’t mean you’re not able to use your own judgement and do the “due diligence” that these companies promote (that is, seeking information from external, unbiased sources AND professional advice to ensure the investment is sound and the legality of the proposed business model).
I like reading different thougths sometimes just to see where others are coming from. I wonder if there is jealousy with regard to a certain company (wine bottles company) A company whose CEO was awarded Enrepreneur of the year by Ernst and Young and reated number 1 in the food and beverage category by the Inc. 500 magazine. Will you now look for dirt of these two companies to bring weight to your argument.