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The Federal Trade Commission (FTC) warns "Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It's best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products." The FTC states that research is your best tool, giving eight steps to follow:
1. Find --- and study --- the company's track record
2. Learn about the product
3. Ask questions
4. Understand any restrictions
5. Talk to other distributors (beware of shills)
6. Consider using a friend or adviser as a neutral sounding board or for a gut check
7. Take your time
8. Think about whether this plan suits your talents and goals
FTC guidelines and most state statutes include a key element in defining pyramid schemes -- the payment of money by the company in return for the right to recruit other participants into the scheme. If the primary emphasis is compensation from recruiting, rather than from the sale of products to end users, it is considered a pyramid scheme. In a 1974 ruling, the FTC found in the very structure of "multi-leveling" or "pyramid selling" [now called multi-level or network marketing, or MLM] "an intolerable potential to deceive."
A Closer Look at Multi-Level Marketing
Direct selling and network marketing refer to the distribution system, while the term "multi-level marketing" describes the compensation plan.
MLM is the direct descendent of classic, no-product pyramid schemes. With expansive pay plans and a whole network of endless chains of recruitment, MLM assume an infinite market, which does not exist in the real world. They also assume virgin markets, which don't exist for long -- which means they either collapse or re-pyramid into new markets. MLM is therefore inherently flawed, deceptive, and profitable primarily for those at or near the top of their respective pyramids -- who are usually the first ones in.
Multi-level marketing (MLM) is a marketing strategy in which the sales force is compensated not only for sales they personally generate, but also for the sales of the other salespeople that they recruit. This recruited sales force is referred to as the participant's "down-line", and can provide multiple levels of compensation.
Multi-level marketing is a purported income opportunity, in which persons recruited into a pyramid of participants make ongoing purchases of products and services, and recruit others to do the same, and they still others, etc. -- in an endless chain of recruitment and personal consumption, in order to qualify for commissions and bonuses and to advance upward in the hierarchy of levels in the pyramid. Product purchases become the means of disguising or laundering investments in what is in fact a product-based pyramid scheme.
Amazingly, four key characteristics are both causative (causing high loss rates) and defining (clearly distinguishing pyramid schemes from legitimate businesses). I'll refer to these causative and defining characteristics as .CDCs. Below are the four CDCs of recruitment-driven MLMs, or product-based pyramid schemes, that cause the harm and that clearly distinguish between MLM and legitimate direct selling opportunities.
1. Each person recruited is empowered and given incentives to recruit other participants, who are empowered and motivated to recruit still other participants, etc. -- in an endless chain of empowered and motivated recruiters recruiting recruiters -- without regard to market saturation.
2. Advancement in a hierarchy of multiple levels of "distributors" is achieved by recruitment and/or by purchase amounts, rather than by appointment.
3. "Pay to play" requirements are met by ongoing "incentivized purchases," with participants the primary buyers.
4. Company payout (in commissions & bonuses) per sale for the total of all up-line participants equal or exceed that for the person selling the product -- resulting in inadequate incentive to retail and excessive incentive to recruit. This is what is meant by a "top -weighted" pay plan.
5. In addition to the four CDCs above, nearly all MLMs also have a fifth CDC, making it even more top-weighted. The MLM company pays commissions and bonuses on more "distributor" levels than are functionally justified; i.e., five or more levels, which only further enriches those at the top of the pyramid.
In Conclusion
An ongoing MLM misrepresentation is that the market collapse predicted for MLMs never happens. Many MLMs have been around for over 40 years and are still going strong. However, I believe the truth of the matter speaks otherwise.
In MLM, market collapse is manifested in CONTINUOUS COLLAPSE, meaning that the market is constantly collapsing, requiring constant recruitment to replace those continually dropping out - with recruits willing to make "pay to play" purchases in hopes of cashing in. MLM leaders have learned other strategies for circumventing market collapse. They find new markets in which to recruit, or recycle through old markets with new generations of prospects, or with new products. Without these efforts, an MLM could collapse fairly quickly.
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