Multi-level Marketing or Pyramid Scheme?
January 25, 2016I’ve been hearing more and more from friends that they are considering a side gig selling a product or service. We all know stories of people who have made substantial extra income from things like nutritional cleansing, personal care products, cosmetics, financial products and vitamins. Many of these are established companies and household names. Consumers like their products and the feeling that comes with supporting their friends and neighbors.
On the other hand, there are other companies that are in litigation or under scrutiny for their business practices. When is multi-level marketing a legitimate business model, and when does it cross over into being a pyramid scheme – a financial fraud which the SEC defines as when the company or individual tries to make money solely from recruiting new participants to pay off earlier stage investors? If you are one of those people considering a side gig like this, how can you protect yourself from a bad investment?
Follow the Money Trail
According to the Federal Trade Commission, multi-level marketing companies sell products through direct sales by their representatives. The marketers can earn commissions not just from their own sales, but by also recruiting new distributors and earning a percentage of their sales. According to the FTC, if your earnings are based on actual sales to the public, it’s multi-level marketing.
Alternatively, if your earnings are based on what you sell to the people you have recruited, it’s probably a pyramid scheme. In other words, you have to be able to make money selling products or services to customers who don’t become distributors, and your distributors have to be able to do that as well. Consult these helpful resources from the SEC and the FTC on distinguishing multi-level marketing from pyramid schemes.
Choose a Genuine Product or Service You Recommend
Does your interest in selling them come from your personal experience or just a desire to generate income? For example, one health coach I know successfully incorporated selling nutritional cleansing products into her practice. She’s used them, believes in them and was comfortable recommending them. When one of her clients is particularly enthusiastic, she’ll ask them if they want to become a representative. Another friend invested tens of thousands of dollars in personal growth seminars without realizing a dime in return, under heavy pressure all the time to recruit her friends and work colleagues into the program.
Do some market research independently. Are the products or service competitively priced? Have there been complaints about the company with the Better Business Bureau?
Demand Evidence
You are about to make an investment of your money and time as well as risk your reputation and credibility with your friends and family. Be relentless in asking hard questions of your sponsor and other representatives. How much product have they sold to the public, and how much to other distributors? Get a hard breakdown of sales that come from products and sales that come from selling inventory to other distributors.
How much time do they spend every week on this business? How hard was it to get started and what did they do to become successful? Make sure you see the math before you invest.
What if You’re Not Sure?
If you aren’t 100% enthusiastic and comfortable with the answers to your questions and what you find out about the company, say no. Trust yourself. No one cares more about your money than you do.
Have you had a good or a bad experience with multi-level marketing? I’d love to hear about it. Email me at [email protected] or follow me on twitter @cynthiameyer_FF