This is a guest post from Ryan who is the author of the Obsessed Analytic blog, a guide for young adults regarding life, money, and technology.
Occasionally you may run across an old friend or acquaintance who has a deal too good to be true. You hear “Just buy a few of these and sell some of those and you’ll retire at thirty.” These pyramid/multi-level marketing/sales pitches are enticing, but it’s important to understand what’s worth it and even what’s legal. Understanding the difference between the scam known as a pyramid scheme and a legal multi-level marketing design is important to anyone wanting to try out one of these sales businesses.
What are Pyramid Schemes and Multi-level Marketing Companies?
Straight up, a pyramid scheme involves a lot of people passing a small amount of money up a “pyramid” so that the person at the top comes out with big bucks. Although profitable for some, the downfall of a pyramid scheme is that it is unsustainable. For any one person to make money, another dozen or so must lose money. Or for a hundred people to make money, a thousand must lose. No matter what, there are always more losers than winners.
Multi-level marketing (MLM) companies have a similar top down design as pyramid schemes, but when designed correctly, they function like a legal sales company (i.e. Primerica, JWS). When following the right frame set, a MLM company can provide sellers with a great entrepreneurial experience and a great source of income, but under the wrong rules, a MLM can ruin someone and make them waste their time.
How to Tell If a Deal is Legitimate
There is one key difference between the legitimate and illegitimate companies and this has to do with the product being created and the source of income. In any real economy, products are traded for currency which signifies the value being traded. A legitimate company has workers and sellers creating and selling a product and then outside buyers purchase the product in exchange for money. A good with value is being passed to someone outside of the company and the money is then distributed among the workers and sellers.
Multi-level marketing companies often require sellers to pay a fee to sell the good and this fee is passed up the ranks. If no goods are ever sold then this set up emulates a pyramid scheme. As more and more goods are sold, the design begins to look more and more like a traditional company where the sellers pay no fee and receive a commission for goods sold. A company is legitimate when it has more money coming in from goods being sold than from sellers paying fees to sell.
When a Multi-Level Marketing Company is Worth It
Even legitimate MLMs may not be worth it to the seller. It may take an unnecessary amount of time and effort to make the smallest amount of money. Here are some questions to ask before committing.
- Is there an entrance fee to become a seller?
- Do I have to buy x units of the product (that’s a fee) to make a commission?
- Will I only make money if I refer others to the company?
When evaluating a company, the more times you answer YES to the questions above then the more likely the MLM is operating like an unsustainable pyramid scheme. Be sure to be cautious of how hard it is to make money in MLMs. Remember that traditional sales companies don’t require sellers to pay fees to get started, don’t require sellers to buy the company product to make money, and don’t require sellers to have other sellers under them to make a living. Although these may increase your pay, you should be able to make a living without them.
What are your thoughts on MLM programs? Have you benefited from a well-designed one or been hurt from a deceitful one? Let us know in the comments…