Pyramid Scheme: Multi-Level Marketing (MLM)

Multi-Level Marketing (MLM)
Legal multi-level marketing (MLM) involves being recruited in order to sell a product or service that actually has some inherent value. As a recruit, you can make a profit from the sales of the product or service, so you don't necessarily have to recruit more salespeople below you. While you may be encouraged to recruit other salespeople whose sales would give you more profit, you can stick to just selling the product directly to the consumer if you choose.

A pyramid scheme MLM, however, will most likely sell a product with no independent value. The product could take the form of reports of some kind, for example, or mailing lists. In this kind of pyramid scheme, you would be required to recruit new members into the MLM in order to make a profit and keep the MLM alive. Joining the MLM is the only reason anyone would buy the products sold by this pyramid scheme.

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It is easy to see how a pyramid scheme can work, but participating in one (regardless of the form in which it is presented) involves deception and fraud because not everyone will receive the money that is promised in return.

As with any other investment plan you consider entering, it is important to ask the right questions. How will this money be invested? What is the rate of return? Who will be investing it? Talk to professionals and do your research before placing your money anywhere. Always remember that if a plan promises you'll get rich quick with no risk, or doesn't tell you how your money will be invested, you should exercise caution before getting on board.

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Amway stresses that the main difference between a legitimate MLM business model and a pyramid scheme is that a legitimate MLM is focused on selling products, not recruiting more salespeople. In a legitimate MLM, it should be possible to make money by simply selling products directly to customers. With that main criterion in mind, here are some other ways to identify product-based pyramid schemes:
Pyramid schemes offer money for simply recruiting people. This money can come as a commission from the sale of a starter kit or as a recruiting "bonus."
Avoid any MLM that puts much more emphasis on recruiting salespeople than selling the actual product.
Pyramid schemes charge steep startup costs for joining, including mandatory training, a starter kit and a non-refundable membership fee.
Beware of any MLM that allows five or more levels of distributors to collect commissions on a single sale.
Make sure that the products being sold have real value and a competitive price. Are they reputable brands? Have the manufacturers been involved in recent lawsuits?
Avoid MLMs that only sell lists of sales leads to other MLM salespeople. This is most likely outdated information that has made the MLM rounds several times before.
Avoid signing up for an MLM as part of a high-pressure motivational event. Consider the information carefully and take it home to think about it.
Be wary of anyone who tries to sell you on an MLM by flaunting their personal wealth. Realize that many of the people who claim to have made millions through MLM have actually made their money selling books and videos on how to make millions through MLMs.
Bottom line: If it sounds too good to be true, then it probably is.

http://money.howstuffworks.com/pyramid-scheme2.htm
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