The big difference between MLM and a pyramid scheme is in the business' operations. The entire purpose of a pyramid scheme is to get your money and then use you to recruit other suckers (ahem - distributors). The entire purpose of MLM is to move product. The theory behind MLM is that the larger the network of distributors, the more product the business will be able to sell.
Use these questions as an acid test if you're in the least doubt as to whether the opportunity you're considering is MLM or a pyramid scheme:
1. Are you required to "invest" a large amount of money up front to become a distributor? This investment request may be disguised as an inventory charge. Legitimate MLM businesses do NOT require large start up costs.
2. If you do have to pay for inventory, will the company buy back unsold inventory? Legitimate MLM companies will offer and stick to inventory buy-backs for at least 80% of what you paid.
3. Is there any mention of or attention paid to a market for the product or service? MLM depends on establishing a market for the company's products.
If the company doesn't seem to have any interest in the consumer demand for its products, don't sign up.
4. Is there more emphasis on recruitment than on selling the product or service? Remember, the difference between MLM and a pyramid scheme is in the focus. The pyramid scheme focuses on fast profits from signing people up and getting their money. If recruitment seems to be the focus of the plan, run. These next two questions will help you determine what the focus of the company is:
5. Is the plan designed so that you make more money by recruiting new members rather than through sales that you make yourself?
6. Are you offered commissions for recruiting new members?
As always, when you're investigating a potential business opportunity, you'll want to gather all the information you can about the MLM company's products and operations.
Get (and read) written copies of the company's sales literature, business plan and/or marketing plan. Talk to other people who have experience with the MLM company and the products, to determine whether the products are actually being sold and if they are of high quality. Check with the Better Business Bureau to see if there have been any complaints about the company. And listen carefully when you're at that MLM recruitment meeting. Inflated claims for the amazing amounts of money you're going to make should set your alarm bells ringing.
Being part of a successful MLM company can be both profitable and fun, but unfortunately, some purported MLM opportunities are actually pyramid schemes designed to flatten both your wallet and your dream of running a business.
Tuesday, September 25, 2007
MLM and Pyramid Schemes - How To Tell The Difference
MLM and Pyramid Schemes Can Be Very Similar
Considering an MLM opportunity? Be careful. It may well be a legitimate MLM business. Or it may be a pyramid scheme.
MLM (multilevel marketing) is an attractive business proposition to many people. MLM offers the opportunity to become involved in a system for distributing products to consumers. Unlike the person starting a business from scratch, the MLM participant has the support of a MLM company that supplies the products and sometimes offers training as well.
As an MLM participant, you make your money by selling the MLM products to other MLM participants. If they're not already a member of your MLM company, you sign them up. Besides earning money off your own sales, you also earn a percentage of the income generated by the distributors that you've brought into the MLM plan (your downline).
Often there are bonuses for selling particular amounts of MLM product or signing up a certain number of new members.
Sounds good, doesn't it? And being part of a well-run MLM business can be a lot like being a member of a large extended family.
Unfortunately,not every MLM opportunity is a legitimate business opportunity. Many pyramid schemes, frauds designed to part the unwary from their money, are disguised as MLM opportunities.
Like MLM, pyramid schemes depend on recruiting people to become distributors of a product or service. Like MLM, the pyramid scheme offers the opportunity to make money by signing up more recruits and by accomplishing certain levels of achievement.
The big difference between MLM and pyramid schemes is that MLM is legal in Canada and pyramid schemes aren't. (Participating in a pyramid scheme is an offence under the Criminal Code of Canada, punishable by up to 5 years imprisonment.) But it can be very difficult for the person looking for a business opportunity to tell the difference between a legitimate MLM opportunity and a pyramid scheme at a glance. How do you tell whether it's a legitimate business opportunity or a scam?
Six Questions to Check Out an MLM/Network Marketing Opportunity
The headlines are certainly enticing, especially in today's troubled economic climate. The idea of making money right away without any special skills or major investment appeals to the immediate need, while the promise of residual income appeals to the desire to not end up in your current financial position ever again. And some highly reputable companies have been built on this marketing & distribution structure... Avon, Mary Kay, Excel Communications, and more. But then there's the down side... "Do I really want to pitch this to all my friends?" "Can I actually make money at it?" "How do I know it's not a scam?"
If you're considering an MLM, CDM, or network marketing opportunity, ask these six questions to determine whether a network, multi-level, or consumer direct marketing is worth your while (and your money).
1. Who is your upline? Take it all the way to the top. What do you know about the person who introduced you to the opportunity? Can you trust what they tell you? Are they willing to divulge exactly how much they've been making? And what about the founders of the company (assuming it's a newer company)? Have they been successful and reputable in their previous businesses? Investigate your entire upline just like you would a business partner you'd never met before.
2. What is the product? Is it something that would sell well in a retail store or via other traditional marketing and distribution channels? What's the competition like? How convincing are you going to have to be in order to sign up customers? If you're not an experienced salesperson, don't expect to become one overnight. You're going to have to become an evangelist for the product, so make sure you believe in it.
3. When will you start actually making money? Don't fall for the line that it takes months or even years to show a profit. You should be able to recoup any investment and start earning income within just a few weeks if there's really demand for the product. Making a living at it is another story. You need to be able to work it part-time in addition to other steadier income sources. Will you realistically be able to do that with this company?
4. Where is the product being promoted and where can you promote it? Is the company doing advertising and publicity of its own to help create demand for the product? And what restrictions are there on where and how you can promote it (advertising, web sites, etc.). There's not a right or wrong answer to that question - a wide open policy is more flexible for you, but for everyone else, too. If you're prepared to be highly competitive, that's fine, but if not, you may prefer to work with a company whose policy is more restrictive.
5. How were you recruited? Were you recruited primarily as a customer, with just a mention of "income opportunity", or was the primary pitch about the business opportunity? The ethical way to build a downline is to sign people up as customers first, and then if they like the product, they'll be drawn to become a rep. A hard-sell on signing up as a rep right at the outset should send up a red flag for you.
6. Why are you doing this? This is perhaps the most important question of all. If you're doing it because you think it's going to help you out of a cash crunch, forget it. If you're doing it because you think you're going to be rich in a year, well, it's fine to have a vision, but don't bank on it. On the other hand, if you really believe in the product, that gives you the best likelihood of success with it.
There are no absolute right and wrong answers to these questions. The point is to make sure that you're going into it with your eyes wide open. Many people have made a lot of money in network marketing, MLM, and consumer direct marketing, but many more have ended up wasting a whole lot of time and money chasing a pipe dream. You can ensure your success best by being sure you're getting into the right opportunity in the first place.