Got a New Home Business Opportunity? Make Sure It Isn't a Pyramid Scheme First
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Got a New Home Business Opportunity? Make Sure It Isn't a Pyramid Scheme First

The difference between a pyramid scheme and a legitimate opportunity is in sales, not recruitment

March 6, 2017

You've probably seen or heard of job opportunities making promises like this: Work from home! Make your own schedule! Earn a full-time income sharing and selling products you love!

Companies that make promises like these are usually looking for people to sell their products as a distributor or "consultant." Such jobs are known as multilevel marketing (MLM), and most people who sign up for such work never experience the promised benefits. If you're thinking of becoming a "consultant" for such a company, look for red flags indicating that you will end up making little or no money and, even worse, actually add to your debt.

Some of the best-known MLM firms are Avon, Mary Kay, and Tupperware. Examples of others include Scentsy, Pampered Chef, Juice Plus, and LuLaRoe. Note that some companies avoid the MLM label in an attempt to distance themselves from other companies that have been accused of making claims about inflated earnings and being pyramid schemes, such as Herbalife.

Pyramid schemes--operations in which the participants pay to join and make profits mainly from payments made by people who join after them--are illegal. For this reason, if you're considering taking a MLM opportunity, you'll want to make sure it's legitimate. The biggest difference between the two is that the main purpose of a pyramid scheme is to recruit other distributors/consultants rather than make direct sales.

MLM Promises and Problems

MLM opportunities can be attractive for anyone, but they are particularly enticing to stay-at-home moms, students, and the unemployed. The companies promise that you can both earn extra income and enrich other people's lives by selling products that you love and believe in. Plus, if you can convince some friends or family members to sign up to be distributors beneath you, you could essentially have your own business!

Such companies also promise large cash payouts for distributors who reach particular sales goals. They claim that their top-tier sellers get bonuses of $15,000 or more, though it isn't easy to find concrete information on the exact number of sales a consultant has to make to earn such amounts or how the bonuses are paid out.

These opportunities can be tempting, but there are a number of problems that come with them:

  • The number of sales that it often takes to reach the income levels advertised by the companies is often very, very high. You may also have to recruit dozens of people to work under you to get there, and they may have to do the same.
  • The line between legitimate MLM firms and pyramid schemes is fuzzy. Prices for products sold in a pyramid scheme are inflated, which makes the items hard to sell and results in most of the consultants losing money.
  • Participants lose money because even legitimate MLM companies usually require a so-called "buy-in." Consultants have to pay a certain amount upfront to buy the company's products, often called "starter kits," to sell. Though the amounts consultants have to pay may be relatively little, it still starts off their business in the red, which is the last thing you need if you're trying to pay off debt.
  • If you make money selling your products right away, then the amount you paid upfront for them may be a good investment. Unfortunately, the reality is that most MLM consultants barely make a profit, much less earn a full-time income.

Tips and Questions for Vetting an MLM Company

As with everything, it's best to do your research before you sign up with a company. Think about the company itself as well as the actual products. Ask the following questions:

  1. How long has the company been in business?
  2. Is it accredited by the Better Business Bureau? If so, what is its score?
  3. Has it been sued for deceptive business practices?
  4. What are its annual sales?
  5. What is the percentage of average sales made to distributors as opposed to retail buyers?

The FTC also recommends that you make sure you understand the firm's compensation structure, terms and conditions, and possible business expenses. You should also get all of its details, including the refund policy, in writing.

In addition, the U.S. Securities and Exchange Commission offers the following tips:

  • Beware of MLMs that don't seem to offer a product or service. If you can't figure out what it's selling, avoid it.
  • Be wary of companies promising massive returns in short amounts of time. Does it sound too good to be true? It probably is.
  • If the company offers compensation for little work, be skeptical. You should see red flags with terms like "easy money" and "passive income."
  • Try to find proof of retail sales. Request to see documents showing how the company generated revenue from the selling of its products or services to people outside its program.
  • Think about it long and hard before you decide to "buy in." If you have to buy a product to get started, question the value of the opportunity.
  • If it's hard to understand how you'll get paid, or if you can't figure out how the company's commissions work, beware.
  • Finally, will you make more money recruiting than you will by selling the product? This is the hallmark of a pyramid scheme.

Remember, think twice before you sign up with an MLM company. At best, you'll probably barely make a profit, and at worst, you may be involving yourself in a pyramid scheme.