When you Google the terms “network marketing” or “multi-level marketing,” (MLM) the suggested completions always include words like “network marketing scam,” and “network marketing pyramid scheme.” Many people are working very hard to give the industry a bad reputation, and some of them have reason to complain. Unfortunately, a number of morally questionable companies have taken advantage of their employees through illegal business practices.
With so many examples of companies getting shut down by the Federal Trade Commission for running illegal operations, should we write off the multi-level marketing industry as one big pyramid scheme?
Is Network Marketing Pyramid Scheme or Not?
The short answer to the question “is network marketing a pyramid scheme” is no (both in Australia and other countries worldwide). In spite of some infamous corporate takedowns, the majority of network marketing companies are completely legal and offer unmatched opportunities for increased income and personal growth.
I have seen first-hand how individuals can build a successful and legal multi-level marketing business. With hard work and good business ethics, not only can you attain a high salary, but you can help the other members of your team flourish as well.
What Makes Some MLM Companies Pyramid Schemes?
A multi-level marketing pyramid scheme, by definition, is a company that compensates participants for enrolling others into the operation without ever providing a good or service to participants or their potential customers. The executives in these MLM pyramid schemes profit off of hefty start-up fees paid by participants; each new recruit pads the bank account of the pyramid scheme’s operator.
Many network marketing pyramid schemes will attempt to shield their illegal actions by pretending to sell a product or service. When the time comes to provide the product, however, the company will provide little infrastructure and support to distributors. Instead, distributors are driven to recruit more and more people to join their “downline.” Their sales will allegedly work their way up and benefit the person who recruited them. However, the company’s lack of sales betrays the fact that the only people making money are the ones at the top collecting the start-up fees.
Famous Examples of Network Marketing Pyramid Schemes
This defunct company was based on the premise that they were selling music through an online store. Bands and artists would pay a recurring fee (annually or monthly) to sell their music through the store, and artists who recruited other musicians would pocket a percentage of their recruits’ sales. The problem with BurnLounge was that few people were actually selling much music at all. The vast majority of BurnLounge’s profits came from registration fees, and a Federal Trade Commission investigation accused the company of being a pyramid scheme in 2012. As of this post, the FTC has begun mailing refund checks totaling $1.9 million to people who lost money to BurnLounge.
This company was recently accused by the FTC of being a pyramid scheme, and I covered the ramifications in depth in a recent blog post. Vemma advertised itself as a multi-level marketing company selling energy drinks and health products. In practice, however, the company charged massive registration fees and required significant product purchases to start a Vemma business. Recruitment was marketed as a way to make money quickly, while sales were difficult to come by due to a lack of company support.
Things to Look For in a Good Network Marketing Company
1.) Low Start-Up Costs
A major red flag when determining if a network marketing company is a pyramid scheme is an exorbitant registration fee or initial purchase requirement. Reputable companies often require only enough initial investment to cover a selection of marketing materials to help you launch your business. If you’re paying a fee upwards of $200-300 (for next to no physical products) that money is likely going straight to the top; you’ve made a significant investment and have little to show for it.
2.) Opportunities for Sales
Here is the key question to determine if a MLM company is safe: can you make a profit simply by selling, without recruiting anyone else? If the answer is yes, you’re in good hands.
A proper MLM company gives you the opportunity to make money by selling a great product. In theory, hard work and good salesmanship will reward you with solid profits. In a network marketing pyramid scheme, the only way you can make a real profit is by recruiting others to join your network. Beware of this structure as it’s a recipe for disaster!
3.) Strong Support Systems
Good multi-level marketing companies want to see you succeed. Multi-level marketing pyramid schemes couldn’t care less about your success once you’ve made your initial investment. Make sure that the company you’re affiliated with has a strong support system for individual distributors. If someone has recruited you to join their network, make sure that they’re giving you their best tips and advice on how to build a client list and make sales.
I go more in to this in my network marketing eBook:
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A good company will offer seller support at the corporate level. Make sure that the company website offers means to contact corporate leaders and customer support representatives. You don’t want to join a company that’s going to leave you out in the cold!
Here’s Bill Gates and his take on network marketing:
I have had the pleasure of working in the industry with fantastic results. I thoroughly researched the companies before I joined to ensure they were reputable and not pyramid schemes. It has certainly paid off; I retired from the 9-5 at the age of just 29!