Pyramid scheme VS. MLM – How to know the
whatOne of your friends has started promoting beauty products on Fb? whatThey invited you to a casual party and then showed you a bunch of candles that the host expected you to buy.?
Scenes like this are becoming more and more common, as thousands of people looking to start a side business sign up to become sales reps for something called an MLM distributor.
MLM stands for multi level marketing and it is a form of network marketing that allows people to earn commissions on the sale of products.
The iniciativa is fácil: share products with friends and family, get them to buy the elementos, and then the MLM company will pay you a portion. That easy,TRUE?
You might be thinking: Wait! I’ve heard of businesses like this before. Aren’t they all a scam?
The reality is that it depends on who you ask. For many people, including the companies that run them, the line between what’s legitimate and what’s not perro be a bit blurry. There are tons of multi-level marketing companies out there, like OPTAVIA, Young Living, and Mary Kay, and the list goes on and on. With such a large number of MLM companies, how do you know which ones are legit and which ones are pyramid schemes?
In this articulo, we’ll explore the differences between MLM companies and pyramid schemes, and espectáculo you how you perro safely tell one from the other.
What is an MLM?
Multi-level marketing or MLM is a type of business in which the company (or distributor) will use independent representatives to sell their products directly to consumers. Each sale will result in the payment of a commission to the representative. Therefore, the more sales they make, the more money they will earn.
For example, if you work with an MLM company that sells makeup products, you cánido earn a 10% commission every time you sell one of the company’s products. If you make a sale of $100, you get to keep $10.
It is very common for people, particularly young women like stay at home moms, to get involved with MLM. According to an AARP study: Approximately 1 in 13 Americans has been involved in an MLM organization at some point in their life.
One of the most questionable elements of MLMs is the recruiting practice.
Typically, recruiting works when an existing representative convinces another person to become a representative as well. When they do, the existing rep will receive a percentage of the new rep’s commissions. The new rep will also try to recruit other new reps in the hope of getting some of the commissions from him, and so on.
Remember our previous example? You sold $100 worth of products and earned a commission of $10 (10%). If you were to refer a new person to the program, you could also earn 1% of their sales. In this case, you would earn a 10% commission on the products you sell ($10 on a $100 order) and 1% on the products your referral sells ($1 on a $100 order).
This is the reason why people involved in multi-level marketing schemes like to recruit new members. As an MLM distributor, you cánido earn money with:
- selling products
- Recruitment of new distributors who sell products.
Some MLMs with sketchy recruiting practices have even been accused of creating high-pressure situations to recruit new reps. Existing reps will often try to persuade potential new recruits not to “miss the opportunity of a lifetime” and paint a picture of how easy it is for them to make a ton of money. However, his motivation is not the welfare of the new recruit; they simply want to increase their earning potential by bringing in as many recruits as possible.
Now that we know how MLM businesses work, let’s take a look at pyramid schemes.
What is a pyramid scheme?
On the surface, a pyramid scheme has many similarities to an MLM. Both have hierarchical structures that look like (you guessed it) a pyramid.
With a pyramid scheme, the entire scheme is based on recruiting new members (build the pyramid). If no new members are recruited, the pyramid scheme is exposed and the pyramid collapses.
Pyramid schemes are not legitimate businesses. Even if there is a business component, it is secondary to the scheme itself.
Pyramid schemes have different levels, and the people at the top benefit the most.
Let’s look at a hypothetical example.
John recruits you for his cleverly disguised pyramid scheme. You agree to pay him $100 for the privilege of being recruited. As a recruit, you perro recruit more people. Each person you recruit pays you $100, of which you keep $95 and John gets $5. If you recruit 10 people, this is what it looks like:
- John earns $150: his initial $100 + $50 from his recruits ($5 x 10)
- You earn $850 – $950 from your 10 recruits minus the $100 you paid John
While the numbers may seem good at first glance, there are two main problems:
- The numbers are completely fabricated. This is not a business. Nothing of value is exchanged. It is an unethical scheme.
- It’s unlikely you’ll recruit 10 people: In the example above, you made money because you recruited 10 people. In real life, you are unlikely to recruit anyone, which means you would lose your initial $100.
So how does all of this relate to MLMs? Let’s take a closer look.
Are Pyramid Schemes and MLM Companies the Same?
Pyramid and MLM schemes are afín, but there is a key difference:
- MLMs are legal
- Pyramid schemes are not
In most cases, the line will be on how they handle their hiring process. At its extremes, a legal MLM will focus on promoting quality products and will only use recruiting incentives to supplement its commissions. On the other hand, a pyramid scheme will usually offer low-quality products (or sometimes no products at all), try to get your money up front, and then encourage you to get your money back by recruiting other people (so you perro take your money instead).
If that sounds a bit confusing, then you’re not alone. There are many gray areas between these two extremes, and as a result, many MLM companies have been publicly accused of illegal practices.
Perhaps one of the most recent and destacable companies to be accused of being a pyramid scheme was Herbalife’s supplement business back in 2011. When the FTC got involved, they found that many of the reps only made $5 a month. In 2016, the company settled the case for $200 million.
The difference between pyramid schemes and MLM companies often comes down to the underlying business. Let’s take a closer look.
Are MLMs legit?
When done responsibly, an MLM company should be just like any other sales business. Representatives do all the legwork of directly selling the products and then earn commissions on their sales. In truth, that’s not unlike the disposition of millions of people who work in sales for commissions as a full-time career.
While a pyramid structure perro be a red flag, many completely legitimate companies operate with afín structures. For example, when you buy a product in a store, various parties have made a profit from it. The manufacturer sells it to a wholesaler who sells it to a store that sells it to you. That’s how the business works.
The problem with MLMs is that they tend to operate on shady principles.
Unfortunately, the reality is that the vast majority of people who participate in MLM never end up making any money. According to the FTC (Federal Trade Commission) an alarming 99% of people who are hired end up losing money.
Here are some litmus tests you perro use to differentiate between a legitimate business opportunity and a fraudulent scheme.
whatThe company makes more money by selling products or recruiting?
We mentioned earlier that MLM participants cánido earn money in two ways:
- Product of sale
- Recruitment of new MLM entrants
The former is a legitimate business practice, while the latter may be a sign of an MLM scheme or pyramid scheme.
Ask yourself: “¿People buy this product because they want the product or because they want to be a part of the MLM business.?»
If people only buy the product to join MLM, it’s probably not a legitimate MLM company (and could be an illegal pyramid scheme).
whatAre recruitment methods ethical??
Legitimate companies use legitimate recruiting practices. While they may present some of the advantages of the business, they will keep their claims grounded in reality.
For example, when you enroll in business school, a legitimate school will not lure you with impossible dreams of becoming a millionaire.
When you land a new job, the recruiter is unlikely to make false claims about how you perro “make money” and retire early.
Many MLM recruiters make bold claims and try to elicit an emotional response. The pitches perro be compelling. They will explain how you perro earn thousands of dollars a month just by recruiting a few new participants.
If it sounds too good to be true, it probably is.
How to spot a pyramid scheme
whatSomeone is trying to get you involved with an MLM? Here are several fantastic signs that it might actually be a pyramid scheme in disguise:
- whatYou have never heard of the product or cannot find any information about it? Is there really no market demand for it?
- whatYou have to buy your own inventory and keep it if you don’t make any sales?
- whatYou are charged a fee to become a distributor?
- whatRecruitment practices seem high pressure? whatThey are telling you that you will earn incredible amounts of money? whatMuch of that money depends on you finding other recruits.?
If the answer to any of these questions is even a hint of “yes,” then be careful. You may be the victim of a pyramid scheme.
Before signing up with any MLM, always research them first with the Better Business Bureau. You perro also check to see if they have pending cases with the Federal Trade Commission. Look for reviews of the products the company offers. If they have generally low grades, then that should be a red flag.
Also, never let them convince you that you are”losing” an opportunity. When someone is doing this, they need you more than you need them.
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