- What Are Multi-Level Marketing Companies?
- Getting Involved In an MLM
- MLM Companies Still Running
- What Is a Pyramid Scheme?
- Red Flags of a Pyramid Scheme
- Confirmed Pyramid Schemes
- Frequently Asked Questions
Mary Kay, Amway, Herbalife, even Tupperware—their business models are singularly directed toward boosting yourself and your recruiters up the ladder, but with many companies it’s a fine line between a legit marketing organization and a pyramid scheme.
So how do we know which is which? Are multi-level marketing companies all pyramid schemes or are there ways to tell the difference between the two?
Before joining any company, it's best to do your research before believing organizations promising infinite growth and cash flow quickly.
What Are Multi-Level Marketing Companies?
There are, in fact, plenty of legal businesses that lean on similar business models of organically-grown sales forces where recruiting others to join the movement is also incentivized. These are called multi-level marketing (MLM) companies.
When participating in an MLM, you’ll receive commission both for the product you sell and for getting others to join, though, in many cases, that’s where the financial flow ends.
Most of these companies seem to be centered in the world of wellness—a realm that really lends itself to the structure. People who feel deeply about a product’s ability to change lives, especially based on a personal experience, are much more likely to be willing to preach it.
But of course, MLMs pop up in every corner of the business world, including tech, finance, retail, and subscription services, among others.
Regardless, the distinction between an MLM and a pyramid scheme is that an MLM will actually pay you based on the amount of product you sell. Sales numbers, rather than recruitment numbers, are the primary focus.
How to Identify a Legitimate MLM
Many MLMs use the same or similar tactics as pyramid schemes to boost both sales and salesforce, so spotting one can be exceptionally difficult.
Your best bet, in any situation, is to ask for more time to consider the offer, then research the company involved. Look out specifically for any lawsuits attached to the company or complaints, whether they’re listed by users on Google or through the Better Business Bureau (BBB).
In general, when it comes to an MLM, you may be able to rely on a few other signs to help distinguish these legitimate businesses, including:
- More time to consider the offer to join.
- More emphasis on the product being sold, and much less emphasis on recruitment.
- No inventory purchase requirements.
- Better or more straightforward information on returned merchandise or how to conduct the business side of selling things.
Still, these conditions are not always the case. In these situations, gathering more information is truly your best weapon against falling for a scam.
Getting Involved In an MLM
Despite the more unsavory implications, the pitch and premise of getting involved in a multi-level marketing company remain appealing for many.
If you’re considering joining one of these businesses, you should keep a few things in mind.
Get to Know the Company
Knowledge really is power in this situation, and there’s really never too little you can know about a company before investing in selling its product.
Some things to pay particular attention to include:
- How long the company has been in business
- Any current, former or pending lawsuits involving the company
- The company’s Better Business Bureau rating and any complaints filed there
- Customer ratings of the company
- Reviews of current and former employees of the company
You may also want to ask your recruiter directly for more specifics, including:
- The compensation structure
- Potential expenses
- Proof of how much money you can actually make selling the product
- The name and contact information of someone higher up in the company who can answer your questions
Understand the Commitment
Finally, if you’re deciding whether to participate in an MLM company, you should be brutally honest with yourself and consider the following factors:
- Whether you’re willing to sell this product primarily to friends and family.
- What your sales plan is.
- Do you know enough people with the money and need to purchase it? Will they be able to buy this product over and over again?
- Your income goals and if this company can realistically help you reach them.
- The amount of time and energy that goes into the venture and whether that will be worth it for the money or products you’ll get in return.
Whether the company you get involved with gets legally ruled a pyramid scheme, you’re putting untold amounts of time and money on the line. It’s important to remember: You could potentially lose it all if you’re not careful.
MLM Companies Still Running
The blurry line between multi-level marketing (MLM) companies and pyramid schemes has allowed several companies to continue doing business—though, sometimes, under the very real threat of legal action.
Here are some MLM companies that some consider sit dangerously close to the line separating them from pyramid schemes.
Many people have likely been approached about the Herbalife "pyramid scheme."
The company, which sells nutritional supplements, is still doing business and was never officially designated one, despite losing a lawsuit that did some serious damage to both its finances and reputation.
Herbalife was ordered in 2016 to pay back more than 350,000 participants in its program, representing one of the largest settlements in this area to date. It’s since made a few tweaks to its marketing strategy.
The beauty product manufacturer plays on the sympathies of those looking for cruelty-free products just as much as the ambitions of those looking to own their own business.
So is Arbonne a pyramid scheme? Not legally.
The company continues to operate today, despite a litany of problematic business practices, including offering commission not just for who you recruit but who they, in turn, recruit; requiring participants to pay for the privilege of selling their products; and an ill-defined point-based system for paying for merchandise.
Another purveyor of beauty and healthcare products, Amway is one of the oldest still-running MLMs in America. It’s been investigated several times by the FTC for pyramid scheme-type activity but has yet to be convicted.
Actors are paid both by selling products and from the cumulative sales performance of their recruits and those who they have recruited (called a down chain), which is why many consider Amway a pyramid scheme.
Monat sells a line of supposedly naturally-based sustainable haircare. The business has no brick and mortar location and instead relies entirely on its "Monat Market Partners"—those recruited into the company—to market and sell its products.
Partners are financially incentivized for recruiting new sellers, but the company may partially get out of being flagged as a pyramid scheme by ensuring those sellers are all contractors, and claiming that they, therefore, don’t legally work for Monat.
Manufacturing specialty knives and cutlery, Cutco relies primarily on independent contractors to generate sales by staging at-home demonstrations to show off the merchandise.
Talk of a Cutco pyramid scheme is likely tied to its past protocols requiring participants to pay for sample kits and other starter materials along with company literature explaining how to sell products to friends and family. The company has since changed some of these policies but remains suspicious in many peoples’ eyes.
One of the most famous MLM companies, Mary Kay sells makeup and beauty products through its team of homegrown sales reps. As of 2018, the company also represented the 6th largest network marketing company in the world, with a wholesale volume of more than $3.25 million.
Many people consider Mary Kay a pyramid scheme based on its "buy-in" requirement and business model of paying consultants both for the sales they make and for the total sales of their down chain. Still, the company has only continued to expand over the years.
What Is a Pyramid Scheme?
To put it simply, a pyramid scheme is a scam. It may be described as a type of business model or marketed as a type of investment strategy. It relies heavily, or even exclusively, on the recruiting efforts of those involved.
The way they work is by incentivizing recruitment and typically operate under similar models:
- You'll be contacted by a person reaching out about the company or business opportunity they’re involved in.
- You’ll be asked to invest a sum of money or buy some merchandise in order to get your start.
- You’ll be asked, or even required, to recruit others into the venture.
- You’ll make a commission off of each person that signs up—as will the person who recruited you.
The idea is that, with enough recruitments under you, you’ll be able to make your investment back and, especially as they all begin to recruit more people themselves, you’ll even see a profit returned.
The only problem? You’re not actually selling anything.
How Pyramid Schemes Are Legally Defined
The legal distinction that separates pyramid schemes from other similar, but legal, business models is where your pay is actually coming from.
If those returns are based primarily or entirely on recruiting others to the effort, as opposed to money made from selling actual products, it’s considered a pyramid scheme.
Despite the package of goods you may be required to purchase in order to start, in the case of a pyramid scheme, the real product and focus of the venture is actually getting others to join.
Red Flags of a Pyramid Scheme
Pyramid schemes can be tricky to spot because they very closely mimic the legal business structures of a multi-level marketing (MLM) company.
But there are some very important distinctions that may make them more obvious, including:
- Big promises from recruiters: "Get rich quick" is typically their mantra, and you’ll likely be promised everything under the sun, including the ability to quit your job and live your dream.
- High-pressure sales tactics: When you’re being recruited, you may be told you’ll have to “Act now!” to avoid missing out on this opportunity. You’ll most likely be given very little time to think about the idea or study the company.
- Recruitment is emphasized: When you’re being approached about the venture, you’ll hear all about the payment structure, but the actual product may seem like more of an afterthought.
- Required purchases: Many pyramid schemes will require you to purchase a certain amount of inventory at certain intervals, whether or not you need the influx at the time. Other versions of this scam include the required purchase of ongoing training.
- Tricky bonus structures: Similarly, many pyramid schemes will promise lavish bonuses, but only for those who meet certain high bars of recruitment or product purchase. The incentive is based on how much product you buy from the company, rather than how much of it you sell.
Confirmed Pyramid Schemes
Indeed, there are a number of companies throughout the years that have been legally identified as pyramid schemes and subsequently shut down or fined into bankruptcy. These include, but aren’t limited to the following:
Officially dissolved in 2001, Equinox was once considered the fastest-growing private company in the United States. The popular scam was put to an end after a court case forced the business to make a $40 million payout.
Purportedly created to sell diet pills, this company closed its doors in 2005, suffering both from claims of federal tax evasion and selling a product that contained dangerous (and deadly) additives.
Another company masquerading as a wellness promotor, MonaVie closed its doors in 2015 after claims of its pyramid scheme-foundation—and the dubious nature of its fruit juice concentrate product—were widely circulated, resulting in a defaulted $182 million loan.
Not every pyramid scheme is selling a physical product.
Nouveau Riche claimed to offer an education in selling real estate but focused its seminars instead on the importance of buying stock in the company. It was shut down in 2011 after a lawsuit resulted in a more than $5 million payout.
Shut down in 2014 after doing battle several times with the Federal Trade Commission (FTC) in court, BurnLounge sold itself as an online music marketplace. The site’s complicated payment process convinced the government otherwise, and BurnLounge was eventually ordered to pay out nearly $2 million in damages.