How to Spot a Multi-Level Marketing Scam

Updated: Dec 4, 2020

Business investment security website management agency
Business investment security website management agency

Multi-level marketing (also known as network marketing) is a type of marketing that involves directly selling products to consumers (family and friends) and recruiting other people to do the same to increase your chances of earning more profits. While some MLMs are legitimate, many of them are illegal pyramid schemes.

Some of the people who join legitimate MLMs make little or no money as their earnings highly depend on how many products they can sell and how many people they are able to recruit. Some end up losing more money than they earn and eventually lose all their investment. Many people get to realize that they’ve been involved in an illegal pyramid scheme after they may have lost a lot of money.

In this article, we will guide you on what you should know about MLMs and how to avoid their scams.

How do MLMs work?

As already defined, MLM is a type of marketing that involves people directly buying products from a company and directly selling them to consumers, and recruiting others to do the same.

There are MLM companies set in place to easily facilitate or connect the network marketers to the companies. Some companies also run their own MLM programs which allows you to buy their products at an inexpensive rate and sell them at market price to earn profits. Once you sign up with a company, you will be referred to as an independent distributor, participant, or contractor.

According to MLMs, participants can make quick money in two ways:

  • selling the company’s products directly to retail customers or end consumers who are not part of the MLM program,

  • recruiting others under you to become new distributors and earn commissions from their transactions (i.e. when they buy products from the MLM company and when make sales to retail customers).

NB: The people you recruit as referred to as your downline. As your sales network grows, your downline expands and you move up the ladder. This type of MLM is called a pyramid scheme. A regular MLM will directly pay you based on your sales to retail customers and end consumers without having to recruit new distributors.

Understanding how pyramid schemes work

A typical pyramid scheme requires you to add more people to your network (downline) to move up the pyramid. Most pyramid schemes are scams, although they can seem like legitimate business opportunities.

Usually, promoters of pyramid schemes tend to get your attention by feeding you with enticing stories of what you stand to earn once you register under them. They tell you stories about how you can change your life for the better, quit your job and become a full-time network marketer, and how you can get rich quick. Many also play the guilt trip card of telling you that your regular job is slavery and you can attain financial independence by joining their network circle.

What they don’t tell you is that your income is mainly based on how many people you are able to recruit and not how much product you are able to sell. The recruitments also come at high fees which pumps money into the main organization to keep a constant income stream into their business.

Some pyramid schemes require that you buy a certain amount of products at intervals before you can qualify for bonuses or commissions even if you are overstock with inventory. At the end of the day, it’s a win-win situation for the company.

Red flags of pyramid schemes

  • Outrageous and enticing promises about how much you can earn

  • Much emphasis on recruiting new distributors as your ticket to earning more money

  • Imposing high-pressure sales tactics to convince you on the need to register immediately without giving you the opportunity to properly understudy the company

  • Outrageous purchase of products just to qualify for certain company bonuses

Here’s a personal favorite of MLM red flags: when distributors try so hard to convince you that everyone is a potential salesperson.

The bottom line is that not all MLMs are scams but the majority are pyramid scheme scams! If you are considering joining an MLM business, know that they are not the best investments you’d find around. Before joining any MLM network be honest with yourself first.

  • Am I a natural salesperson?

  • Do I have an interest in marketing?

  • Do I have a good sales plan?

  • Do I have what it takes to risk money and time?

Also, put in enough time and effort to properly research a company, find out what people are saying about the company, consider if the products are worth the stress, count the costs, and ask enough questions.

For more information on marketing as well as services please do feel free to contact Parnda Hedima (239) 227-5768. Website management agency is a website design, marketing & Business development company founded in Naples Florida. Offices in Austin, Texas & Naples Florida. Services provided nationwide.

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