| How to Identify a Product-Based Pyramid | | | | or a clever attempt to disguise pyramid |
| Scheme ("Recruiting MLM") | | | | investments as product purchases. |
| © 2003, Jon M. Taylor, PhD | | | | 4. The company offers commissions and/or |
| Multilevel companies that are based on profits | | | | bonuses to more than five levels of "distributors." |
| from recruiting rather than retailing should be | | | | Ask whether the company pay overrides to |
| regarded as pyramid schemes or "recruiting | | | | distributors in a hierarchy of more levels than are |
| MLMs." This article describes five ways to | | | | functionally justifiable. Even in major corporations, |
| distinguish them from "retail MLMs" in which the | | | | the entire world marketplace can be covered in |
| company pays generously for retailing products | | | | five levels of sales management - branch, |
| without recruiting a large downline. "Recruiting | | | | district, regional, national, and international sales |
| MLMs" typically display five features: | | | | managers. Paying commissions and bonuses on |
| 1. Recruiting of participants is unlimited in an | | | | more than five levels in an MLM program primarily |
| endless chain of recruiters recruiting recruiters. | | | | enriches those at the top at the expense of |
| Ask whether unlimited recruiting is allowed. When | | | | those at the bottom. You would be wise to avoid |
| a given market is saturated, and the program | | | | any program that pays overrides on more than |
| must move on to another location or introduce | | | | five levels. Breakaway compensation systems are |
| new products or divisions to continue, the | | | | particularly exploitive, as payments are on a |
| opportunity for each new person to make money | | | | hierarchy of "breakaway" organizations of whole |
| becomes less and less as the programs expands. | | | | groups of participants, not just individuals -- |
| 2. Advancement in a hierarchy of multiple levels | | | | creating an extraordinarily high loss rate, except |
| of "distributors" is achieved by recruitment, rather | | | | for those at the top of a "mega-pyramid of |
| than by appointment. | | | | pyramids." |
| Ask whether participating "distributors" advance | | | | 5. Company payout per sale for each upline |
| their position (and potential income) in a hierarchy | | | | participant equals or exceeds that for the person |
| of multiple levels of "distributors" by recruiting | | | | selling the product, creating inadequate incentive |
| other "distributors" who in turn advance by | | | | to retail and excessive incentive to recruit -- and |
| recruiting distributors under them, etc.? If so, the | | | | an extreme concentration of income at the top. |
| result is self-appointment through recruitment to | | | | Ask whether a "distributor" purchasing products |
| ascending payout levels in the distributor hierarchy. | | | | "for resale" would receive about the same total |
| If the only way a person can profit significantly in | | | | payout (in commissions, bonuses, etc.) from the |
| the scheme is through recruiting to advance to | | | | MLM company as participants several levels above |
| higher payout levels (or to buy another's | | | | who had nothing to do with the sale. If so, the |
| downline), this strongly indicates a pyramid | | | | company's payments to the person retailing the |
| scheme. | | | | product would be pitifully small, while those at the |
| 3."Pay to play" requirements are satisfied by | | | | top of the upline can compound the small |
| ongoing "incentivized purchases." These are | | | | commission per sale by the sales of hundreds or |
| purchases of goods and services that are | | | | even thousands of downline distributors. This is |
| required to participate in commissions or to | | | | great for the upline leaders but lousy for those |
| ascend in the distributor hierarchy. If they are | | | | attempting retail sales. Avoid any MLM company |
| required to participate in the "business | | | | that pays less than half of all distributor payout to |
| opportunity," then whether they are used, sold, | | | | the person actually selling the products to outside |
| given away, or stored is irrelevant. They should | | | | customers. |
| be considered a cost of doing business. | | | | Never accept income projections of retail sales at |
| Ask whether prospective "distributors" are | | | | full retail prices, especially for products that are |
| encouraged to make sizable investments ("front | | | | overpriced and not competitive in the |
| loading") in "incentivized purchases" in order to | | | | marketplace. Also be wary if you are asked to |
| take advantage of the "business opportunity" and | | | | choose between two options or "tracks" -- one |
| later to continue qualifying for advancement or | | | | for those who want to "retail" the products and |
| higher payout in overrides (commissions and | | | | another track for those who are serious about |
| bonuses). This practice, can result in large losses if | | | | "building the business." This sales pitch usually |
| the products cannot be resold.Also be wary of | | | | indicates that the incentives are heavily weighted |
| plans that require minimum periodic purchases | | | | towards recruiting |
| ("pay to play") to qualify for commissions or | | | | Where valid data are available, recent research |
| advancement. Do not sign up for continuing | | | | has demonstrated that when all five of these red |
| product purchases on auto-ship through an | | | | flags are found in an MLM, the percentage of |
| automatic bank draft or credit card, rather than | | | | participants who lose money is 99.9% -- even |
| making occasional purchases as needed. Such | | | | worse than the loss rates for typical no-product |
| purchase requirements may be disguised | | | | pyramid schemes and for games of chance in Las |
| investments in a product-based pyramid scheme | | | | Vegas. |