How to Tell a Legit Opportunity From a Pyramid Scheme

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How to Tell a Legit Opportunity From a Pyramid Scheme

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February 06, 2018

How can you tell whether you’re looking at a great business opportunity or a pyramid scheme? At first glance, telling the two apart may be difficult. Pyramid schemes often resemble multilevel marketing (MLM) opportunities, but major differences exist. First, multilevel marketing is legal while pyramid schemes are not. Multilevel marketing is also capable of generating long-term profits. Pyramid schemes crumble eventually, leaving some people with huge losses or, at the very least, wasted time. Discover some tips for telling the difference between the two.

Look at the Products or Services

The foundational difference between MLM and pyramid schemes is that legitimate MLM companies make money from selling products or services. You may be able to bring in extra revenue by recruiting people, but you and your company are making most of your profits from selling something with real value to customers, not from signing up new recruits.

If you think about well-known direct sales companies such as Amway, one of the oldest and most recognizable companies in the United States that sells a range of personal care and household cleaning products, or Avon, a leader in beauty products, you’ll realize they have been successfully operating for decades because these companies offer well-known products that customers love. Sales reps who work with these companies can make extra money by recruiting and training others, but that avenue isn’t where most of the company’s income comes from.

Ask yourself: Is the emphasis on selling products or on recruiting people?

Weigh the Sign-Up Fees

Pyramid schemes may offer a product or service, but most of the energy is in recruiting. A large part of the revenue comes from the hefty sign-up fees that these companies charge new investors. Legitimate companies often charge a small fee to cover sales materials, catalogs, samples, and other necessary supplies.

Avon representatives can get started with as little as $20 and can invest in the sales supplies they think they need at a reasonable cost. Amway charges a registration fee of $65 and offers a money-back guarantee. High sign-up fees or a requirement to buy much inventory to get started is a sign of a pyramid scheme.

Ask yourself: Are the start-up costs reasonable for what you’re getting? Are you in control of how much inventory to order?

Look for Realistic Promises

Direct selling is difficult. You have to build a network of customers, persuade them to try your products, offer them good customer service, and try to set up repeat sales with them. A multilevel marketer will stress that the work of selling products is the biggest part of your job. In a pyramid scheme, you’re being sold on the idea of building wealth without effort. Your supposed riches will come from recruiting others who will make money from recruiting others and so on. Only the people at the top of the pyramid are making money, and they’re making it from you.

Ask yourself: Does this idea sound like a job or a get-rich-quick scheme?

Understand the Commission Structure

A legitimate opportunity should have a clear-cut commission structure. The structure may not be simple; your level of commission may be stair-stepped so that you make more when you have higher sales, for example, or you may get additional revenue from selling specific products or recruiting other reps. But if the structure is so complicated you can’t understand it, something is being hidden from you. Don’t get involved in a “business” that can’t tell you exactly where your earnings originate.

Ask yourself: Do I understand exactly where my earnings will come from?

Don’t Cave to Pressure

Since a legitimate MLM or direct sales company makes its money from selling products to people outside the company, you don’t need to pressure people to join the organization. If people are putting pressure on you to sign up now, just say no.

Ask yourself: Am I being treated with respect or being pushed into signing up today?

Pyramid schemes always fail. After a few levels, those behind them need to recruit more people than the population of the United States to stay viable. Legitimate opportunities focus on selling to people outside the company and providing a stable income for someone with true sales talent and initiative.

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Ryan Tyson

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