Multi-level Marketing And Pyramid Schemes: An investor’s Perspectives – Tunji Awonusi

Tunji Awonusi

According to Wikipedia, Multilevel marketing is a strategy that some direct sales companies use to encourage their existing distributors to recruit new distributors by paying the existing distributors a percentage of their recruits’ sales; the recruits are known as a distributor’s “down line.”

Pyramid Schemes Have Only One Purpose: To get your money and then use you to recruit others who will lose their money.

The major difference between Multi-Level marketing and Pyramid Schemes is in the way the businesses operate. Multilevel marketing companies most often have a product to sell and all the manufacturer is doing is cut down marketing costs by bypassing the middleman and selling directly to the consumers and sharing profits with all the distributors.

For self-motivated individuals with a knack for sales, opportunities abound to make extra cash using this. Working for a multi-level marketing company, also known as direct sales and network marketing can even become one’s primary source of income. Pyramid schemes on the other hand thrive more on grand promises; huge sums of cash and minimal work are very tempting aspects of pyramid schemes. Knowing the difference between legal multi-level marketing organisations and illegal pyramid schemes can help you make the safe decision when considering opportunities.

How do you then distinguish between multilevel marketing and pyramid schemes?

Do extensive research about the company and its products with special emphasis on how long the company has been in existence and its track record in the area of product innovation and development. Rule of thumb for me is the company should have been in existence for a minimum 10 years of trading records.

Who are the executives of the company? Multi-level marketing companies have very structured management structure which clearly shows who is responsible for every aspect of the business they only use multi-level marketing system as a substitute for advertising budget. This work is done instead by salespeople on the ground telling others about their product. If the company emphasizes the work of the executives in recruiting new members in their ‘downline’ over the role the salespeople play, it is probably a pyramid scheme.

What are their compensation plans?  Multi-level marketing make their money off sales rather than the contributions of new members. They want to recruit and keep better salespeople, so they compensate them well. Pyramid schemes will glaze over the compensation details of the lower tier to tell you how much money you can make after getting promoted. Push them to give you not only concrete profit margins for salespeople, but actual yearly averages of profit for entry-level workers – not the executives.

The Multi-level marketing strategy is to establish a large population of salespeople to distribute the products and increase their sales force exponentially. Promoters get commission on the sale of the product, as well as income for sales their recruits makes

What is their promotion strategy?  People move up in pyramid schemes based on how many recruits they sign. Multi-level marketing companies promote people based on their sales numbers or similar performance criteria. If you can promote yourself without an official appointment, it is probably a pyramid scheme.

What is their business model?  Multi-level marketing should be quite straightforward. The salespeople are recruited to sell large quantities of merchandise to people outside the company. Pyramid schemes rely on exciting promises and buzzwords to cover up the fact that they don’t have a legitimate business model. Their actual model would not entice nearly as many people to buy in.

What is the company’s cash-flow? The company cash-flow will tell you how sustainable a business is? Stable businesses depend on a cycle of production, marketing, and sales. In Pyramid schemes the promoters tends to speak more about how money comes in than go out. If money only seems to be coming from people inside rather than outside the business, it is not self-sustainable.

What products are they selling?  This is the biggest giveaway with pyramid schemes. They often don’t even mention what product you’d be selling, but only talk about recruitment and making money off the downline. The products they sell are often ridiculous and unsellable, picked for the allure of getting rich selling them rather than actually using them. Multi-level marketing companies have useful everyday products that have been sold door-to-door and on the internet for decades.

Some examples of phony pyramid scheme products are ‘miracle cures,’ unfamiliar health products at seemingly high prices, or low-cost, high-yield investment opportunities.

My thoughts and tips for our esteemed readers

  • If you discover a multi-level marketing company that you may want to sign-up for, always do a cost/benefit analysis. Weigh all possible costs associated with signing up against all the potential benefits. If the benefits outweigh the costs, you may want to sign-up and try to make some money from the company. The same is true vice versa. In the end, the decision is up to you.
  • Remember that if it seems too good to be true, it most likely is.
  • Get a friend to look at a suspect network marketing company before joining it. Another set of eyes is always a plus, especially if they have a background in business. If they are not interested in the opportunity themselves, they stand a better chance of evaluating it impartially.
  • As people learn to spot the warning signs of pyramid schemes, executives get better at disguising their intentions. They are also masters of manipulation and will say anything to get you to sign. If you are unsure whether a job opportunity is with a Multi-level marketing company or a pyramid scheme after evaluating them based on these criteria, shy away from it. It’s better to be safe than sorry.




Written by