9 Signs To Spot A Pyramid Scheme

Unfortunately, because of the previous Ponzi scheme that was successfully propagated through the 1930s, people are very wary of Network Marketing.

There are times that people and companies do take advantage of people, so we have listed the suspicious actions of a would-be Multi-Level Marketing Plan that is using a Pyramid Scheme in this article. 

1. Lack of something to sell

The first red flag that alerts you to a marketing scam is the lack of something to sell, very low-quality merchandise, or even nothing for your money. Multi-Level Marketing businesses that promote recruiting rather than the sales of their merchandise could be a pyramid scheme. Every company knows that profit is the most important consideration for a business. Without profit, there is no income, and without income, the business fails.

A commercial business should always be absorbed in attracting new customers, not looking for new representatives. When you look at the successful Network marketing businesses, they have been historically based on a quality product. Mary Kay Cosmetics is an example of a Multi-Level Marketing firm that has a very high-quality product, in addition to a very good compensation plan for their representatives. In a legitimate Multi-Level company, the emphasis will be on sales of the product, not on recruitment for your team. Income will be based on the sales volume of the team, not the number of members.

2. Miracle claims on their products 

A second red flag should be unusual “miracle” claims that the product is a cure-all for every disease and condition known to plague mankind. Outrageous hyperbole is a clue in any situation that the product is bogus. 

This type of scam is utilized most often in health supplements and vitamin industries. If the business or company you are examining has products that seem over the top, unfounded scientifically, or even weird or bizarre, back away im- mediately. This is just an old-fashioned snake oil peddler in new clothes.

3. Sense of urgency

The get-in-on-the-ground floor high-pressure tactic is commonly used to encourage the recruit to make a hurried decision regarding becoming a representative of the company. This should be a red flag for several reasons but the two that are most important are:

1. Network marketing companies fail every day. You want to align with one that has been around for more than a decade to see if it is reputable and sustainable. 
2. Any company that emphasizes impulse decisions may also have other shady practices. One should wonder if the company is in such a hurry because they don’t want the recruit to have the opportunity to investigate them thoroughly.

4. Requires the purchase of a certain level of product inventory

All Network marketing businesses, like most other start-up businesses, will have some costs at the onset. As a representative, you will incur the costs of forms, product kits, samples, catalogs, promotional merchandise, and brochures. 

Be wary of any company that requires the purchase of a certain level of product inventory to be the representative. There is a law now that forces MLM companies to purchase back any surplus inventory when someone leaves the organization, but you don’t want your money tied up in excess inventory stacked in your spare bedroom. Also, be concerned if the MLM requires a specific level of sales before you receive a minimum commission.

5. Companies discourage questions about their products, commissions, or company policies

If the company you are investigating discourages questions about the company, the product, or the commission structure, this is another red flag. There are laws specifically regarding MLM companies and their transparency around financial compensation. They are legally bound to tell you the average investment per distributor and the average total net profit for the distributor. If they don’t want to reveal these figures, or hem-haw around and sidestep the question, they are shady and disreputable.

6. Expensive training

Training should be free. If your prospective company requires the distributor to buy training tapes or attend expensive training seminars at your expense, this is a red flag you are talking to a scam. The once-a-year convention that is attended by all distributors is not the same as a once-a-month training weekend that cost several hundred dollars. Legitimate companies either pay for training in advance for the distributor or arrange reimbursement for the representative, most often with a cash advance system.

7. Complaints on Better Business Bureau

Check with the Better Business Bureau for complaints against the company. Every company that has been around for two decades or more will have legitimate complaints, but what you are looking to discover is how they deal with the issues. A legitimate company will make a concerted effort to satisfy the customer, even at the expense of the company’s profits. A scam business, on the other hand, will more likely ignore the complaints and ignore the customer.

8. False advertising 

Watch how the company advertises for new people. If they advertise a “job” with an interview but are really looking for marketing representatives, they have falsely advertised. Another red flag is an advertisement that states an income amount to be received (in specifics), like “you will make $10,000 a month like I did”, or suggestions that “you can make $10,000 a month sitting in your pajamas” as if people would hand you the money for doing nothing in return. These are all examples of false advertising and a Multi-Level Marketing company that should be avoided.

9. Bizarre and mysterious job interview

Amway was penalized for luring people to meetings for a sales presentation that was described to the representative as an employment opportunity. This is dishonest in two ways: 

1. The company may not allow the representative to say the company name, which seems secretive and suspicious, and 
2. They are using deception to trap you into hearing the sales pitch. 

Real Multi-Level Marketing companies want their name and logo promoted at every opportunity. Can you imagine a Tupperware representative calling you and saying, “I need to meet with you but can’t disclose why or the name of my product?”