Is This A Pyramid?
November 7, 2009
As someone who is extremely entrepreneurial and someone who buys a lot of “stuff” from small business owners or direct sales folks I am always vigilant for companies that seem “too good to be true”. I ran into one such company the other day, and since the issues brought to my attention have not been proven yet, I won’t mention their name, but they did inspire me to help my readers be able to recognize a “scheme” if they run into it. So let’s take a look at what a real pyramid scheme looks like.
Wikipedia defines a Pyramid Scheme as: “A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, often without any product or service being delivered.” The key to that statement is “without any product or service being delivered”. Wikipedia goes on to explain “a successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula which is used for profit. The essential idea is that Mr. X, makes only one payment. To start earning, Mr. X has to recruit others like him who will also make one payment each. Mr. X gets paid out of receipts from those new recruits. They then go on to recruit others. As each new recruit makes a payment, Mr. X gets a cut. He is thus promised exponential benefits as the “business” expands.” Keep in mind at no time is anyone getting a product, or trying to sell a product. It is all based on recruiting and paying for the privilege to recruit others. Each level getting a small cut of the action, but the real money goes to the top of the pyramid. This is known as a financial pyramid.
So how can you tell if you’re being approached by a legitimate business opportunity or a pyramid scheme.
The big difference between MLM (multi-level marketing) and a pyramid scheme is in how the business operates. The real purpose for an MLM is to move product, not enroll people. A MLM or network marketing business has a legitimate product or service they want you to sell. The theory behind MLM is that the larger the network of distributors, the more product the business will be able to sell. Product must move or the business quits growing. The reason they recruit is that the more people selling and using their product, the more money the company makes and the more money the can pay the sales team.
Here are some other questions to ask before you sign up!
1. Is there a huge investment up front? Most MLM businesses require and enrollment fee, some are quite low like $40 but can range as high as $500, depending on what the products and services are you will be selling. If someone is requesting thousands of dollars, really investigate the company. It may be legitimate, but usually the best part of getting involved in a MLM is the low entrance fee.
2. If you have to buy inventory, will they buy it back? There may be a “restocking” fee, but a legitimate company has some kind of inventory buy back policy and many companies will refund your sign up money within a certain period after start up.
3. Is there attention paid to educating you about the product and how to sell it? A legitimate company recognizes that in order to move product, it needs a sales force that understands the product and is willing to sell it. If a company says you don’t have to sell, I would be wary of them, since moving the products involves talking, which is really selling.
4. Is there more emphasis on recruiting than selling. Although building a team is important, the emphasis should be on sales. The company must move product to survive.
5. Do you make more money recruiting or selling. If it is recruiting…run.
Being part of a legitimate network marketing company can be very rewarding. MLM companies give people who have very little money to invest in the opportunity to have their own business with all the materials and reputation created for them. Although success requires commitment and constant learning, many people have come from having no money at all to become top income earners in these companies. I commend the leaders of these companies for creating opportunities that would never exist for many people without the money to by a franchise or start their own business. The network marketing and direct sales industry is amazing with the likes of Warren Buffet and Donald Trump involved in these endeavors.
So, in a nutshell, you can use these criteria when you approached about joining a business. Once you satisfy yourself that the company is legitimate, look at the things you enjoy to determine which company to get involved with. Personally I have a passion for travel and health and these are the two areas that I concentrate on when I am not coaching. Think about what you love to do and try to find something that will help you make a living doing it.
