MLM - Pyramid scheme or SCAM?

When I look at this picture I like to imagine the man on the first camel talking to the man on the second camel about this “amazing new business opportunity.”

When he starts to explain the compensation plan he is quickly interrupted by the man on the third camel who exclaims, “That’s a Pyramid Scheme!”

Okay, I know. That’s a little corny (or maybe a lot). Chances are pretty high though that if you have been in the MLM industry for very long you have heard this claim directed towards you.

The Pyramid Scheme

So what is this scheme that has maligned the name of the great structures built by the ancient Egyptians? Wikipedia states that …
"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 only way to recoup your investment in a pyramid scheme is to recruit other investors. There is either no product sold or the product has no real market value outside of the pyramid scheme – the product is only meant to be sold to its members but never really used. Your initial investment earns you the right to receive commissions on all the investments from people you recruit and all the people they recruit and so on.

The Pyramid Problem

Let’s say, for example, that for an investment of $1,000 you are required to recuit six other investors for which you receive $200 each plus $100 dollars for each investor they recruit and so on. You can get your original investment back quickly and make a ton of money. At just four levels below you there are already 1,296 people which means you have recouped your original investment of $1,000 plus $129,200!

Sounds like a great plan, huh? Well it depends on when you get in. The problem is that as more and more investors are added the possibility that those investors will be able to recoup their money quickly becomes zero.

Why? The math shows us that you would need an infinite number of investors flowing into the plan for the last investor in to be able to recoup their investment. In fact, you very quickly run through the world’s population!

"At only eleven levels below the top person in the scheme it requires more investors than the U.S. population and at thirteen levels below the top person it requires more investors than the population of the entire world."

Inevitably, these plans collapse well before this point as new investors cannot be recruited. Only the first few levels of the pyramid scheme have a realistic chance of recouping their original investment and making money. This is why pyramid schemes are illegal.
Multi-Level Marketing

When it comes to MLM plans people tend to judge the book by the cover – if it walks like a duck and talks like a duck then it must be a duck (or maybe in our case a pyramid building Egyptian!). MLM plans do have a pyramid shaped structure (as does almost every company, school, or organization). In fact, many aspects of a MLM company’s compensation plan are almost identical to the pyramid scheme. If the MLM company only focuses on bringing in new distributors then it has the same problem – there just aren’t enough people to make it work.

So what should you look for when thinking about joining a MLM company?

First, look at the product or service sold by the MLM company.

It should be of high quality, fairly priced, proprietary to the MLM company, and there should be a strong demand in the real world marketplace.

Second, look at how you earn money.

You should be compensated primarily on actual sales that you make plus the sales that your distributors below you make. A bonus may be paid on new distributors you recruit but the focus should be on sales to end users.

Third, you should not be required to purchase more inventory than you can reasonably be expected to use or sale.

Most MLM companies today have online ordering systems that will drop ship directly to the end user. You should not have a garage full of inventory!

If these three cursory observations do not hold true for the MLM company, RUN, don’t walk to the nearest exit.

Ultimately, ask this question, “Can I recoup my investment and make money solely by selling the product without ever recruiting anyone to become a distributor?” The answer to this question must always be yes! If not, it is most likely a pyramid scheme.