Amway, Avon, Herbalife and World Ventures are all names you may have heard before. At some point we’ve all been invited to meetings or pitches from a friend, co-worker, classmate or maybe even a random person who started a conversation with you in the bank. Are these scams? A few weeks ago we cleared up how to identify Ponzi and pyramid schemes. Now we’ll talk about multi-level marketing or MLM schemes. Are they scams or legitimate businesses?

Multi-level marketing is a business strategy involving the sale of products to family and friends along with the recruiting of other persons to do the same. This is also called network marketing or direct marketing. While it has a similar pyramid structure as a pyramid scheme, it’s not quite the same. How can you tell the difference? Let’s highlight some questions you should ask yourself.

1. Am I being charged for a product or service?

Network marketing companies ideally only charge you for the products being sold. On the other hand, pyramid schemes do not involve the sale of any products or services, and if they do, it does not get much emphasis compared to that of recruitment. There is little to no interest in market research and consumer demand! This is one of the first deal breakers you will encounter when the business is being pitched to you.

2. If I purchase products or inventory, will the company repurchase what is unsold? Many MLMs have a buyback policy. For example, Amway and Avon both have buyback policies for their distributors. That means, if you don’t sell all the products, the companies will buy them back. Be sure to check if the company you are interested in offers a buyback policy and what is the time in which that offer is valid. This varies from place to place. For pyramid schemes, it’s generally a one-off purchase or offer IF any products are offered.

3. Do I have the potential to earn without recruiting anyone? The great news is that many MLMs give beginners the possibility of generating more money than those above them in the structure, whereas a pyramid scheme will always have those above making the bulk of funds. It really boils down to what is being offered as featured streams of income in the business. Once paying money and recruiting persons are the only makeup of the business model, you will always be lower than those above you.

4. Am I required to invest a large sum of money to become a “distributor”? Was your answer YES? Then, high chances are that it’s a pyramid scheme. Legitimate MLMs have little to no start-up cost involved while pyramid schemes require high start-up costs. These start-up costs will come in the form of sign up fees telling you about paying for training and learning material. Again, much of the effort is being placed in telling you how to recruit people. MLM companies such as Herbalife strive upon their product sales. Many persons made themselves into entrepreneurs by marketing and selling the products, versus something like Loom, which told “investors” that they will yield higher returns the more persons they got who were willing to put up their money in the “loom”. Well ,where is that loom now?

5. How long has this company been around and are they a registered business? MLMs or direct selling companies tend to remain around for more significant periods of time. This can be due to more robust and legal structures along with attention to consumer demand. Pyramid schemes are solely designed for a “get rich quick” scheme under the cover of low to no risk.

Though there may be additional factors you can consider, these five questions or considerations are very important to note in order to identify a legitimate MLM or network marketing company and save yourself from the ravaging effects of a pyramid scheme.

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