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How to avoid joining a scam

Tips for differentiating legitimate direct sellers from pyramid schemes

Article by: Jana Bangerter
April 9, 2018

First-time MLM distributors often wonder if the company they’re thinking about joining might be a scam. Unfortunately, some companies claiming to be legitimate MLMs are pyramid schemes. But many MLMs are legitimate businesses. So how can you tell the good from the bad?

It’s not a bad idea to Google the company’s name in conjunction with the word “scam” or “pyramid scheme”—if only to get a feel for what your future customers will see. But take what you see online with a grain of salt. People say all kinds of things on the internet for all kinds of reasons. And you never know who’s really on the other end of that blog post!

There are some rules of thumb for separating good companies from bad ones. As you evaluate a direct sales business opportunity, ask yourself these questions. Many of them are the same questions regulatory bodies use to evaluate MLMs.

Has the company run into legal problems in the past?

Search for articles from legitimate news sources to see if the company or its owners have had civil suits filed or regulatory actions taken against them. Legal problems aren’t necessarily proof of a scam; even huge, mainstream brands have legal troubles from time to time. But it’s good to be informed about the company’s record. Consider the details so you can see what the company is being accused of and decide for yourself how serious it is.

Is there a real product that people actually want?

If the product lacks real value to consumers, beware! If all the people who buy it do so just to qualify to sell it to someone else, that’s a strong indication it is a pyramid scheme. Distributors in these companies recruit endlessly for their pay, without ever acquiring a legitimate customer base.

Are the product claims reasonable and legal?

If the company makes outlandish claims about the benefits of their product (“it cures cancer”), that’s a red flag. Claims about health benefits that can’t be backed up with evidence fall into the category of deceptive advertising which is illegal. Ask for supporting documentation for any claim.

There is a difference between individuals making illegal claims and the company itself making illegal claims. But legitimate MLMs will have rules about what distributors can say, good distributor training materials that clearly explain the rules, and programs for enforcing the rules.  Companies that allow their distributors to make illegal claims are more likely to be scams, and may run afoul of the FDA. So, if your recruiter is guilty of this, and if you find others making the same mistake online, you should be wary of the company.

Is the pricing reasonable?

If the price for the product is too high, that’s cause for concern that this may be a scam. For example, in the 1990s, some MLMs sold phone cards. These cards were functionally identical to others on the market but had a much higher price point. In this situation, the only people willing to pay for them were people who expected to receive a commission. Again, if there is not a consumer market for the product, then you may be looking at a pyramid scheme.

Compare the price of the product to the pricing of similar products from ordinary retailers or even from other MLMs. Factor in the special benefits of the product—cruelty free, eco-friendly, ethically produced, etc.—and the amount of value added by the personal relationship with the distributor. If you (as a customer) wouldn’t buy the product at its pricing, don’t sign up to sell it!

Are there real customers?

You probably saw this one coming. There must be real customers buying the product for no reason other than to use it. Think about your own relationship to the company and the product. Have you been a customer for a while already? Have you used and loved the product? If you haven’t ever bought the product before but a distributor is trying to recruit you to sell it, that should be a red flag.

Ask your recruiter how many customers they have. Ask them if they buy the product for themselves, and if they use what they buy. If the company offers the ability to join as a preferred customer, rather than a distributor, ask for company-wide information comparing numbers of distributors to numbers of customers. If almost every buyer is a distributor who doesn’t actually use the product, that’s a problem. On the other hand, if the company has incentives for sales to non-distributor customers, that’s a good sign!

Do the distributors use high-pressure sales or recruiting tactics?

If you feel like you’re being strong-armed or rushed to a decision, trust your gut and walk away. Salespeople who try to convince you that the world will stop spinning if you don’t buy or join right now are not your friends. Manipulative sales tactics are a bad sign about the company’s stability and legitimacy. Anything that’s worth buying today will be worth buying tomorrow. And anything that you need to manipulate people into buying is probably not worth selling.

You want to join a company that is focused on customer satisfaction, and trains its salespeople to have this focus as well. Anybody that wants you to sign up before you’ve had a chance to really weigh the pros and cons is scamming you, whether their company is legitimate or not. Look for salespeople who are perfectly happy with you buying or joining at your own pace. If a recruiter encourages you to take time to think it over, that’s a very good sign.

Are the earnings claims realistic?

Yes, you really can make money working as a direct seller! No, you probably aren’t going get rich quick (just like any other profession). Legitimate direct sales companies provide their distributors with income to match their efforts and they don’t throw their distributors into ethical gray areas to do it. If the person trying to recruit you implies that you can get rich quick, they’re lying to you and breaking the law. The vast majority of direct sellers with legitimate MLMs do not make millions of dollars on their businesses, and the ones that do make millions work hard for it. As with product claims, there’s a difference between earnings claims made by individuals and those made by the company. But, again, legitimate MLMs will train their distributors to not make these claims, and will have and enforce rules against them.

Legitimate direct sales companies work to develop programs that compensate distributors fairly for the time and effort they put into their businesses. This means you should be able to make a few hundred extra dollars a month working a business part time, and that with a greater time investment and business skills, you may be able to achieve full-time pay. Look for recruiters that talk about a range of income possibilities and exhibit realism about the time investment involved. Ask for corporate documentation on earnings statistics. Ask how much the recruiter makes and how much time they put in to earn it. Do the math and really think about whether or not the investment is worthwhile for you.

Conclusion

Carefully consider each of these questions before you sign up with any company. Aside from pointing out specific pitfalls to avoid, the most important advice we can give to anyone considering joining an MLM as a business opportunity is to take it seriously. The cost of starting a business as an MLM distributor is typically much lower than the startup cost of a traditional business. This can cause people to sign up without taking time to really consider the decision. Please avoid that impulse! You can make money in this industry but only if you take the work seriously.

This is a business. You wouldn’t purchase a fast food franchise on a whim. You shouldn’t join a direct sales company on a whim. Research the company, its products, its claims, and its practices. But if you find a product you love, coming from a company with ethics and practices you admire, and you think that sales is a good fit for you, go for it!

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MLM vs Pyramid Scheme, MLM Scams and Legal News, All Articles

Jana Bangerter

Jana Bangerter | Associate Editor

Born in Detroit, Jana spent her childhood in Michigan, Mexico, and Southern California developing an...

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