How An MLM Can Show It Isn’t an Illegal Pyramid Scheme

It seems like many MLMs are actually illegal pyramid schemes. As a consumer and/or a potential distributor, you want to be sure that the company you get involved with is legal. It isn't much fun to build a team only to have them shut down by the FTC. So what can you look for to ensure that an MLM is a legal one and not a pyramid scheme? Let's dig an find out:

In previous articles we found out: MLMs with required minimum purchases to earn commissions are pyramid schemes. We also found that the FTC says MLMs must focus on sales to outside participants.

So if you are evaluating an MLM company and trying to figure out if it is legal, look for two things in the compensation plan:

  • No minimum purchases to qualify for commissions - An MLM distributor will likely claim that you must be familiar with the product to recommend them. This makes sense. However, there's a difference to being familiar with a product and being required to buy as a fee to participate in the business. The later is a sign of a pyramid scheme.
  • Commissions are not paid on products ordered by other distributors - This gives each distributor an incentive to make sales to people outside the system, which the FTC says is necessary for a legit MLM.

Let's look at how this works in practice. If I recruit Dave, John, and Sam, I get a percentage of the sales that each of them made to people who are not distributors. There's still a reward for recruiting, but there is also a strong incentive to make actual sales to people outside the system. Even better it rewards people for finding and training good salespeople, not just someone who is a seller of a "business opportunity" in recruiting others.

If the MLM company is reputable, you'll find both of these to be true. If the MLM doesn't have both of these in place, it is best to avoid it.

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MLMs vs. Pyramid Schemes

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4 Responses to “How An MLM Can Show It Isn’t an Illegal Pyramid Scheme”
  1. Dave Says:

    [-]Interesting comments
    “No minimum purchases to qualify for commissions – An MLM distributor will likely claim that you must be familiar with the product to recommend them. This makes sense. However, there’s a difference to being familiar with a product and being required to buy as a fee to participate in the business.”

    [-]HLF does support the no min purchase.
    A distributor can earn from distributors below them, the difference on their own %discount and their 1st line ie 1st line at 25% but recruiter is on 50% then recruiter gains 25% on their 1st line’s retail.
    Commission reduces to 15%, 8% then 0% when 1st line is at 50% (due to being a 0 difference)

    “The later is a sign of a pyramid scheme.
    Commissions are not paid on products ordered by other distributors – This gives each distributor an incentive to make sales to people outside the system, which the FTC says is necessary for a legit MLM.”
    (see my comment above)
    [-]HLF does pay the recruiting person on their downline distributors.
    However, the aim is always to have consistent retail, like any traditional business.
    [-] A distributor is paid a % on retail sales and also a commission on team output.
    So i don’t see what the issue is.

    ps personally I work in baking Risk management.
    I think there is more corruption within the banking environment than MLMs
    Barlcays, HSBC etc not as if these are small banks either.

  2. mlmmyth Says:

    I’m not seeing the requirement to sell product to people who are not involved in HerbaLife. It seems like one could make money by only recruiting others. This would fail the FTC’s MLMs Must Focus on Sales to Outside Participants guidelines.

    HerbaLife admitted that they don’t know how much product is sold to people outside the HerbaLife network and the California court system ruled that HerbaLife could be tried for being an endless-chain scheme (for sources see: Pyramid Scheme Questions Cause Herbalife to Lose 3 Billion Dollars). Clearly if the US courts can see the problems with HerbaLife, there is significant doubt as to the legality. If there were no issues, the court would have thrown any endless-chain scheme charge out as being ridiculous and not based on any fact.

    It is possible that there’s more corruption in the banking environment, but that’s done behind closed doors so that is speculation, most people make money by investing with banks, and there’s zero possibility that putting your money to work with a bank is an illegal scheme. That said, the banking environment is a whole other can of worms for another website to deal with.

  3. Artfool Says:

    I’d have to say I’m not sure I’d agree about not paying any commission on other distributors in your own network. I’d think a better system would be to just pay higher commission on Customers. Incentives to acquire customers seems like a good business practice but why not pay everyone on all the dollar volume they create just different rates (a business vs personal rate for example) After all a “distributor” is just another customer (what if they never recruited a single other person?)

  4. mlmmyth Says:

    If you are paying on other distributor’s purchases, you are creating a system that rewards recruiting. Sure you can pay higher commissions on customers who are not distributors, but due to the high price of the products, many MLMers just ignore getting customers altogether. They just have trouble getting them to buy the products without the business opportunity attached. Also, MLMs try to push customers to be distributors by giving them a wholesale price, so there wouldn’t be too many customers anyway.

    A distributor can’t be treated as just another customer or it clearly heads to a pyramid scheme.

    “What if a distributor never recruited a single other person?” Great question. Are they a failed distributor who is buying product month after month to be in business opportunity or are they a loyal customer who just wants to buy product at a discount. The MLMer would like you to believe the later. However as we can see from the churn rate in MLM there’s not much loyalty. It looks more like distributors are failing and quitting.

 

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