Before we get to the discussion of the product, let's have a quick review of the FTC's guidelines on pyramid schemes:

Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.

So to paraphrase, if you sell product to people outside the business it may be legit. However, if your money is made from your recruited downline, it is a pyramid scheme.

The problem with actually selling product is that you can’t really make a business of it. Specifically there are at least three problems:

1) Every product I’ve seen is ridiculously expensive… usually overpriced by around 5x-10x. They can get away with this, because they are really selling product to distributors. Distributors think they are saving 20%, but they are really overpaying by 300% or 400% in an effort to sell it at 500%. Distributors are also buying the product because they need to fulfill a Personal Volume (PV) requirement to earn commissions from the pyramid/team/recruitment hierarchy.

This was quite obvious when MonaVie sold $45 bottles of juice. They were only 25 ounces. Even PomWonderful’s juice isn’t close to that price.

2) The next issue is that you can usually find the product for the discount price on Ebay. Why would anyone pay the suggested retail price, when you can get it cheaper very easily? You simply can’t make a living selling a month of protein shakes at $120 when anyone can buy them at $100 elsewhere.

3) Finally, if people really like the product, they may become a distributor themselves to buy the product at the distributor rate instead of the retail price. It’s usually very easy to become a distributor (a one-time $25 fee, sometimes even free), so almost anyone interested would be wise to join to get the discount price.

In this last scenario, you are back to recruiting instead of selling product, which according to the FTC’s guidelines makes it an illegal pyramid scheme.

I like to say that MLM has a selling component and a pyramid scheme component. You can’t know how much is which without full transparency into the MLM. I believe that a responsible company would stick to a simple affiliate sale model rather than risk running a pyramid scheme. It accomplishes the same thing of letting people promote product sales.

When a company sticks with a pyramid scheme model, it tells me it shouldn’t be considered reputable.

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I came across a great post on Fat Wallet warning people about Lyoness and thought it illustrated a great point about MLMs and pyramid schemes:

"Say Mr Pyramid buys pens in bulk from Staples and sells them for $100 each. Who's gonna pay $100 for a pen? But tell them that they can also sell pens for $100, and we'll pay you $30 for every pen you sell, plus you can recruit people to sell pens as well, and you'll get $10 for every pen they sell, and $5 for every pen their recruits sell. Three levels, $45 commissions total on a $100 sale. Everyone has to buy 10 pens a month for personal use to participate in the program. Just find three people who find three people who find three people.... In the end, yeah, you are buying 10 pens a month for $1000, but you are getting $3150 in commissions, so don't sweat it. Why wouldn't you join?

Product is moving. The pens get used. No recruitment revenue, only product commissions. Absolutely 100% a pyramid scheme. The only real reason people are paying $100 for a pen is for the opportunity to make money off the sale of pens. Completely unsustainable as eventually, you run out of people to sell to and those at the bottom get hosed buying $1000 pens but not being able to sell them. This is an extreme example, but if you look at the world of MLM, there are some pretty big name companies out there that somewhat fit this mold on a less cut and dry basis."

I loved how quickly and easily he described the scheme. So when a company like MonaVie sells a 25 ounce bottle juice at $40 or a shake company wants to sell you on 90 calories for $1.50, you've got a pretty good idea that they are pretty much a pyramid scheme. The companies and their distributors like to say that their product is a higher quality. The quality of the products, such as a juice, shake, or vitamin are often impossible to judge.

What is clear is that MLMs all seem to charge high prices. Are we to assume that each one has supreme quality or is there a fee being tacked onto the product due to the "business opportunity" where the people at the bottom get screwed? I'll go with the later.

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MLMs vs. Pyramid Schemes

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Fresh on the heels of Pyramid Scheme Questions Causing Herbalife to Lose 3 Billion Dollars, the Direct Selling Association (DSA) issued an interesting view of legit businesses as opposed to pyramid schemes (PDF). This view was in stark contrast to the FTC's document about MLMs and pyramid schemes, which curiously didn't get a mention.

I should back up for a second. For those who are not familiar with the DSA, they are an association in which 95% of the members are MLM companies. It exists to serve the interests of those members. The DSA being almost all MLM companies is also one of the biggest reasons why most people in MLM confuse MLM, Network Marketing, and Direct Selling.

It is interesting to compare and contrast the two documents: the DSA version, biased due to its membership of MLM companies... and the unbiased one from the FTC who is simply trying to protect consumers. Let's look at some of the claims that the DSA one makes. We'll compare each one to the FTC document.

"Here's how to tell a legitimate business from a pyramid scheme:
Legitimate direct selling companies contribute to a vibrant marketplace by selling competitive, high-quality
products and services and providing a sustainable source of income for those who choose to sell those products."

There's nothing in the FTC document suggesting that legit MLMs contribute to a vibrant marketplace. This illustrates the DSA's need to sugarcoat their paper and exposes it for the marketing it is. As for the selling of competitive high-quality products and services, there's nothing in the FTC about quality of products at all. The FTC document does suggest that the consumer review the product's pricing, "Is the product priced competitively?"

We finally have a point that it seems the FTC and DSA agree on... competitive pricing. Unfortunately for the DSA, many MLM companies fail this test. Last year USA Today noted that even MLM advocates say the products aren't priced competitively:

"The problem so many have is their prices aren't competitive in the real world," says Lou Abbott, who works in multilevel marketing

It gets worse. USA Today noted, "A 31-day supply of Amway's Nutrilite Double X multivitamins is $75. Supplement retailer GNC's most comparable product, Ultra Mega Green multivitamins, cost $40 for a 60-day supply."

So a fair comparison is that about $20 of GNC's product (a 30-day supply) is more or less equal to $75 of Amway's product. This is not competitively priced and thus gives a sign that even the DSA thinks that even DSA member Amway is not a legit company and shares a trait with what they consider a pyramid scheme.

The last part of the DSA statement "providing a sustainable source of income for those who choose to sell those products", isn't addressed in the FTC document. This is more marketing because any business, even pyramid schemes can provide a sustainable source of income for those who choose to sell those products.

Let's look at the other bullet-points about legit companies from the DSA:

• Provide accurate information about the company, its products and what one can expect as a seller of the company’s
products and services.

A little research shows that MonaVie doesn't supply accurate information about the antioxidants in its juice. Additionally, LifeVantage and Dr. Joe McCord Lied about the Creation of Protandim and Joe McCord Illegally Says that Protandim is about Cancer Prevention.

MonaVie is a pending member of the DSA. LifeVantage is a member and of the DSA and has a "Code of Ethics 2012" badge.

• Charge a nominal fee for a starter kit – the median cost for the start-up kit is $99 and usually includes items
such as samples, catalogs, order forms and other tools that help the seller begin selling.

The FTC document doesn't mention anything about starter kits or pricing of them. In the past, this was a problem with MLM companies, but they've since moved to pricing the products more (see above) which costs consumers more than the expensive kits in the long run.

Nonetheless, this is the DSA promoting something that is unrelated to MLMs being pyramid schemes.

• Have a product or service that is competitive in the marketplace and is purchased by the ultimate user.

The competitive in the marketplace was covered above. The $40+ price for 25 ounces of MonaVie's 100% fruit juice blend is not competitive with V8 Fusion's 100% fruit juice blend which is around $3.50 for 46 ounces.

As for the product being purchased by the ultimate user, who else would purchase the product? The FTC document makes the point about "sales to people outside the plan who intend to use the products."

This is a stunning example of how the DSA continues to claim that selling products to other distributors who consume it themselves is legit while the FTC says otherwise. The FTC has been clear MLMs Must Focus on Sales to Outside Participants, which are very different than "ultimate users."

• Require sellers to hold little or no inventory and has a buyback policy to protect against inventory loading.

Latest documents from the FTC like the one cited above don't mention the amount of inventory.

The FTC document does mention to look for the return policy saying, "policies vary on getting full refunds — and how long it could take..."

However, in the case of most MLMs, which involve overpriced, consumable products, the financial damage is done month after month and product that is consumed obviously can't be returned.

• Base compensation primarily on the sale of products and services to the ultimate user. Compensation can be
generated from either your own sales or the sales of others you have recruited.

This terminology makes it seem like it isn't a pyramid scheme if compensation is based entirely off of product bought those recruited. The FTC seems to have a very, very different view saying, "Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It’s best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products."

The FTC is clear that compensation should be primarily generated from your own sales to people outside the plan.

• Take time to describe the business and give potential sellers adequate time to make a decision – any opportunity
worth having will be there tomorrow."

The DSA and FTC agree on this, but this should be common sense and not a determining factor of whether a business is a pyramid scheme.

The DSA tries to be helpful in providing a few more tips where "pyramid schemes take advantage of and defraud people." Let's look at those as well:

• Promise large earnings with little effort.

Well the MLM One24, promises that one can retire in 24 months, simply by recruiting 24 people... just one a month. That's a lot of earnings from seemingly very little effort.

One of the biggest supporters of MLM recently spoke to a lot of people with the message MLM is not hard.

• Promise that one can earn a substantial income merely for recruiting people into the operation.

See the above about One24 and recruiting 24 people... just one a month.

• May or may not be a “product” to sell, but if there is it generally has little or no actual value.

The FTC document doesn't put the value of the product in their guidelines anywhere. In fact the FTC prosecuted JewelWay, which sold jewelry that had significant value.

This is an attempt by the DSA to try to make it seem like its members are legit companies because they sell products of value.

• Convince people to buy large amounts of inventory which they cannot easily sell to others and is not returnable
(this is called “inventory loading”).

The FTC document cited above does not address inventory loading. Again, this was a problem in the past, but modern pyramid schemes have abandoned the practice. It doesn't mean that they still aren't pyramid schemes.

• Charge large up-front fees to get involved, either as a direct payment or in the form of an obligatory payment for
“products”. Promoters of pyramid schemes will also try to pressure people to sign up immediately by suggesting
the same opportunity will not be available later.

Again the large up-front fees was a problem in the past, but modern pyramid schemes have avoided it by building the fees into the product pricing. However, in some cases the fees are still around. In order to be eligible in all the ways to make money with LifeVantage, one has to sign up for a package that gives a year supply of product at over $500, which constitutes both "inventory loading" and large up-front fees.

• Base compensation primarily on activity (these payments for recruitment are called “headhunting fees”).
Participants are convinced to pay to get involved with the promise of receiving “headhunting fees” when
they recruit others.

I've never heard of this. It doesn't seem to apply to any MLMs that I've come across. The participants do get compensated for the recruitment of others in the form of the product that they buy. It isn't much different than a headhunting fee. It's still a fee for recruiting since the recruited person typically has to buy product right away to be eligible for commissions.

In fact, a one-time headhunting fee is a logical way to compensate someone for a referral. Many companies have a one-time bonus to employees to recruit other employees to work for the company. This makes a lot more sense than giving compensation month after as a sales commission to a salesman who has quite possibly never met or interacted with the person making the sale as is often the case in MLM.

Bottom Line: The DSA suggests that the confusion about pyramid schemes is understandable due to their portrayal on television. The reality is that consumers don't get confused by jokes on television - they get confused by organizations like the DSA spreading misinformation like the very press release they sent out. When you read the official FTC literature on the subject, it becomes clear that the DSA is not interested in spreading the correct information about pyramid schemes, but instead creating misinformation in an attempt to make its members seem legitimate.

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Many distributors promoting MLM try to defend legit pyramid scheme similarities with MLM by suggesting that other things out there are pyramid schemes. Quite often they'll use an analogy of a CEO managing Vice Presidents, managing middle managers, managing employees as a pyramid. You'll note that they often leave off the "scheme" part of that, which is a very important distinction.

There are so many differences that it is easy to expose the person making this claim as someone who is trying to defraud you. As the FBI says:

"At the heart of each pyramid scheme is typically a representation that new participants can recoup their original investments by inducing two or more prospects to make the same investment."

When you look at a software engineer, vice president, or CEO, does anyone make their salary recruiting other people to perform the same job as they do? You may argue that a HR person recruits, but they don't recruit a chain of HR people who recruit more HR people, etc. They recruit VPs and software engineers, and those people perform their duties, which don't typically include recruiting any others.

Here are a few other obvious differences:

  1. The typical CEO graduates from a very difficult business school and almost typically starts with a salary upwards of $150,000 a year in an executive position.
  2. The employee and/or manager isn't required to buy product to earn salary. This is what you see in MLMs and pyramid schemes: MLMs with Required Minimum Purchases to Earn Commissions are Pyramid Schemes

Corporate America is simply a hierarchical organization. It isn't a pyramid scheme with endless recruiting of 2 or more people making the same investment.

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MLMs vs. Pyramid Schemes

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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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I see many MLM distributors confused about the very industry they are in. I've read one distributor claim, "MLM is not a sales business, its a training, coaching and mentoring business." A distributor holding this view seems to be confused about what the FTC has to say on the subject.

The FTC has a great guide of MLM vs. Pyramid Schemes:

"Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It’s best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products."

"Avoid any plan where the reward for recruiting new distributors is more than it is for selling products to the public. That’s a time tested tip-off to a pyramid scheme."

"Another sign of a pyramid scheme is if the money you make depends more on recruiting — getting new distributors to pay for the right to participate in the plan — than on sales to the public."

Here's a letter from when the FTC went after JewelWay for being a illegal pyramid scheme:

"Legitimate multi-level marketing plans are a way of making retail sales of products or services to consumers through a network of representatives. However, in an illegal pyramid scheme the main focus is not on sales, but on recruiting new representatives into the program. Typically, each new representative must buy a certain amount of products and must recruit a specified number of new participants in order to earn money in the program. In a pyramid scheme there is almost no emphasis on making retail sales of products to persons who are not participants in the program."

I've added some emphasis to particular points to make it clear. The unbiased reader will likely get the point without the added emphasis. However, an MLM distributor who believes that he/she does not have to sell product will likely experience cognitive dissonance and try to explain away the FTC's requirement to make sales to others outside the scheme.

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MLMs vs. Pyramid Schemes

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MLM distributors have long been claiming that they aren't involved in a pyramid scheme, but much of the time they are either unaware of the definition of a pyramid scheme or simply not willing to face an inconvenient truth.

Most often distributors erroneously make the claim that as long as they are buying the product and using it, it isn't a pyramid scheme. This is sometimes called "internal consumption." For years Amway distributors have said something like: "All we do is buy from ourselves and find others who do the same" with the implication that they don't need to make sales.

In 2004, the President of the Direct Selling Association (an organization that lobbies for MLM companies), Mr. Neil H. Offen wrote the FTC to get clarity on the legality of this internal consumption business model. The FTC's response couldn't have been what the DSA was hoping for. In particular, the letter included this quote:

"The Commission's recent cases, however, demonstrate that the sale of goods and service; alone does not necessarily render a multi-level system legitimate. Modern pyramid schemes generally do not blatantly base commissions on the outright payment of fees, but instead try to disguise these payments to appear as if they are based on the sale of goods or services. The most common means employed to achieve this goal is to require a certain level of monthly purchases to qualify for commissions. While the sale of goods and services nominally generates all commissions in a system primarily funded by such purchases, in fact, those commissions are funded by purchases made to obtain the right to participate in the scheme. Each individual who profits, therefore, does so primarily from the payments of others who are themselves making payments in order to obtain their own profit. As discussed above, such a plan is little more than a transfer scheme, dooming the vast majority of participants to financial failure."

I highlighted a few parts to make it clear. If an MLM requires that a distributor purchase product to earn commissions it is very likely a modern pyramid scheme. One way that an MLM can do this legally is if there are enough sales to people outside the scheme, so that commissions aren't funded primary from those within the scheme.

Using this as a guide is clear that companies such a MonaVie and One24 are pyramid schemes. At a minimum, such companies by being in the industry that they are in bare the burden of proving that profits don't come primarily from sales to internal distributors.

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MLMs vs. Pyramid Schemes

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One common argument that a MLM distributor will make is that because one MLM is legal all of them must be legal. Often times the argument will come in the form of: Avon and Tupperware are legal have been around forever so [fill-in the MLM the distributor is pushing] must be legal. The logic seem sound at first and if you didn't know better you may fall for it.

However we know that MLMs with products can be illegal pyramid schemes. Some MLMs are legal are some are not.

This lack of logic is known as an association fallacy. The very same logic could be used to say that because a serial killer is a person and you are a person, you must be a serial killer. Hopefully, it is now clear how poor this logic is.

Bottom Line: There are many different varieties of MLMs. Use the guidelines from this FTC document on MLMs and pyramid schemes to determine if one is legal. If an MLM distributor is using this type of logical fallacy to convince you to join his or her MLM, it is likely they are trying to trick you. Avoid the person and the company like the plague.

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One of the most common and oldest myths is that an MLM can not be a illegal pyramid scheme simply because it has a product. I'm not quite sure where this myth was started, but it seems to be by someone with a vested interested in an MLM product or company.

However it was started, this is one of the easiest MLM Myths to put to rest. The FTC has two very good articles on the subject. Each are very straight-forward

The first has this specific quote:

"Not all multilevel marketing plans are legitimate. Some are pyramid schemes."

The rest of that article has a lot of information for how to determine whether an MLM is a pyramid scheme. If you are considering getting involved in an MLM, it is well worth taking the 2 minutes to read the article in detail.

The second has this specific quote:

"Pyramid schemes now come in so many forms that they may be difficult to recognize immediately. However, they all share one overriding characteristic. They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure."

I've put the last sentence in bold because it clearly shows that some pyramid schemes use a product to appear to be legal.

Furthermore the FTC has shut down companies like JewelWay, which had products, for being a pyramid scheme.

Bottom Line: If you hear someone spreading this very old myth and the person is involved in an MLM company, it is best to run away from the person and the company. They clearly don't have a grasp on their own business, which should make warning bells go off in your head about anything and everything they say involving the "opportunity."

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