By virtue of owning a website created to help small companies, people trying to launch their own businesses are regular visitors here. Many of these soon-to-be entrepreneurs have the drive, the knowledge and the plans required to become a great success someday, which makes running this website one of the more fun and rewarding things I do with my time. But over the last few months, an alarming trend has emerged. As the economy continues to falter and unemployment claims rise, many people are being forced to get creative with how they make ends meet. And pyramid schemes (a.k.a. Network Marketing Opportunities or Multi-Level Marketing Businesses) are providing just the right amount of false hope for hundreds of thousands of people across the country.
Regardless of what their websites say or how they say it, the white-collar criminals who run Network Marketing / MLM companies are taking advantage of an economic opportunity; preying on the insecurities of desperate people in uncertain times. I often fall asleep at night smiling, because I know there is a special place in hell reserved for every single one of them. But sometimes I lie awake frustrated, wishing there was more I could do to prevent these modern-day grifters from ripping off another friend, relative or acquaintance whose only crime is needing something positive to hold onto. Hence this posting.
If you believe you (or a loved one) might be getting taken for a ride by one of these Network Marketing or MLM business opportunities, I encourage you to spend a few minutes reviewing this list of “Signs You’re Involved in a Pyramid Scheme.” And if you need someone to talk to after reading it, feel free to reply to this post or send an email directly to eric@thesmallcompanyblog.com. Also, for MUCH more information on ths topic than I could ever hope to provide, please visit Dr. John M. Taylor’s website MLM-The Truth!.
9 Signs You’re Involved in a Pyramid Scheme
Sign #1: You Receive No Salary AND No Benefits.
There are obviously many sales people in this world who work on 100% commission. But real companies care enough about their employees to at least protect them with things like health insurance and retirement plans. Offering an allegedly valuable person like yourself no salary AND no benefits is pyramid scheme code for “We really don’t give a crap about you.”
Sign #2: You Are Asked to Sell Things Which Are Readily Available at Any Discount Store.
Vitamins, makeup, cleaning supplies, dietary supplements and food additives can ALL be purchased at any Wal Mart or Target. Even if the ones you sell are ‘higher quality’ than the discount store brands (which is highly unlikely) do you really think you can compete with these places and their billion dollar marketing budgets? The truth is, the people who run your Network Marketing business aren’t really expecting you to sell much of this stuff to anyone—except yourself.
Sign #3: You Pay for Your Own Training.
Real businesses invest in their employees by paying for courses and continuing development opportunities. Pyramid schemes use training as a profit center, and charge their consultants hundreds of dollars to attend the same ‘training’ sessions over and over again.
Sign #4: The Company Spends Time Explaining Why it is NOT a Pyramid Scheme.
People who run pyramid schemes know they’re illegal. To convince potential victims like you to participate, they have no choice but to present a semi-convincing list of reasons why their business is legitimate. My personal favorite is the one used by the Seriesse people, who claim that almost every business in the world is a pyramid scheme, simply because most organizational charts are shaped like a triangle. I’m not sure the Federal Government agrees.
Sign #5: Meetings are Littered with Statements that Can’t Be Verified.
It startles me how effective Network Marketing shills are at convincing people of outrageous things with absolutely no supporting documentation—and how willing people are to believe them. It’s motivating to think another consultant in your group lost everything, lived in her car, and turned her life around by making over a million dollars per year in network marketing. But if she was lying, how would you know it? You wouldn’t.
Sign #6: The Business is Endorsed by a Celebrity Who Never Shows Up at the Conferences.
Pyramid scheme operators love to lock in interested parties by name-dropping. “Did you know Donald Trump has a stake in this company? Do you realize the man on stage is Sylvester Stallone’s wife’s brother?” People who are easily star-struck find it almost impossible to think objectively about something when there is a celebrity involved . . . and operators are quick to take advantage of their instant boost in credibility.
Sign #7: You Receive More Compliments and Praise from People in the Network Than You Do from Your Family and Friends.
People who run pyramid schemes all have one thing in common: they actively recruit impressionable people with low self-esteem. But the compliments and praise will only last as long as you continue to produce in the form of either new sales or new recruits. Unless, of course, you keep paying for the training sessions.
Sign #8: The Group Alienates You from Your Support System.
Step 1 in the Setting up a Pyramid Scheme Handbook is to create an “us against them” attitude among new recruits. Pyramid scheme operators know full well that at some point, a friend or family member of yours will express concern about what you are doing. Therefore, much of your early ‘training’ will focus not on the products or the business itself, but on how relatives and friends are going to hold you back by being ”closed-minded” and “negative” about your new business. If you find yourself in heated arguments with friends and family over your business decision, chances are you took the bait.
Sign #9: They Spend More Time Training You How to Recruit Than How to Sell Products.
Contrary to the Network Marketing-based claim that “all businesses are pyramid schemes,” there isn’t one legitimate company that requires new employees to immediately begin searching for five replacements for themselves. But this is exactly what MLM companies do. MLM owners know that the shelf life of a single recruit is less than a year, so the focus becomes building the network first, and selling the products later. Worst-case, you and the people you recruit make the minimum investment in ’starter products,’ and the pyramid pulls in thousands of dollars without you ever making a legitimate sale.
Closing Thoughts
The fact is, if you’re serious about working for yourself, you do NOT need these con artists to help you get started. If selling things like makeup, cleaning supplies and dietary supplements is truly your passion, you can become a manufacturer’s representative for any number of an up-and-coming companies—with real training, interested customers, and no requirement to recruit others. Here is an article that explains how to become a manufacturer’s representative. And if you enjoy the job, you can even become a certified manufacturer’s rep and make a career of it.
Comments? Questions? Feel free to reply to this post. Otherwise a Retweet, Facebook Share, LinkedIn Share or other type of social share (handy buttons provided) would be greatly appreciated. Thank you!
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Author: Eric_Rudolf (76 Articles)
Eric Rudolf is Director of Marketing for one of the fastest-growing professional development and training companies in the world, as well as a featured small business writer for LegalZoom.com and RainToday.com—a major marketing and sales portal operated by the Wellesley Hills Group. Eric can be followed on LinkedIn or Twitter.
October 5th, 2010 at 1:54 pm
I appreciate many of your articles, Eric, but I object to this one. It is incorrect to use “pyramid scheme” to describe all networking marketing and MLM companies. It is unprofessional and incorrect to say “the white-collar criminals who run Network Marketing / MLM companies…[are] preying on the insecurities of desperate people in uncertain times.” And your comment is shocking: “I often fall asleep at night smiling, because I know there is a special place in hell reserved for every single one of them.”
First of all, you are not using the term “pyramid” correctly. The government describes “pyramid schemes” as companies where you receive commissions just for signing someone up and no product or service is purchased. Many reputable MLMs are providing great products and services and some are offering products or services at prices lower than retail. I work in the Network Marketing industry and am honored to work as a representative for SendOutCards. I have met the company founder, staff and many top distributors and they operate from the greatest integrity and professionalism.
As with any industry, there are people and companies who do it well and others who do not operate with ethics or who don’t offer good quality products or services. Additionally, I love working from home or when I travel and it allows me an incredible lifestyle and flexibility. SendOutCards never presents the business as a “get rich quick” business. This is work and takes time and commitment and the company and other distributors will always be honest to say that. You are doing a disservice to MLMs such as SendOutCards who are doing business right when you paint the whole industry with such a broad negative and mean-spirited brush.
October 5th, 2010 at 2:47 pm
Hi Lisa. Thanks for replying. Obviously if you didn’t pay for your own training, and you’re not incented to recruit other people, and they haven’t alienated you from your support system, and they’ve never spent any time convincing you that they’re not a pyramid scheme, then this article doesn’t apply to you or the company you work for. I know there are legitimate, home-based businesses out there. If you work for one, consider yourself very fortunate. I will be the first to admit I have never heard of your business, and have no experience to speak about it. I’m not sure why this article hit a nerve with you, if none of these things accurately describe your company.
Also, the government’s definition of a Pyramid Scheme as you state above is completely inaccurate. According to the Federal Government, the purchase of products or services is a MAJOR part of any Pyramid Scheme, and always has been. Here is the definition directly from the Federal Trade Commission (FTC) website:
Pyramid schemes 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. There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. Inventory loading occurs when a company’s incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. A lack of retail sales is also a red flag that a pyramid exists. Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.
So again . . . if you’re not purchasing products at inflated prices and/or being promised “hot cake-like” sales volumes, I think you’re in the clear. Thanks again for commenting.
October 6th, 2010 at 4:10 pm
The article “hit a nerve” with me because you paint all network marketing companies with the same broad, mean-spirited brush. You say “the white-collar criminals who run Network Marketing / MLM companies are taking advantage of an economic opportunity; preying on the insecurities of desperate people in uncertain times.” Really? …”white-collar criminals” run MLMs? What about the many corporations who pay their CEOs extravagant salaries and bonuses while they lay off 10s of 1,000s of employees? How about the white-collar criminals who run many of the banks in this country and beyond…who have gotten away with their crimes and bankrupted individuals, small companies, and are helping bankrupt this country? How about the white-collar criminals in the mortgage and insurance industries who will never be prosecuted? Do these companies all operate ethically and with the best interests in mind for their customers and employees?
As with any industry, there are MLMs that do business ethically and well and with unique and well-priced products and services. There are other MLMs that don’t do business well, have over-priced products or services, and promise that distributors will get rich quick. These companies, of course, do a disservice to the reputation of the industry.
SendOutCards and many MLMs include training. We have free training online, in person, and by phone weekly. It is strictly optional to attend an annual training convention, for example.
And re: companies not offering health insurance as a measure of whether they really care about their employees or independent contractors? Do you realize that the cost of health insurance in this country is out of control and many companies can’t afford to contribute towards health insurance for their people? I have worked as an employee in the past for several small companies and non-profits that did not offer health insurance or any other benefits.
MLMs are not for everyone and MLMs that present the business this way also do not serve the company or industry well. I was told that SendOutCards was work and that it may take several years or more to build the business to a full-time income, depending on my financial goals and my time investment. Starting your own business is cost-prohibitive for most people; franchises cost $100,000+, having a storefront is expensive, the costs of education and licensing to become a Realtor or other professional is expensive. A good MLM, for the right person, can offer a low-risk and low-cost way to have a home-based business.
SendOutCards has never alienated me from my friends or family or business associates. My support group is delighted to receive a real and customized greeting card in the mail and many of them use the service to also easily keep in touch with people in a memorable way.
Obviously, as you are honest to admit, you have never heard of SendOutCards, one of the Inc. 500 fastest growing companies in 2009, which means that you have not researched all MLMs. Again, my objection to your article was re: the harsh, unprofessional, and mean-spirited language you use to describe all MLMs and their CEOs.
October 6th, 2010 at 4:36 pm
Again, you’re missing the point. If this article doesn’t apply to you, this is a GOOD THING. But don’t be naive–for every ‘good’ MLM out there, there are PLENTY that are scams. You know it, I know it, and the Federal Government knows it.
The fact is, you are painting with as broad a brush as I am. Taking the position that all MLMs are wonderful by definition is nothing more than blind, biased, and flawed logic. I understand your attempt at defending your company specifically, but I haven’t said one negative thing about them. In fact, I’ve allowed you post over 1,000 words on my blog PRAISING your company. I could have just as easily removed your comments, then proceeded to blast your company’s business model without giving you a chance to present your side. At this point, your cries of unfairness are unjustified.
As I’ve stated before, it seems your company is one of the rare MLMs that does not promote recruitment of others (the foundation of any pyramid scheme), does not promise excessive sales, does not mandate the purchase of overpriced supplies, and does not force members to pay for their own training. I am honestly very happy for you, and wish you nothing but good things in the future.
October 6th, 2010 at 6:37 pm
Apparently we are both missing each other’s points, somewhat. I never said that all MLMs are wonderful. I did say that there are bad MLMs. Of course, the bad or unethical MLMs hurt the reputation of the industry as a whole. My company does recruit others as distributors as well as offer the service for customers. The network marketing business model, by definition, includes recruitment of distributors. The unethical or scam MLMs, as I understand it, have commission structures that pay just for recruiting distributors, with no products sold to customers, no training and support for distributors. Warren Buffet has a division of Berkshire Hathaway that uses the MLM model, economist/author/U.S. Gov. Administration past economic adviser Paul Zane Pilzer writes about the benefits of the MLM business model, when done well and properly.
I guess we will just have to agree to disagree. Thank you for allowing me to comment and for sharing my post.
October 7th, 2010 at 3:43 pm
Sorry, but I have to comment one more time. Whether the MLM directly pays people for recruitment is irrelevant. Even if there is no direct payment for recruitment, there are plenty of unethical and illegal things MLMs can do to fall under the definition of ‘pyramid scheme.’ Unfortunately, the people who make careers out of starting dirty MLMs (statistically, the person at the top makes 90% of the money . . . not exactly fair?) are very careful about what they put in writing. They become masters at implying facts, creating impressions, and making promises without ever actually crossing the line.
And you need to be careful about using Paul Zane Pilzer as a good example of an unbiased third party who endorses the MLM business model. The guy makes MILLIONS of dollars per year writing self-help books and CDs for people who work in MLM businesses. And regarding the Warren Buffet comment . . . again, you need to be careful. If you actually research this, you will find that the only people repeating this ‘fact’ are people involved in the MLM business. Warren Buffet does NOT run Berkshire Hathaway like an MLM. Here is the real story: in February of 2003, Warren Buffet invested in “The Pampered Chef.” Of course, unethical MLMers quickly spun this into “Warren Buffet runs his company like an MLM!” . . . and yet another urban legend was born. Here is the link to the CNN Money article:
http://money.cnn.com/magazines/fsb/fsb_archive/2003/02/01/336873/index.htm
I sincerely hope you take the time to read it.
October 16th, 2010 at 11:11 am
Thanks for the info. I get it…you hate Networking Marketing and MLMs. You have called the people who run MLMs “white-collar criminals” and you say that you “…often fall asleep at night smiling, because I know there is a special place in hell reserved for every single one of them.” Those are pretty strong, mean-spirited thoughts. Good luck with that.
November 5th, 2010 at 3:52 pm
Thank you for this great article. A loved one has been suckered into one of these schemes, which I won’t name. This person is spending tons of money travelling on their own dime to “seminars,” putting a huge strain on our relationship and alienating every one else that they know with the constant pushing pushing and selling. I wish I could understand how seemingly intelligent people fall for this nonsense.
November 5th, 2010 at 4:22 pm
I’m sorry to hear that, Angie, but I can completely relate. If I have any good news for you, it’s that eventually your loved one WILL become disillusioned. It just takes time. But hang in there–the first few months are REALLY tough. The best thing you can do is put your thoughts out there and make your position clear. There is really no point in badgering (unfortunately) but some boundaries will help. Tell your loved one “You’re an adult, so you can do what you want. But I don’t agree with this idea. And when we’re together, I don’t want you to talk about it, try to involve me, or try to involve the people we’re with.” Part of what drives people to stick with these things (other than the allure of financial independence) is the excitement of something ‘new’ in their lives. But eventually the excitement wears off, when they realize THEY are the only ones who are excited.
Good luck!
December 31st, 2010 at 8:38 am
Eric -
Thank you for a well-written and insightful article. Everyone considering MLM should read it!
I am the sponsor of the web site you recommended at the end. From 15 years’ research, anlaysis of over 350 MLMs, I can tell you that all your observations are “on the money.”
This week marks the completion of an ebook summarizing thousands of pages of research and worldwide feedback. It is titled “The Case (for and) against Multi-level Marketing.” The statistics showing that 99.6% of MLM participants lose money is based on the statistics of MLM companies for which average earnings data was available. The ebook can be downloaded free of charge from my web site at http://www.mlm-thetruth.com.
Happy New Year, and keep up the good work.
Jon M. Taylor, MBA , Ph.D.
January 1st, 2011 at 8:07 pm
Hi Jon:
I must say it is an HONOR to receive an article comment, much less a positive one, from someone who has been doing this as long as you have. I wrote this article after an MLM ‘claimed’ a family member of mine, as I was educating myself using websites like yours. The point is, it’s me that should be thanking you for your decades of work and dedication to this cause.
Even though it is nearly 2 years old, I still get a great deal of traffic on this article. I would be happy to let my followers know about your free e-book through this post. Maybe between the two of us, we can wake a few people up on this issue.
Thanks for writing, and good luck!