Is This a Pyramid or a Legitimate
By Jeffrey A. Babener
The Inevitable Question
OK, you have either been recruited for a network marketing
opportunity or you are the one doing the recruiting. Inevitably,
this question will come up: Is this a pyramid scheme or a legitimate
This Tuna's for Selling
Product and Price
No Investment Required
Purchase and Inventory Requirements
Sales Commissions Sources
Active Role for Distributors
Although this is a complex legal area, a simple story
draws a clear line in the sand. Party No. 1 sells Party No. 2 a
case of cans of tuna fish for $10. Party No. 2 sells the same case
to No. 3 for $20 and so on until No. 9 sells the case to No. 10
for $500. No. 10 opens the case and opens one of the cans, which
turns out to be rancid. He goes back to No. 9 who refers him to
No. 8 and so on until No. 10 goes to No. 1 to complain.
"I have major problem," he says.
"So, what's your problem?"
says No. 1.
"Well," says No. 10, "the tuna is rancid,
"So, what's your problem," No. 1 says again.
No. 10 says, "Like I said, this tuna is no good."
"Well," says No. 1, "the way
I see it, you don't really have a problem."
"What do you mean?" says No. 10, "this
stuff is worthless."
"You don't understand," said No. 1, "this
tuna is for selling, it's not for eating!"
And there lies the difference. Distributors in
a network marketing program that are merely buying product to buy
into the deal as opposed to an intention of really making a market
for it, are really working a pyramid scheme, not a legitimate direct
selling business. Remember, when you offer this opportunity to your
next-door neighbor or your best friend, it's your credibility that's
going to be on the line for years to come.
What to Look for - A Checklist
So, what do you look for with respect to legitimacy
vs. pyramid? Here's a good checklist to consider.
- Product and Price
Does the company offer a high quality product for which there
is a strong demand in the real world marketplace? Is the product
fairly priced and priced competitively with similar products?
Can the product be demonstrated, and does it stand out when you
show it to friends? Is the product proprietary to the company,
and available only through its distributors? (Have you ever noticed
that you can't buy Avon products in stores or Shaklee vitamins
at pharmacies?) Is it backed up with a customer satisfaction guarantee?
Is post-sales service or customer assistance available? Do the
people who participate in the program buy the product enthusiastically
based on its own merits, even if they don't participate in the
- Second, No Investment Requirement
Can you participate in the company's program without having to
make any investment other than purchasing a sales kit or demonstration
materials sold at company cost?
- Third, Look at Purchase and Inventory Requirements
Can you become a distributor or sales representative without having
to fulfill a minimum up-front purchase or inventory requirement?
(When you are pitched to put thousands of dollars of inventory
at the very beginning, run fast in the opposite direction.) Does
the company's compensation plan discourage inventory loading?
Garages and backrooms filled with product serve no useful purpose
- Fourth, Look at the Sales Commissions Sources
Are sales commissions paid only on actual products or services
sold through distributors in the network to the end-user or ultimate
consumer? (This means that products don't end up in basements
and closets. They are used, because they have genuine value.)
Does the compensation plan avoid paying commissions or bonuses
for the mere act of sponsoring or recruiting? (If it pays headhunting
fees, it is illegal.)
- Fifth, Check the Buy-Back Policy
Will the company buy back inventory and sales kit materials from
distributors who cancel their participation in the program, as
long as these items are in resalable condition? (This policy is
required in states that have adopted multilevel distribution statutes.)
- Sixth and Very Important, Look for Retail Sales
Is there an emphasis on actual retail sales to end-consumers?
Can the company demonstrate efforts to market products to the
ultimate consumer? Do the company's distributors have ongoing
retailing requirements to qualify for commissions? What is a "retail
sale?" The industry and many MLM statutes include both sales
to nonparticipants and purchases in reasonable amounts for personal
use by distributors. Some regulatory groups, including the FTC,
have historically rejected personal use as a legitimate retail
sale. Stay tuned as this debate continues. The legislative trend
is definitely supportive of the industry position.
- Seventh, Expect an Active and not Passive Role
Are distributors in the company required to actively participate
in the development and management of their networks? (Many of
the MLM statutes require that distributors perform bona fide,
supervisory, distributing, selling, or soliciting functions in
moving product to the ultimate consumer.)
- Eighth, Watch Out for Earnings Misrepresentations
Do the company's literature and training materials scrupulously
avoid claims of income potential that is promises of specific
income levels other than demonstrations of verifiable income levels
within its program? (The Federal Trade Commission, attorneys general,
and postal inspectors all have their eyes on the matter of earnings
representations. The acceptable approach emerging is that there
should be no earnings representations unless they are based on
a verifiable track record of the average earnings of distributors.
For instance, a company should have statistics to show the percentage
of active distributors and the average earnings of active distributors.)
- Finally, Look for Good Training
Does the company offer its independent distributors solid training
opportunities in sales and recruitment? Are different levels of
training offered to match the increasing levels of experience
and responsibilities of distributors?
The Journey Begins
OK, is this the end of your journey? Obviously not.
You have now looked at some legal issues and its time to move on
to some solid business analysis. But it's a great start.
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