Distinguishing legit direct-selling from pyramiding scams

Pyramiding companies survive by disguising themselves as legitimate direct selling or MLM companies with hopes of taking advantage of unsuspecting consumers. And here’s how you can distinguish them.

Network marketing or MLM, is a legitimate business model wherein products are sold via person-to-person selling instead of the traditional way of selling from a fixed retail location. The objective is to sell products to the end-consumers.

Direct selling is all about providing opportunities to earn by selling quality, fair market value products to consumers on a sustainable basis.

The difference between MLM and direct selling is in the commission system, wherein participants in MLM generally benefit from the sales made by people under their line of sponsorship even if they are several levels deep. Like a percentage “Cut” or “Kick-back” (override) commission of sorts from an independent distributor’s recruits and the recruit’s recruit, hence it’s “Multi-level” aspect.

Pyramiding on the other hand is generally characterized by people earning primarily from the act of recruiting other people who pay significant registration fees to join the pyramid scheme. The people who sign up and make the investment in the form of registration fees then try to recoup their investment by recruiting other people into the scheme by enticing them to make similar investments.

Pyramiding is illegal because profits are derived primarily from participants’ entry fees, and the income is dependent on the participants slot rather than the ability to sell the products or services.

This is similar to a Ponzi scheme, which is a business structure operated on by a person or group, natural or juridical where there is no true product or service being offered in exchange for the investment and where the money tendered by new investors are paid to earlier investors.

In the past, pyramiding has attracted a lot of people because of its promise of easy and immediate financial gain. What’s alarming to me now is that some are even using the term “Financial Literacy or Freedom” to entice others to join them.

Red Flags to note

DSAP’s [Direct Sellers Association of the Philippines] 8-point Test—a series of questions that can differentiate a legitimate direct selling company from a pyramiding one:

• Is there a product?

• Are commissions paid on sale of products and not on registration/entry fees?

• Is the intent to sell a product not a position?

• Is there no direct correlation between the number of recruits and compensation?

• If recruitment were to be stopped today, would the participants still make money?

• Is there a reasonable product return policy?

• Do products have fair market value?

• Is there a compelling reason to buy?

If the answer to all the questions is YES, then the company is legit, If there’s a NO, then there is a high probability that it is a pyramid scam.

Pyramid schemes, which are focused more on ‘earning-through-recruiting’ members to make a profit rather than through sales, are deceptive because the system will inevitably collapse due to market saturation. The ones who have benefited are the ones on top, who have already profited.

Do not easily believe just because someone very famous, a celebrity, or someone who is in a higher position tells you to join. Protect yourself and always be practical and think long-term when it comes to investments & financial decisions.

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Vernon Joseph Go, RFP®, REB, is a Public Speaker, Content Producer and  Author of the book  “A Lazy Investor’s Way”.