Often we hear about MLM Scams, news headlines say thousands of people lost their hard earn money to a pyramid scheme.
Even after hundred of MLM scams taken place, Why these MLM schemes are operating? Why government is not banning them permanently? and How people are being scammed.
All these questions are easy to ask, but their answers are quite complicated. Every countries’ government wants to get rid of such scams, but it is not that easy.
What is MLM?
MLM is an alternative to traditional supply system which involves independent associates to promote and sell products ahead.
Above same definition is common for direct selling.
But as the name Multi-Level Marketing hint, in MLM distributor joins company at a specific level relative to upline. Every distributor gets commission when someone in their downline purchases products of company.
Every MLM company has a compensation plan, according to that distributors’ commission is determined.
MLM is legal or not?
Yes, MLM is a legal Business Model.
In all 50 states of the USA, MLM is legalized with their own regulations.
MLM was originated in USA and now it spread across different continents. Countries like China, India, Japan, and other European countries have own law or guidelines for governing MLM.
If MLM is legal then why we hear about MLM Scams and Why MLM has bad reputations?
Answer is Pyramid Schemes.
To a great extent, pyramid scheme and MLM are similar to a each other.
MLM is legal but pyramid schemes are illegal like chit fund and ponzi schemes. They are considered fraud in almost all countries.
Why Pyramid Schemes are illegal.
Even after having similarities with MLM, there are some odd differences that make pyramid scheme scams.
In MLM commission is generated in 2 ways.
- When associates buy products at distributor price and sell them ahead at MRP, it is called retail profit.
- And whenever any associates in downline purchase company products, upline get some commission.
On the other hand, Pyramid scheme company provides commission mainly on recruitment.
Pyrmaid scheme companies promise to provide fix amount on every recruitment.
But from where do pyramid scheme company gives commission?
So while joining every member need to pay some money to company. Some take joining fee or some may call it any other charge.
Companies circulate that initial joining amount to the network of associates. Older members actually get decent commission, hence it attracts more people to join the pyramid scheme.
Directly taking joining fees makes pyramid schemes easy to identify. So now pyramid scheme company use dummy products and pretend to be MLM. Earlier education courses, gift vouchers, holiday packages were widely used as dummy products by pyramid schemes, but now there is trend of Cryptocurrency-based MLM Scams.
They perform the same money-circulation but now they sell highly overpriced products to get money for circulation.
So most time when we hear about MLM Scam, it was an illegal pyramid scheme operating as MLM.
Compared to an actual MLM, pyramid schemes spread faster as they seem more attractive and promoter makes false promises.
How to know legality of MLM Company
It is an easy task.
First of all, try to get more information about the company. Origin of the company, who is operating them, and what is their agenda.
Analyze products and services offered by the company. If products’ price is reasonable and are good in quality, then the company can be fine MLM. Sometimes companies may use quality products to cover gimmick products, so take a deep dive in checking products offered.
How company is distributing commission. If company is paying only on recruiting people then it is a red flag. This recruiting commission can be a slice of new members joining fee or first product purchase.
We have also written a detailed guide to differentiate between MLM and Pyramid scheme.