Wednesday, January 11, 2012

How To Identify A Pyramid Scheme

Multilevel companies that make profits based on recruiting new people in the organization should be regarded as Pyramid scheme or "recruiting MLM" business models that just pays out based on number of new recruiters you hire for the company than acknowledging any product or service sale than this is a typical Pyramid scheme.

In this article we will discuss few ways that can help you in identifying a Pyramid scheme and distinguish between "retail MLM" in which companies pays generously based on product selling then recruiting large number of people down-line. "Recruiting MLM" or say Pyramid schemes display following features:
  • Is a Start-up cost Reasonable
    A legitimate company generally offers a start-up kit that consist of a product catalog, product samples, order forms and other essentials that you need to get started selling. This may cost some initial cost to purchase it. But it should not be very high. Generally companies that are basically Pyramid schemes, they offer the kit at very price that contains products that are so expensive that rarely anyone buys it.

    There main source of income is always from hiring new recruiters. So, be aware before joining any network marketing scheme.
  • Compensation comes from selling products or recruiting members
    Ge to know whether compensation that company gives, comes through as a result of any product or service sold or just due to the new members recruited in any scheme. Be sure products and services are being sold to the ultimate consumer of those products instead of passing large quantities of product from seller to seller.
  • Recruitment of more and more Participants in an endless chain
    Check whether unlimited recruitment is allowed. In such a scenario the opportunity for each new person to make money becomes less and less as the program expands. As a result the one who joins early earns good money and the one who joins later always looses their money.
  • Advancement in Hierarchy is achieved by Recruitment
    If the company gives you promotion and promote to a upper level in the hierarchy just based on the number of new people you are able to recruit in the company, then simply keep away from such company as they are completely fraud and are pure Pyramid scheme.
  • Companies pay out bonuses to a number of levels that are functionally unjustified
    Ask whether the company pay to distributors in a hierarchy of more levels than it is functionally justifiable. No matter how big a corporation is, the entire world marketplace can be covered in maximum five levels of sales management. If the company pays commissions and bonuses more than five levels then it primarily enriches those at the top at the expense of those at the bottom. You would be wise to avoid such program.
  • Will the company buy back sales kits and unsold inventory?
    Most direct selling companies do not require to maintain large inventory purchases. But if they do, ensure that if the products remains unsold then whether the company will buy it back or not. If it buys back than its a legitimate company otherwise its a fraud and be away from it.

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