The popularity of direct selling sometimes motivates dishonest individuals and organisations to misrepresent themselves as legitimate direct selling businesses in hopes of enticing victims. People globally have lost millions of dollars participating in scams like pyramid schemes. Many victims thought they were paying for help in starting a small business of their own, when in fact they were being fooled by a slick pyramid scheme disguised to look like a legitimate business.
What is a Pyramid Scheme?
A pyramid scheme is where a person pays to another person or company a payment, (called a participation payment) for the right to receive payment or other benefits from the recruitment of other persons, (called a recruitment payment).
Consider a simple scheme where each member must recruit only 5 new members. It starts out simply enough, going from the promoter and five members, to 25 members, to 125 but by the time the sixth layer is reached there are 15,625 members and at the ninth layer there are more than 1.9 million members. All pyramid schemes will run out of new recruits and most people lose money.
It is illegal in Romania to promote or participate in a pyramid scheme.
How Does Direct Selling Differ from a Pyramid Scheme?
Pyramid schemes seek to generate income to those who participate, from the recruitment of others. In a legitimate direct selling organisation income is generated by the sale or consumption of the product either by the salesperson or those is that person’s downline.
Legitimate companies rely on solid sales over time. A strong base of customers who love and use the products is important to continuing success. Scams like pyramid schemes, on the other hand, generally rely on people making a large upfront payment, from which the scheme promoter profits. People are then reliant on recruiting others into the scheme in order to recover their upfront cost and earn further income.
Multi-level marketing structures are commonly used for the distribution of goods and services in the direct selling industry. These structures may seem similar to pyramid schemes, but in reality, they are substantially different and are more similar to a conventional corporate business model.
In direct selling new salespersons are contracted to organisations under independent contractor arrangements. They are usually required to make a modest payment the aim of which is to have the salesperson show a commitment to the organisations and for a quantity of goods and/or literature and stationery to facilitate the demonstration and sale of products to customers and prospective customers. In a pyramid scheme however, there is likely to be a large upfront payment for products which will be generally overpriced and have little or no market value.
In a legitimate direct selling opportunity, the rewards come from sales of products and services to consumers by salespersons and their recruits, called down lines.
Avoiding Pyramid Schemes
Before considering an opportunity, ask yourself these questions:
- Are start-up costs minimal?
- Can you return unsold inventory?
- Is income only possible from the sale of products?
- Do you understand the marketing plan?
If the answer to each is yes, then you are probably considering a legitimate direct selling opportunity.