People have been asking me, “Hey, Dan, I want to make some extra money part time. Should I join multi-level marketing or is it a pyramid scheme?”
That’s a good question to ask. If you’re going to start a side business, it’s a good idea to do your research first. The last thing you want is to start a business that doesn’t make you any money.
So today I’m going to teach you seven ways to spot a pyramid scheme.
In case you haven’t heard the term before, a pyramid scheme is a business model in which paying members make money by recruiting new members into the scheme.
I’ve had experience with multi-level marketing (MLM), and I’ve coached the top 1 percent earners in the MLM industry, so I know this business inside out, from the consumer side and business side as well as recruiter’s side.
Today I’m going to share with you some stories about how I got into MLM, and then we are going to dispel some of the myths.
Typical MLM Pyramid Scheme Stories
My story begins early on, when I was invited by a guy I looked up to, who noticed I was starting my own business. He invited me to a coffee shop and then opened up a brochure to do a presentation. About 45 or 60 minutes later, I was sold. They had closed me on joining an MLM opportunity for home care products and vitamins.
So I signed up for a few hundred dollars and got a little kit which was a binder and the first month of products. I used the products, which I thought were okay.
Excited about the amazing opportunity, I talked to all my friends. I followed exactly what the MLM company taught me on the script. The first 30 days, I talked to every single person I knew because I was supposed to start with the warm list. The Hundred List which includes your mom, your dad, your highschool friends, your neighbours, your postman, and your dog. You talk to everyone.
I signed up four people. And then I ran out of people to talk to. By then, I had joined the NFL Club. The No Friends Left Club. No one wanted to talk to me anymore.
My Executive Director, Desmond, has a similar story. He was young at the time, eighteen. A gentleman he respected came up to him and said, “Are you keeping your options open?” He told Desmond he looked like a sharp young guy. That was the tell-tale MLM question which he didn’t know back then. Desmond went for coffee with him.
He asked Desmond about his dreams, what income he wanted to make, and started drawing these circles to show him the compensation plan. He made it sound so easy. Desmond didn’t have much money at the time so the gentleman said that he didn’t need a lot of money to start an MLM. He only needed a small investment, like a couple hundred dollars to set up his business and become an entrepreneur.
It sounded good to be an entrepreneur for a few hundred dollars, instead of working at McDonald’s as an employee or something like that.
Desmond was ambitious. He wanted to earn extra time and extra money. Get out of having a job. So he signed up. Eventually, he ran out of people to talk to, and the sad thing is that all the people he loved to spend time with didn’t want to spend time with him anymore. He had joined the NFL.
The “great opportunity” was all he talked about with everyone he knew. He had been brainwashed to convince everyone he met about MLM. Everyone became a prospect.
Eventually, Desmond rose to become one of the top earners of the company. When you get to that level, you know the industry inside and out because you have to understand how to recruit more people and how to get compensated. You also learn some of the ugly truths about MLM.
So, from our experiences, we’ve put together a list of ways to spot a pyramid scheme.
Watch this video about how to spot a pyramid scheme.
Seven Ways to Spot a Pyramid Scheme (or MLM)
1. They are always prospecting.
People are always going out there and prospecting. They go to networking events, the mall, anywhere where there are people they can talk to. If they think you’re looking to start a side business, or make more money, or open to buying new products, they will start a conversation with you.
They ask questions like, “Are you keeping your options open?” or “Are you looking for an extra way to make income?”
If your answer is “Yes,” most likely you will find yourself having coffee with them or attending a group presentation so you can hear about their great opportunity.
2. They have very complex commission structures.
Even the leaders have trouble understanding how they make money. With most companies, the newest recruits make the least amount of commission and the ones at the top make the most.
The leaders are paid basic commissions just like the new people, and then they get all these bonuses. The bonuses can be money, vacations, or prizes. How these commissions and bonuses are calculated become more complex as you become a top earner.
The idea is that they want you to feel like there is a lot of earning potential. But don’t let the complex commission structures distract you. The general rule is, if it takes you an hour to learn how to get paid, it’s a pyramid scheme.
3. Their success depends on their “downline”.
They are known as the “upline” and the people that they recruit as the “downline.” The more people they have in their downline, the better off they are.
There are two ways that people hope to be successful in MLM. One way is to have a downline of several consumers, people who buy the product but don’t make money in the business. Or they might have one rockstar recruit who found several consumers to bring their upline all the sales volume. Either way, it’s the get rich quick for nothing lottery mentality.
It’s okay to be a consumer and buy the products from an MLM company, but if you think you’ll become a millionaire by buying a vitamin, you’re dreaming.
4. They have to attend all these conferences and trainings.
People in an MLM tell you that you need to attend conferences and trainings if you want to be successful. They tell new recruits about the top one percent and make it seem like it’s easy to reach that level, that they’ll get that dream if they invest more money and buy their company training.
The positive part about the trainings is the personal development. If you join an MLM, you learn to deal with rejection, inner conflict, and not be shy when you talk with people. You learn to work on yourself.
But showing just the results of the top earners at these conferences sets the wrong expectations to people.
5. They tell only part of the success story.
When they are trying to recruit you, they tell stories about someone who joined and made five figures in his first year. What you don’t hear is how he’s been doing MLM for 20 years and he pulled people from other downlines. He didn’t start building his team from scratch. He already had a network.
To succeed in the business, you have to be there before the market gets saturated. You need to have the first mover’s advantage. For example, when Coca Cola first started and there wasn’t any competition. That’s first mover’s advantage.
6. Success is dependent on recruiting.
There is a high attrition rate in MLM, network marketing, and pyramid schemes. People are quitting all the time so they are always recruiting. Their income goes up and down because they’re attracting the wrong people, and they quit. Most people join an MLM for the wrong reasons.
Most believe in getting rich quick, or making a lot of money without putting in the work. They didn’t know that people in MLMs constantly have to go to meetings and put more time into the business.
7. They say it’s about the people but it’s about moving product.
People in MLMs are pressured to meet their monthly quotas if they want to keep getting their cheques. Even leaders have to move volume to keep their status. People are so pressured to buy product and meet quotas that they have a garage for their products. They max out their credit cards.
If you notice any of these seven signs, then you know you are dealing with an MLM. A real company does not require its people to recruit or buy extra product to keep the business open.
In my organization, for example, I have a team of closers that close programs for people who offer them. When a student enrolls in a program, the closer gets paid a 10 percent commission. It’s a very simple commission structure.
That’s how a real company works. The entrepreneurs have a business that offers a valuable service to their consumers.
If you’re still thinking about joining an MLM, consider these numbers: billions of people are involved in MLM companies. About 99 percent of these people lose money at it.
Final Thoughts On How To Spot A Pyramid Scheme
Desmond and I had similar experiences in the MLM business. We’ve noticed that people in MLMs have some aspects in common. For example, they are always looking for prospects. Their companies have complex commission structures, and their success depends on recruiting more people or moving more product.
MLMers attend conventions where they hear success stories of the people who became rich in this type of business. However, the reality is, most people don’t make a lot of money from joining an MLM because most people who join don’t treat it like a real business and put enough time into it.
Also a real company doesn’t require you to recruit new members or buy a minimum amount of product to get paid commissions or keep your business open. So be aware of these signs for spotting a pyramid scheme if you’re thinking about joining an MLM.
Do you have an MLM story you can’t wait to share? Comment below.