Chances are, you have a friend whom you’ve lost contact with in years or an officemate who invited you to a small seminar about a business opportunity. Perhaps you’ve said yes to that friend because you’re genuinely interested or you play along because you don’t want to say no to a friend.
During the seminar, you are shown checks with insane amounts of money written on it. Your friend or officemate tells you that he/she was able to buy a new car with cash within three months. It all sounds too good to be true that your friend is earning this much so quickly!
Your friend explains the business and draws something on the board that looks like an organizational chart and says words such as “upline” and “downline,” tells you that the business runs on a multilevel marketing model, and that you get commissions based on every new recruit that your downline gets.
But before you hand over your hard-earned cash and “invest” in this business, be smart and do your research first to avoid being victimized by schemes that can look very much like a legitimate business.
What Is a Multilevel Marketing?
Multilevel marketing (MLM) refers to the system where “distributors at different levels are given the right to recruit other distributors who earn commissions from the sale of consumer products and services,” according to a paper from Ateneo Law Journal. Therefore, legitimate MLM can help members earn money when they sell products or services.
Prominent brands have used this marketing strategy to sell their products, including Avon, Electrolux, and Tupperware. This system is also called networking because participants typically recruit within their own social networks (such as friends, classmates, colleagues, and acquaintances).
What Makes MLM Different From a Ponzi Scheme / Pyramiding Scheme?
Many pyramid schemes are disguised as legitimate MLM businesses. Many of them also sell products that help these schemes appear legitimate, thereby increasing the confusion for people who are looking for legitimate business opportunities. However, the income of participants in pyramiding schemes typically relies on how many people are recruited, that is, the income of these participants are not earned as a commission on the products that any recruit in the downline are able to sell.
Ponzi or pyramid schemes promise participants huge returns on investments depending on how many people they recruit. However, these schemes are unsustainable and start to crumble when members fail to recruit new members. Pyramiding schemes are similar to Ponzi schemes, which pay early investors with money that are believed to be “profits,” but in reality, this money is funds invested by later investors.
How to Protect Yourself From Networking Scams
So how do you protect yourself from becoming a victim to a pyramiding scam, and how do you differentiate a legitimate MLM business from pyramiding scams? Here are a few reminders.
- When the returns on your investments are too good to be true, alarm bells should already be set off.
- Be suspicious of any “guaranteed” returns on investments, as legitimate businesses can’t promise consistent returns.
- Verify if the company has proper business permits and licenses.
- Check if the profits from the business comes from sales of products sold or from profits earned mostly from recruiting new members. If the business relies mainly on recruiting new members, then say “no.”
- If the business involves selling products, check if product prices are comparable with those of similar products on the market.
- Ensure that you understand the products or services that you will be selling. Many times, the products that are being sold in these scams tout benefits that are not scientifically proven.
As with any investment, it is your responsibility to do a research diligently before you put any money. Doing so can help you from becoming a victim of pyramiding scams that can rob you your hard earned money.
So be smart with your money and know that it’s OK to say NO to a friend who offers you to join a networking scheme when your guts tells you that it is a scam. You’re better off spending your money to get a car insurance that can prove to be useful if you ever get into a car accident.