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Home Business Opportunity or Pyramid Scheme? - Get the Facts First!

by Jean Murray on February 1st, 2009

I’ve only been full time in my home business for two months, and already the opportunities are pouring in.  Within the last week, I have been contacted by two “friends” - each one has said, “This is a great home business opportunity for you!”  In both cases, I turned them down.  What?! Why would I turn down great opportunities?  Because they looked and sounded more like scams (pyramid scheme/Multi-level Marketing) than legitimate home business opportunities.  And lots of people are getting taken by these schemes.  You would think with the recent news about Bernie Madoff and the BILLIONS of dollars being lost by people who bought into his Ponzi scheme over the past 30 years, that people would be more attunded to this kind of thing.  But apparently people still want to believe.

What is a Pyramid Scheme/Multi-Level Marketing? According to the Securities and Exchange Commission, in a pyramid scheme individuals are encouraged to make money by selling others on the scheme.  The person who recruited you gets money when you recruit others, and on up the line.  You get commissions based on what the people “downline” from you sell or who they recruit.  In most cases, there is some kind of product, just to make the whole thing look legitimate. The problem is that the pyramid gets too big to sustain and collapses (look at the illustration on the SEC website).

Legit Business vs Scam? What makes an “opportunity” a scam, instead of “legitimate”?  Here are some “red flags” to look for:

Image source: StockXchng

Investment Required. You are required to put up an initial amount to “invest” in the business.  In a legit business, the sales people don’t have to invest; they just have to sell.

Emphasis on Recruiting, not Products. The emphasis is less on selling the products than on recruiting others to sell. In a pyramid scheme, you are told that your success depends on getting other people to sign on.  You get a commission based on signing up other “downline” people.  And the person “upline” from you got a commission from recruiting you.

Spending to Learn to Sell. These companies love to have big sales meetings (that you pay to attend), where they hype you up and get you to buy lots of books and products to teach you how to sell.  In a legitimate business, the company pays to train its sales people.

Market Saturation. Who actually needs this product? If you sold the product, how long would it take before you saturated the market?  One of the companies I was approached about sold phone and other telecommunications equipment.  Well, who doesn’t already have phone service?  Why would I buy phone service from a “no name” company?  If this were a legitimate phone service company, why wouldn’t they make their money out in the market selling these great phones?

Commissions. Ask about levels and amounts of commissions.  How many people are making a commission from your sales, and how many levels do you get commissions from? How much commission does the person actually doing the selling get?  In a legit company, the person selling the product gets the most commission, and the people “upline” get less.

Fool-Proof System. There are NO GUARANTEES in life.  Sorry.  Anyone who tries to get you to sign up for a sales scheme and who says, “I guarantee you’ll make lots of money,” is lying.  In most cases, they are more subtle about making promises, but you get a lot of hype and a lot of expectation.

If you are considering an “opportunity” that sounds too good to be true, you can get information on the Internet.  One good place to check is Pyramid Scheme Alert (note that this is pyramidschemealert.ORG, a non-profit organization. And the Consumer Awareness Institute has a comprehensive list of watchdog groups you might want to check out.

As I was searching through this website, where I did find information on one of the companies someone was trying to get me to join (ACN), I also found that Mary Kaye and Amway, have been accused of being pyramid/MLM organization.  For example, check out the Pink Truth site about Mary Kaye.

Now, I know people who signed up with Amway just to be able to get the products cheaply and to sell to a few friends.  Nothing wrong with that.  But think carefully when you’re presented with an opportunity and ask yourself, “Is this really too good to be true?”

Tags: Home Business Opportunities, Ponzi schemes, pyramid schemes

POSTED IN: Consumer Alerts, Disadvantages & Concerns, Laws & Regulations, Laws & Regulations

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