What Is A Pyramid Scheme – Selling Scams
Most direct sales companies, probably more than 99.999%, are operating within a legitimate business model and yet it is not uncommon to hear direct sales, party plan and MLM companies referred to as being a pyramid scheme.
It is unfortunate that these viable business models are tainted by a few bad eggs. It is not unusual for a direct sales consultant to hear these comments when sharing their business:
- Oh, like a pyramid scheme!
- Is that one of those pyramid businesses?
- I am not interested in any pyramid business!
Below we have scripts to answer the pyramid scheme questions effectively but first let’s define exactly what a pyramid scheme is and how you tell if a company is really just an illegal selling scam.
What Is A Pyramid Scheme?
A pyramid scheme is an illegal way of structuring a business that is fraudulent and illegal according to the Federal Trade Commission (FTC). While the company is often disguised, it should be pretty easy to tell if one is a pyramid scheme.
- In a pyramid scheme the income is not based on the sale of a product or service.
- There are no products or services for sale in a pyramid scheme.
- In a pyramid scheme the total basis is a payment for recruiting.
- It is impossible for a pyramid scheme to keep going long term.
You recruit people into the program and get paid for only the process of recruiting, then those that you recruited do the same and get paid for it. Sooner or later with no actual product sales the program runs out of money!
Sometimes there is a fraudulent product or something that has no value of its own, like a list of names. The purpose being that you buy the product (list of names) then you must contact them and bring them into the organization in order to make money.
In the pyramid to the right, each new member is required to recruit 10 people to get paid. When you do the multiplication you can see that it is only a matter of time before the pyramid collapses either from lack of people or lack of money for the bottom levels.
Direct Sales Companies Commission Structures
MLM, person-to-person, party plan, door to door and other network marketing companies are all direct sales businesses with a viable product and opportunity. They are legal and are FTC approved business models.
Legitimate business models have a product or service of value that is sold to the consumer. The commissions that sales distributors make are a result of selling those products or services.
Generally speaking, the different types of direct sales companies are separated by the commission structure. While all direct sellers earn a commission on their personal sales of the products or services their company provides, they may also receive bonus commissions on the sales of those with whom they share the business opportunity.
How those commission bonuses (often called overrides) are paid is what differentiates the different type of networking companies.
- Door To Door & Person To Person: Generally these direct sellers only earn a commission on their personal sales to their customers.
- Party Plan: Usually, party plan businesses are considered a unilateral compensation plan. Their first level (hence the name unilateral) is their personally sponsored consultants and can include an unlimited number of people.
Consultants in the party plan business model earn a commission (20-50%) on their personal sales and an additional commission on their downline‘s sales. Consultants can sponsor as many people into their first line as they want and earn overides or bonus commissions (1-10%) on all their sponsored consultant’s personal sales.
In addition commission percentages on the override or bonus on levels below that their first line of consultants is less. Possibly as low as .5%. There is a stop point though, usually at 3-4 consultant levels down.
- MLM: Multilevel marketing companies fall under a wide variety of commission structures, including: binary, breakaway, matrix and any combinations of them all.
Often there are restrictions to the number of distributors in the first line. A leader can sponsor team members and place them under others on the team.
Usually, they must create a limited number of balanced legs under themselves. A distributor’s commisionable pay line may go 8 –12 levels deep and possibly break away to form a new team.
On these plans the % of overrides changes depending on how deep, balanced or whether the team is a break away.
In all of these business models all the commissions are based on the sales of products or services and everyone joining the company has the exact same earning potential assuming they indusstay in long enough to attain the results.
Legitimate direct sales companies have 3 things in common regardless of the compensation system:
- Pay is based on sales at all levels.
- Everyone has equal opportunity to achieve the sales levels.
- It is sustainable forever.
That is not the case in a pyramid scheme. Learn more about the different methods of direct selling and their commission structures.
Pyramid Selling Commission Structures
In a pyramid scheme, on the other hand, commissions are based on recruitment only as opposed to selling product or services of value and it is not sustainable for the long term. The only ones who really make the promised money are those who join first.
As you can see from the chart to the right, even the second level of recruits have substantially less income potential over the long term.
- Pyramid schemes are based on recruiting ONLY!
Example in its simplest form*:
- You buy in for $100 and are required to bring in 10 people.
- Those 10 buy in for $100 and you made $900.
- Each of those 10 then are required to recruit 10 more. You receive a small cut of that (lets say $10) so they only make $890 each but you made $100 more.
- Then each of these now 100 people are required to bring in 10 more new people and they get $870 each and you get another cut or $1000 on this level.
- And so on….
- By the time the pyramid base goes down to 10 levels there is only $450 for each recruiter because everyone above them gets a $10 cut of the start up fee.
Sooner or later the pyramid will run out of money, if it does not run out of people first.
*NOTE: This is a hypothetical simplistic example.
The base of the pyramid is not strong enough to continue to recruit because there is no money left and mathematically there are not enough people on earth to keep the thing going when each level has a numbers requirement.
How To Recognize A Pyramid Scheme
If the total basis of the operation is recruiting and there is no sale of products or services that have a value, then it IS a pyramid scheme.
It is that simple! Do your research before buying into a company!
If you do your due diligence and ask the right questions before joining a company it will be easy to tell if it is a pyramid scheme.
Ask your recruiter or check:
- What is the start up fee?
- What product do I get for that investment? Legitimate companies do have a start up fee but they also do provide you with a product or a service for that investment.
- Are they making unrealistic claims? Fast money, massive riches, promises that are too big?
- Are the commissions based on the sale of products or services or are they based on recruiting only?
- What is the commission based on?
- Is there a legitimate product or service that has value that people will want?
- Is the main corporate contact information on their literature?
- Do they provide ongoing training? Legitimate direct sales companies always do!
Print out this handy pyramid scheme check list so that you have the questions with you as you look for a direct selling company.
Read more on how to pick a good home business to match your personality.
How Consultants Should Answer The Pyramid Scheme Questions
- All companies are pyramids…
- Pyramids are illegal. We are registered with the FTC.
When responding to someone who is asking a pyramid question it is important to diffuse rather than defend. One of the best ways to overcome the pyramid concern is to use the “Feel, Felt, Found” method of responding.
- I know how you feel…
- I felt the same…
- What I learned was that..
I understand your how you feel.
At one time I did not understand what a pyramid scheme was either and what I have learned is that there is no product or services to sell in pyramids.
A pyramid scheme is an opportunity to sell an opportunity. As you can see we have a beautiful catalog with lots of great products. Would you like to come to my practice show?Deb Bixler, Party Plan Guru
The “Feel, Felt, Found” method diffuses the situation and when you end with a question the conversation will continue. Print the scripting tool and create your answers to the pyramid question so that you are not on the defensive next time you hear: “Is it one of those pyramids?”
Examples Of Scripts From Top Direct Sales Industry Experts
She is one of the most recognized experts in the direct sales industry. She is a coach and consultant for some of the top companies in direct sales.
I am so glad you asked….
Don’t defend… educate.
Pyramid Selling And Network Marketing Are Not The Same
It is unfortunate that network marketing organizations are often perceived as pyramid selling.
When someone asks you if your business is a pyramid scheme, the answer is, “No, pyramid schemes are illegal because they are unsustainable. People in illegal pyramids get paid for signing people up for the pyramid, not for the sale of products.
A legal direct selling opportunity provides commissions for the sale of products. When people join, I earn a commission on my own sales, as well as on the sales of people I train. If nothing gets sold, I don’t get paid! The sale of products is what produces sustainable income.Jennifer Fong, Vice President of Marketing & Communications for SwissJust North America
Avon’s multi-level marketing program focuses on earning commissions from personal product sales and the sales of the representatives they bring into the business. Everyone has the same earning and advancement opportunity unlike pyramids involves the exchange of money but no products.
Multi-level Marketing companies are legal and Avon is one of the best opportunities in the industry. What other concerns do you have?Merilyn Strange, Avon Leader, Direct Sales Coach & Speaker
As a consultant when you take the time to script out your response to the pyramid question you will be more effective in diffusing the situation. Please share your scripts in the comment section below!