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What Is A Pyramid Scheme – Selling Scams

It is surprising that today, in the 21st century, legitimate direct sales, party plan and MLM companies are still accused of 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 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 that process, then those that you recruited do the same and get paid for it.

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.

Unilevel Compensation Plan

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.

Binary commission structure 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:

  1. Pay is based on sales at all levels.
  2. Everyone has equal opportunity to achieve the sales levels.
  3. 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

what is pyramid selling 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.

ftc pyramid scheme

 

 

 

 

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!

Download Pyramid Scheme Question 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

This is a tough question for consultants to answer when it’s posed. Most distributors have a tendency to be defensive and that does not alleviate the problem at all.

  • 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..

selling scams The “Feel, Felt, Found” diffuses the situation by validating the concern. You do not always have to literally say the words “Feel, Felt, Found” but the words you use are basically the same principle.

 

direct sales quotes 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?

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

Nicki Keohohou is the founder and president of the Direct Selling Women’s Alliance.

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….

A pyramid is actually when no product is being sold. It is when someone is selling an opportunity to sell a business opportunity. As you can see we have a beautiful catalog…

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.

direct sales quotes 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.
That’s what defines a legal direct selling company.

Jennifer Fong, Sales And Marketing Consultant For Direct Selling Industry

direct sales quotes


direct sales quotes 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, Team Leader and Trainer, Avon direct sales quotes

selling scams 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!



34 Responses to “What Is A Pyramid Scheme – Selling Scams”

    34
    Shared by: kathy hill:

    Very informative espacially the downloadable scripts and Nicki’s suggested response. thank you

    33
    Shared by: Pam Shaw:

    I got a lot out of this article. I’m now much more comfortable responding to these concerns. I’d rather have someone ask me questions so that I can respond in a professional manner. Thank you for the scripts.

    32
    Shared by: Kim Thompson-Pinder:

    What an awesome article on what a pyramid scheme and what it isn’t. Thanks for supplying scripts to help people combat this common abjection.

    31
    Shared by: Linda:

    I thank you for this valuable information! Will definitely share!

    30
    Shared by: Carolyn Rogers:

    Thank you for quick, easy ways to get those concerns out of the way, you never know when you will need a response.
    Thank you for preparing us!

    29
    Shared by: Ann-Maree Bennett:

    Thank-you for helping with the wording to explain the difference. It is so frustrating when people say this – especially those who think they know better than me and look down their noses at me and treat me as if I’m a simple idiot.

    28
    Shared by: Beth Kilburn:

    Btw, thank God that wasn’t a lead I said that to! It was a family member who I don’t even talk to that much!

    27
    Shared by: Beth Kilburn:

    It does get frustrating when someone calls our direct selling business a pyramid scheme! I’ve had a few call mine one and Avon has been around for 127 years! I even said to one, “Now, if a pyramid scheme can’t last long, tell me how one could last *that* long!” Probably not exactly the best thing to say at that point…. :-/ Now, I have something much better to say!

    26
    Shared by: Dawn Mulvey:

    Great article as always! There is a huge difference between the two and with the sample script we now have the perfect answer should the question come up. Thanks!

    25
    Shared by: Melanie:

    Thanks for educating me. I can in turn educate my team and customers who challenge me.

    24
    Shared by: Priscilla:

    I really appreciated these scripts. Sometimes it’s hard for people to see the value in direct sales. I think it comes from their own fears about success and beliefs that you can only succeed when you’re working for someone else. These scripts are invaluable and make great sense. Thanks!

    23
    Shared by: Mary Hanus:

    Every once in a while this does come up, and now I have clear, concise verbiage to respond. thank you!

    22
    Shared by: Krystyne:

    I have never been asked this question since joining my direct sales company. Good thing – before now I had no idea how to answer!

    21
    Shared by: Deb Bixler:

    Great Peter – it is so important to teach/train new people how to deal with this question to diffuse the nay-sayer rather than empower them!

    20
    Shared by: Maria:

    Fortunately, I don’t hear this question that frequently. I am prepared, especially after this article!

    19
    Shared by: Amy S.:

    I haven’t encountered these types of questions yet, but now I am prepared if I do!! Thanks!!

    18
    Shared by: Peter Gibson:

    Deb I love that you have this blog entry. I have grown tired of trying to explain how Direct Sales companies are not Pyramid schemes. I plan on sharng this with those who ask me abou this.

    17
    Shared by: Julia:

    THank you!! I get so tired of direct sales being referred to as a pyramid!

    16
    Shared by: Deb Bixler:

    This is a topic that should be taught to the team, Lisa – share the page and make a meeting topic!

    15
    Shared by: Lisa Donoian:

    Great scripts!

    14
    Shared by: Deb Bixler:

    I appreciate that, Danielle – stocks and bonds are regulated differently and really do not fall under the definition of direct selling. I really do not know enough about it to speak to how being a registered stock broker or part of the security exchange commission relates to also being involved in direct sales, but it makes sense that it could be a conflict.

    Even many of your general direct sales agreements have conflict of interest clauses especially at the leadership levels.

    13
    Shared by: Danielle:

    Unfortunately FINRA views MLM and networking marketing in a way that makes it difficult for anybody who is registered (Series 7 etc) to participate in the recruiting aspect of any program. Because I am FINRA registered I’m limited to selling products but cannot recruit/have a downline.

    12
    Shared by: Deb Bixler:

    Thanks, for passing it on, Brian!

    11
    Shared by: Deb Bixler:

    Yes, Amanda – send him this link and let him share it with his accountant friends…. LOL – You should have an accountant who respects your business!!
    This is an article that talks about that: http://www.createacashflowshow.com/home-office-tips/pick-a-tax-accountant.htm

    10
    Shared by: bongani:

    Thanks for the info anyone who does their research can certainly tell the difference. I think most of the time it is older people who get scammed.

    9
    Shared by: Amanda Harvey:

    My CPA, year after year, keeps calling my business a pyramid scheme. I’m prepared now to educate him.

    Thank you!

    8
    Shared by: Kristina Cottrell:

    This is a very informative article. Thanks for sharing.

    7
    Shared by: Corrie:

    Thank you for these handy print outs. I have used what you taught before to explain why we are not a pyramid scheme, but these print outs will be great to share with my downline. Thank you again for great teaching skills!

    6
    Shared by: DerekB:

    Thanks for keeping it simple and something I can duplicate!

    5
    Shared by: Brian Hurlburt:

    Thanks Deb, definitely the best description and suggestions I’ve seen! Already forwarded to my Primary Leaders!

    4
    Shared by: Deb Bixler:

    I would suggest that you use the feel, felt, found method with multiple variations.

    Script out responses that match your company and products, using the samples that are listed above.

    Just having a script (which is a plan) gives you the ability to communicate better and adapt to the exact situation. It is not what you say exactly but you can modify it as you need to once the plan is made, Sheila.

    3
    Shared by: Sheila Watt:

    I have only been asked this once and I was caught off guard and felt unprepared. Next time I will have a response ready. Frequently I hear “I don’t like direct sales/multi-level marketing” and often the person cannot articulate why. I am going to try the “I know how you feel” response. Any other suggestions?

    2
    Shared by: Deb Bixler:

    Thanks for saying so, Sandy! We appreciate all your comments! I will definitely send this on over to Nicki too!

    1
    Shared by: Sandy Kreps:

    I don’t have my own script because I have been saying these scripts after learning them from Deb Bixler and Nicki Keohouhou. Great way to educate people and give them confidence in our industry.

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