Do-It-Yourself Evaluation of Multi-Level Marketing* Programs and
Suspected Pyramid Schemes

A Proactive Guide for Consumers, Regulators, and Consumer Advocates

By Jon M. Taylor, Ph.D., Pyramid Scheme Alert

Pyramid schemes in which no products are sold (Gifting Clubs, Matrix Schemes, Women Helping Women Schemes, etc.) are fairly easy to identify, and they seldom last long in any given area without government officials shutting them down or they collapse.

But when consumers are presented with an income "opportunity" with multiple levels of product distributors, (Multi-level Marketing (MLM), Network Marketing, "Direct Selling", etc.) it is not always easy to determine whether or not it is an exploitive product-based pyramid scheme. In these schemes, the consumer is expected to buy products and the company claims it is not a pyramid scheme, but a "home-based" direct selling business.

Note: Nearly all of the MLM schemes that Pyramid Scheme Alert has analyzed turn out to be recruitment scams, not legitimate direct selling. In these schemes, all the "distributors" buy products but few products are ever retailed to the public. All "distributors" recruit other distributors and are told they can receive commissions on the purchases of the chain of distributors "below" them.

Consumers tell us they cannot easily determine when an MLM or "direct selling opportunity" is a scam. This five-step program is designed to assist.

By performing this do-it-yourself evaluation, you can decide for yourself whether or not a MLM program should be avoided. As you answer each question, you will be given information that will enable you to make a more informed decision.

The key to identifying the potential harm of a multi-level marketing program is to look for elements in the compensation system that create extremely high leverage for the top persons in the hierarchy of participants. MLM "leverage" refers to the concentration of payments from the company to founding and other top-level distributors, who profit hugely from the efforts and purchases of a multitude of "distributors" beneath them, the vast majority of whom lose both time and money.

Additionally, direct selling scams are identified by the emphasis on recruiting more and more "distributors", rather than on selling the product "door to door" on a retail basis.

Note: the answer to the first question is "YES", because this test is specifically to identify "product-based" schemes. If you are evaluating a multi-level marketing scheme or any type of "product-based "opportunity", start by clicking "YES" and the follow this series of questions to make a more informed decision.

*a.k.a. "Multi-level Marketing," "Network Marketing," "Consumer Direct Marketing," etc. The acronym "MLM" is used as a generic term here for the sake of brevity and because it is a widely known and accepted acronym for any type of multi-level product-based distribution system.

© 2001 Jon M. Taylor. This analysis may be reproduced in its entirety - including credits - for consumer awareness, but may not be sold or packaged for sale without the author's written permission. For more information on problems with pyramid schemes or MLM/network marketing and possible solutions, check our other resources on the Pyramid Scheme Alert web site. The author may be contacted directly by e-mail at: [email protected].

This page last updated on 4/3/06