Business

April 15, 2014

Action Line: Pyramid scheme? Or legitimate opportunity? Here's a litmus test

A reader asks for help discerning a legitimate business opportunity, and BBB's Blair Looney offers a two-question litmus test.

From a reader: Last week, one of my colleagues invited me to attend a meeting to find out how to earn extra money. I went to the meeting thinking this may be a way to build my own business, but after the meeting I was left confused. I was not really sure what the product or service of the company was, other than recruiting other participants to invest. Instead, the emphasis of the meeting was on how much money the organizers were making.. How can I tell if this is a legitimate or fraudulent work-at-home job opportunity?

Action Line: It's important to be aware and know the difference between multi-level marketing and a pyramid scheme before you consider committing yourself to a company.

Multi-level marketing often involves personal sales of cosmetics, home décor, or other consumer products sold by independent business people.

Although it is possible to build a successful multi-level business, it is not a means of getting rich quick or easily and usually requires a small start-up cost.

Pyramid schemes concentrate mainly on quick profits to be earned by recruiting others and largely ignoring the merchandise or service to be sold. The start-up cost for pyramid schemes is substantial and people are pressured to pay large amounts to become a "distributor."

So how do you tell the difference? Answer these questions:

Is the start-up cost reasonable? A legitimate company will generally offer a startup kit that includes product samples, catalogs, order forms and other essentials that you need to get started selling. The median cost of a kit is $99, but can range from free to several hundred dollars depending on the type of product being sold. A pyramid scheme, on the other hand, will often require a large upfront investment of several thousand dollars for which you get little more than the right to recruit others.

Does your compensation come from selling products and services or from recruiting others? The money-making potential in a legitimate multi-level marketing company will rely primarily on selling products -- from your own sales or the sales made by your recruits. In a pyramid scheme, money is made by the recruiter from the fees paid by new recruits, regardless of whether they sell anything.

Additionally, be sure that products and services are being sold to the ultimate consumer of those products instead of passing large quantities of product from seller to seller.

The bottom line is that a legitimate company will portray an honest picture of the opportunity, including the possible risks, rewards, and challenges.

A pyramid scheme, however, will enthusiastically sell you on the promise of making tons of money with little effort. Successful multi-marketing businesses treat the experience like running a small business. There are no shortcuts to success. Keep a level head and evaluate all opportunities objectively.

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