Network Marketing Scheme: Illegal Pyramid or Legal Business? 5 Ways to Tell

Let's look briefly at a few network marketing scheme questions and answers. I've heard the whispers, you probably have, too. Things like that's one of those pyramid schemes, or even the dreaded moniker: Ponzi scheme. Not to be confused with a Fonzi scheme, which refers to saying heeeeeyyyyy and hitting the juke box while you wink at a cute girl.

Seriously, let's get into what people mean when they say: It's a network marketing scheme.

What's in a name?

First, what does scheme mean?

From thefreedictionary.com, Scheme means:

1. A systematic plan of action.

2. A secret or devious plan; a plot.

3. An orderly combination of related parts.

4. A chart, diagram, or outline of a system or object. (Similar to a schematic.)

Simple, right?

Only one of these has any negative connotation, #2. Hard to be positive about a devious plan or plot. Of course, you can take almost anything negatively if you want.

So what separates network marketing from a pyramid scheme or Ponzi scheme? Mainly one simple thing:

- The Network marketing business, also called multilevel marketing or MLM, is a legal form of business for the sale of products and services. The objective is to sell product and build a legitimate business.

- Illegal pyramids or Ponzi schemes have no product or a sham product, but try to portray a legitimate business. An example being Bernie Madoff's hedge fund collapse in 2008, and many others. Note that Madoff passed himself off as an investor, but didn't in the end he wasn't investing.

5 Items To Check

While not a comprehensive list, these 5 should be strong indication of legality or not. If you see any funny business, start asking questions and talking to lawyers. Here are 5 items to check:

1. What does the company sell? Is it a real product or service?

This cuts to the chase quickly. If the company sells a real tangible product or service and you can prove it, you have eliminated probably half the problems.

2. Transparency: Does the company follow the rules?

For example, does the company provide an income disclosure statement? One of the things that sunk Enron and Arthur Anderson - regular companies, who employed thousands - was faulty accounting. They cooked the books.

All legal network marketing schemes - and by that I mean companies - must provide an income disclosure statement to new distributors. It tells you what people at different levels of the company earn. You can find many of these online, too.

3. Are other products like yours selling for similar prices?

Look at make-up and perfume for an example on this one. You can get make-up, like eye shadow, foundation, and perfume at your grocery store, or you can go to Neimann Marcus for them. The prices will be wildly different, but both acceptable and legal.

Also, look at juice prices. Some MLM companies sell juice for $70 per quart. Wow! But it's organic, it's imported, it's rare, or hard to process. These are pretty good reasons. It reminds me of wine prices: $10 per box, or $100 per bottle.

The point: can you find other products for prices in a similar neighborhood to yours that aren't part of the network marketing business. If you can't, then maybe you should steer away.

Now if you are selling a cookie for $25, you may run into trouble, especially if you don't have a good reason for the price, such as superior ingredients or high overhead for your location. No one sells cookies for that price.

This can be called a product-based pyramid, where the product just covers for a way to move large sums of money. Also illegal.

4. What do you get paid to do?

In an illegal pyramid, you get paid to bring people into the scam. Sometimes people call these giving circles, or birthday clubs.

In good businesses, you earn money for selling products or services. A good, solid network marketing business will live for years selling products to people. An illegal pyramid will die immediately without new recruits. And take your money with it.

5. Ethics

Nothing substitutes here. If you work with good people, you get better results. What kind of ethics do you see in the people in this business? Beyond all the income other people may tell you they make, can you trust them? Do they follow the rules, or do they push people to buy more than they can resell or use?

And when you ask how the business works, do you get a straight answer? For instance, we sell pre-paid services for this industry. Or, we sell nutritional supplements. If they can't explain it, find someone who can or move on.

By the way, if the answer sounds like: "we all give money to Fred, bring in 10 people, and when it's our turn we get a sack full of hundred dollar bills," you should probably leave. There's no product, you get paid to bring people in, and eventually the people on the bottom get nothing.

Final Notes

No one can guarantee you success in network marketing or anything, really. You must take responsibility for your actions and be careful where you invest money and time and heart.

By calling it a network marketing scheme, people try to demean it.

Is your current business opportunity a network marketing scheme? If by scheme you mean a systematic plan or an orderly combination of related parts, then probably. Is it a devious plot or illegal? Not usually. I buy from several companies that have been around for years and have great products.

To buy, I am signed up in some of these companies, since I get a discount. Kind of like being a member at Sam's Club. But I only promote one as a business opportunity at this time.

Check out the companies you look at seriously. Go to a meeting or two, look closely at the products. Call the home office or go on a tour there if you can. I have at a couple. Go to a big convention.

These are reasonable precautions to take. By the way, don't invest money over the phone, either, unless you have checked it out first. Remember, no one can sell you the Brooklyn Bridge, and millionaires in Nigeria don't really need you to put their money in your bank account ;)

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