Multilevel marketing, also known as “network marketing,” is a legitimate way of selling goods or services through independent distributors. Generally, independent sales people do not receive a salary. Instead, they are compensated through commissions based on the sale of products, both for their own sales as well as on the sales of those they recruit and support. Legitimate MLM's base compensation primarily on the amount of products sold - not on the mere act of recruiting. That is a key difference between Pyramid Schemes and MLM's.
MLM plans are legal under state and federal law, as long as the primary focus of the plan is the selling of actual products and services. Commissions gained only by recruiting new members into the plan are generally outlawed. Consumers should be wary of MLM plans that promise big earnings with little or no efforts, especially if such promises are accompanied by a “guaranteed” return on investment. For most MLM plan distributors, the MLM is not their full-time job. Many participate to earn extra income on top of another career.
MLM plans help their distributors focus on building a sustainable business based on sales of the actual products and services to their customers, not to “downline” distributors. They provide detailed information in writing to new and current distributors, including business plans, marketing information, financial reports, and independent references. In good MLM plans, the parent company should buy back unsold products or unused supplies at no less than 90% of the wholesale purchase price.
The differences between legitimate MLM's and Pyramid Schemes are what makes one a legal business model that works for some consumers, and the other an illegal, money-losing scam.
How to Differentiate a Pyramid Schemes to MLM?
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