Thursday, January 25, 2018

Spotting a Pyramid Scheme

Here are three simple rules-of-thumb to help you decide if an opportunity is a legitimate direct sales or MLM company or if it's an illegal pyramid scheme – the history, compensation plan, and the inventory policy.

First things first – pyramid schemes are rare because they are illegal. There are laws and watchdog groups everywhere to prevent them from popping up and hurting people. That being the case, if one does pop-up, it's likely on the down-low. Illegal pyramid scheme business models are typically run by individuals or small groups; they don't like to promote their opportunity in public forums for fear of getting busted; and these "exciting new opportunities" don't have much to show in terms of history of clients, partners, and consumers. 

FYI – Southwestern Advantage has a 160 year history, millions of families served, and we lobby for anti-pyramid scheme legislation. No one hates pyramid schemes more than reputable direct sales and MLM companies do. 

Compensation Plans
The primary compensation in a pyramid scheme is from recruiting more participants, not from the actual sale of a product or service. Often, there is an up-front fee required by new members which feeds the up-line. The primary compensation of a reputable organization should be the sale of products or services, not recruitment fees. If the products or services are being sold between reps and not to the outside public, that’s also a major cause for concern.

Southwestern Advantage is a wholesale distributor of educational products and one of the oldest in the U.S. (est. 1855).  As a wholesale distributor, our only method of making money comes from our product sales.​ No money is made by recruiting. 

The primary compensation for our Student Reps comes from selling our products to third-party consumers. Experienced Student Reps often recruit personal teams but are not required or paid to do so. New recruits do not pay any sign-up fees. In fact, Southwestern Advantage provides all initial sales supplies and training free of charge. 

If both the team leader and their team do well in sales, the team leader can receive a rebate on their personal wholesale purchases. This is a rebate, not primary compensation, and comes out of the company's profits. Student Leaders are never paid out of the profits that their recruits make. 

Inventory Policies
Participants in pyramid schemes often find themselves stuck with piles of inventory and piles of debt. Inventory loading is the practice of requiring or stiff-arming reps into buying inventory up-front before sufficient customer orders or payments have transpired. Is there an inventory buy-back policy? Is it simple and swift or is it a complex process filled with vague requirements?

Southwestern Advantage Student Reps have no up-front inventory requirements, no sales quotas, and our company immediately accepts back and credits any unsold inventory at the end of the selling season. 

The fact is, there are many legitimate and trustworthy direct sales and multilevel marketing opportunities that benefit millions of participants and millions of consumers. To blindly label direct sales or MLM opportunities as a "pyramid scheme" without considering the facts is plain ignorant. Common sense and some simple awareness can go a long way in both preventing yourself or someone you care about from ending up in an unfortunate situation, or, misjudging a work opportunity that could benefit them.

For more consumer protection information, visit

Additional info from the DSA:
Pyramid schemes take advantage of and defraud people because they: 

• Promise large earnings with little effort. 
• Promise that one can earn a substantial income merely for recruiting people into the operation. 
• May or may not be a “product” to sell, but if there is it generally has little or no actual value. 
• Convince people to buy large amounts of inventory which they cannot easily sell to others and is not returnable (this is called “inventory loading”). 
• Charge large up-front fees to get involved, either as a direct payment or in the form of an obligatory payment for “products”. Promoters of pyramid schemes will also try to pressure people to sign up immediately by suggesting the same opportunity will not be available later. 
• Base compensation primarily on activity (these payments for recruitment are called “headhunting fees”). Participants are convinced to pay to get involved with the promise of receiving “headhunting fees” when they recruit others.

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