The popularity of direct selling sometimes motivates dishonest individuals and organisations to misrepresent themselves as legitimate direct selling businesses in hopes of enticing victims. People globally have lost millions of dollars participating in scams like pyramid schemes. Many victims thought they were paying for help in starting a small business of their own, when in fact they were being fooled by a slick pyramid scheme disguised to look like a legitimate business.
What is a Pyramid Scheme?
A pyramid scheme is where a person pays to another person or company a payment, (called a participation payment) for the right to receive payment or other benefits from the recruitment of other persons, (called a recruitment payment).
Consider a simple scheme where each member has to recruit only 5 new members. It starts out simply enough, going from the promoter and five members, to 25 members, to 125 but by the time the sixth layer is reached there are 15,625 members and at the ninth layer there are more than 1.9 million members. All pyramid schemes will run out of new recruits and most people lose money.
It is illegal in the United Kingdom to promote or participate in a pyramid scheme.
How Does Direct Selling Differ From a Pyramid Scheme?
Pyramid schemes seek to generate income to those who participate, from the recruitment of others. In a legitimate direct selling organisation income is generated by the sale or consumption of the product either by the salesperson or those is that person's downline.
Legitimate companies rely on solid sales over time. A strong base of customers who love and use the products is important to continuing success. Scams like pyramid schemes, on the other hand, generally rely on people making a large upfront payment, from which the scheme promoter profits. People are then reliant on recruiting others into the scheme in order to recover their upfront cost and earn further income.
Multi-level marketing structures are commonly used for the distribution of goods and services in the direct selling industry. These structures may seem similar to pyramid schemes, but in reality they are substantially different and are more similar to a conventional corporate business model.
In direct selling new salespersons are contracted to organisations under independent contractor arrangements. They are usually required to make a modest payment the aim of which is to have the salesperson show a commitment to the organisations and for a quantity of goods and/or literature and stationery to facilitate the demonstration and sale of products to customers and prospective customers. In a pyramid scheme however there is likely to be a large upfront payment for products which will be generally overpriced and have little or no market value.
In a legitimate direct selling opportunity the rewards come from sales of products and services to consumers by salespersons and their recruits, called down lines.
Avoiding Pyramid Schemes
Before considering an opportunity, ask yourself these questions:
- Are start-up costs minimal?
- Can you return unsold inventory?
- Is income only possible from the sale of products?
If the answer to each is yes then you are probably considering a legitimate direct selling opportunity.
All DSA Member companies are audited for compliance to the DSA Code and operate in accordance with UK law and comply with DSA Codes. Start up cost in direct selling organisations is usually a modest contribution, typically around £100, to the cost of a sales kit. Organisations want to make it easy and inexpensive for new salespersons. This is unlike pyramid schemes, which are often disguised with direct selling characteristics. Pyramid schemes make their money from fees paid by new recruits or by loading inventory or training aids on them. High entry costs are a tell tale sign.
A condition of DSA Membership is that Members have a buy back policy. This means if you quit the business, the Member will buy back unsold marketable products you purchased in the prior 12 months, for 90 percent of what you paid for them. Think carefully about opportunities that encourage front end loading, or buying large inventories of unreturnable products to reach levels for price or other gains.
Earnings from sales, not recruitment, are essential for a legitimate business. Direct selling, like other retail channels, depends on selling to consumers. This requires quality products at competitive prices. Be careful of any business that claims you can get rich by solely using their products or by recruiting new people into the business. You should believe in the products you will be selling.
We would advise that you always select a company who is a Member of the UK DSA.