6 Red Flags To Watch Out For When You’re Considering A Direct Sales Business

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When running a network marketing business, one of the most common reactions I've gotten is, “What??? You’re running one of 'those'  things?

A pyramid scheme?!! Isn't that illegal?"

Okay, that is a bit overly-dramatic, but if you have been running a network marketing business for any length of time, I’m sure you have encountered people who have questioned the legality or even just the ethics of your enterprise.

The simple truth is that the hierarchical structure of a network marketing business is no different than any other company.

What is the difference between MLM and a pyramid scheme?

But just what is the difference between a multi-level marketing company and a pyramid scheme?

 Short answer:

In network marketing, everyone receives value.

In network marketing, everyone receives value.

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It doesn’t matter how many levels there are to the organization, everyone is gaining some income or value.

This is because there is a real product and real customers.  

In a pyramid scheme, only the people at the top receive any benefit, and there are no products and no customers.

Longer-ish answer:

Every company is set up in a hierarchical structure that could be described as a  "pyramid."  

There is nothing inherently wrong with pyramids. The Egyptians were quite fond of them as a matter of fact.

Most organizations utilize some hierarchical or pyramid-type management structure.  

The branches of the U.S government each have a pyramid structure.  The executive branch has the president at the top.

The education system is a pyramid, with the college President or Principle being at the top, and on down through the staff chain to teachers and then students.

All businesses are pyramids.

mlm pyramid scheme

All businesses are pyramids.

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Chick-Fil-A,  Apple, Wal-Mart, Ford Motor Company, and Chase Bank: they’re all pyramids with a hierarchical structure.  

Even small "Mom and Pop" businesses, like a family lawn care service, are run the same way, with the business owner at the top of the "pyramid."  

Dare I say it...even churches are pyramids, with the pastor on top followed by elders, deacons, and then members. 

No one has a problem with this system because it just makes sense practically speaking, but it's analogous to the system a network marketing business also follows.

In a network marketing business, as with every other legitimate business, the people at the bottom still get paid, and customers still receive a product.

However, in a "pyramid scheme," not everyone receives value. There is no product, and money is only made by getting people to sign up under you.

Only those at the top make money, and not through selling a product, but merely by having those below you pay an enrollment fee or ongoing monthly fee.

According to the U.S. Securities and Exchange Commission...

“In the classic ‘pyramid’ scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.”

Legitimate network marketing businesses actually have a valuable product to sell, and customers, outside of the company, who are buying.

You actually have to work to maintain your business, through selling products to new and existing customers, whereas illegal pyramids have no real products or customers outside of the "pyramid."

See the difference?

Pyramid schemes cannot endure for very long since the only money inflow is arriving from those in the lower levels who are tricked into signing up.

The people at the top will make their money, but only at the expense of the lower levels when they run out of gullible friends and family.

There is no product of value that is being sold to bring in a healthy revenue.

Legal doesn't = legit

So why are multi-level marketing companies frequently associated with illegal pyramid schemes? 

There are basically two factors that contribute to this confusion.

First, unlike other businesses that employ workers and pay a wage or salary, network marketing companies rely on "independent consultants" or "distributors" for their sales force.  

Compensation plans include commission incentives and bonuses to encourage consultants to grow a sales organization with a hierarchical structure.  

Therefore, the idea that you would "enroll" other consultants to "build a team" strikes people as a similarity with illegal pyramid schemes, even when they are not. 

 The second factor, however,  is the real problem that causes many people to confuse multi-level marketing companies with "pyramid schemes."

A lot of network marketing distributors go about recruiting in dishonest ways, which, understandably, rubs people the wrong way.  

On top of this, there are some network marketing companies that while legal, are not sound business models. 

Here are a few red flags to look out for...

If a direct sales or network marketing business has one of these red flags, you might want to think twice before signing up.

Red Flag #1

High enrollment cost

Beware of direct sales companies which have a large enrollment fee.

Beware of direct sales companies which have a large enrollment fee. #NetworkMarketingTips

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You have to invest start a business, and if you wanted to start a traditional business (outside of network marketing), you're probably looking at $10,000+ in start-up costs, on the low end.

So while there is nothing inherently wrong with a network marketing business charging a couple thousand dollars for you to start your business...you may want to think twice. 

While the company might be legal, it may be dangerously close to a "pyramid scheme" since it is likely the majority of your money will be made through signing up other people, rather than through a good product that gives value to the customer.

Red Flag #2

You only make income through signing-up others

Similarly, even if the enrollment cost is not exorbitant, you will want to stay away from network marketing companies where your income is only generated through signing up others.

You should be able to make a good profit by selling product alone, without having to enroll a single person.

You should be able to make a good profit by selling product alone, without having to enroll a single person. #networkmarketingtips

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Enrolling others should be icing on the cake; a nice bonus if you are wanting to make a higher income (and many times quite a bit higher!), but certainly not necessary for making a decent profit.

Red Flag #3

No Outside Customers

If you are mostly going to be selling your product to yourself or other distributors in a particular model, you may want to reconsider.

There must be third party customers buying the product for the direct sales company to be sound.

There must be third party customers buying the product for the direct sales company to be sound.

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Red Flag #4

High quotas

If there is a high quota or a minimum amount that you are required to purchase yourself, you may want to rethink, as you could lose a lot of money.

If the company thinks their consultants have to be the ones making most of the purchases, odds are, the product or company isn't that great.

If the company thinks their consultants have to be the ones making most of the purchases, odds are, the product or company isn't that great.

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Red Flag #5

the compensation plan is unrealistic

Closely check out the compensation plan. Is the pay-out realistic? Is it sustainable?

For example, if the enrollment fee is $300, and you make $100, not only on each person you enroll, but also for each person your team enrolls, where is that commission coming from?

Watch out for unrealistic compensation plans.

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Red Flag #6

Product is not unique and/or overpriced

Beware of  direct sales companies selling over-priced and unoriginal products.

Beware of direct sales companies selling over-priced and unoriginal products.

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If the product is something you could get for less at Walmart, it will be very difficult to convince customers that they should buy from you.

In a healthy direct sales company, you can be successful!

The mere fact that you have distributors enrolled under you in no way means you're running a pyramid scheme.

Find a healthy direct sales company and you really can be successful.

Find one with a low enrollment fee,  which generates income by selling to third party customers without signing up a single consultant, and no mandatory quotas. 

Above all, find a unique product you love! I found mine, and it has been an incredible experience. Go find yours!

If you're interested in learning more about my company, which has:

  • Low enrollment cost
  • The ability to make an income from the product alone
  • Tons of outside customers 
  •  No monthly or quarterly quotas 
  • An awesome compensation plan
  • And a super unique, patented product that can't be found in stores

If you're interested in learning more, just click the button below!

Free Online Marketing Quickstart Guide

Discover how to get hundreds of leads for your network marketing business, increase sales and grow your team online without social media, Facebook parties, messaging strangers, or bugging friends and family.

I hope you found this post on, 6 Signs You May Be In A Pyramid Scheme, helpful!

If you liked this post, you may also be interested in reading more at IS MLM Really A Legitimate Business Model?

Please feel free to share if you got value, and let me know in the comments below...

Have you ever had someone accuse you of being in pyramid scheme? Comment below!


Hi, I'm Paula Ramm

I’m a homeschooling mom of 7, living in the sunny state of Florida. I’ve been in direct sales for over 7 years and managed to build a multi-million dollar revenue-generating team of over 6,000 amazing consultants.

I love to help other ladies build their own thriving businesses from home, so they can spend more time with their families and be able to focus on the truly important things in life.

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