Multi-level Marketing: is it a scam?

Today I wanted to talk about multi-level marketing (MLM). It's a subject that has come up very often in forums and social networks after the fall of "you know what" coin suggesting that's exactly what this was, yet another multi-level marketing/ponzi scheme that ran out money to pay it's investors and collapsed.

Lots of people talk about these two things like they are one and the same, and although I know many MLM end up being nothing more than ponzi schemes I wanted to address this issue to clarify the differences between the two and most importantly, how to realize which MLM are (or show signs of being) ponzis or are simply set to fail.

So first, we have to clarify that a ponzi scheme is an investment operation in which the operators get rich by paying old investors with money coming from new investors, attracting those new investors with the promise of sky-high returns. At this point we need to talk about a similar kind of scheme that although is slightly different, it's very often included as ponzi example: I'm talking about pyramid schemes.

In a pyramid scheme new investors are recruited under the promise of being paid a given amount of money for recruiting new people. Once they run out of new recruitments, they run out of money.

And this is exactly where it becomes more difficult to distinguish a legitimate MLM (yes, there are) from a pyramid scheme (or scam), because the structure of both can be exactly the same. However, there are a few signs that we can watch so we can have an idea of what we are dealing with:

1. Product
   An MLM is usually a tool or a strategy to sell goods or services in which commissions are paid to the participants for the sales they made directly to the costumers. In addition, participants are paid for recruiting more people and they also get a small cut of their recruits sales.

   Up until this point it doesn't sound so different from a pyramid scheme except for one big, important thing: to sell goods or services. I know, many pyramid schemes offer to sell you some shitty (sorry) product to justify their whole operation and that's why a QUALITY PRODUCT is a very good clue. After all, if a company is capable of making great products (goods or services) it will be able to make a profit on its own.

2. Selling
   So, the company has a product to sell. That's a start. But how comfortable do you feel selling it? Would you buy it if you were a costumer? Do they use any questionable selling technique? Maybe some ridiculous cult like stage show?

Exactly

1. Profit
   Finally, this is what I think is tipping point. I know that the offer to gain some money for recruiting more people is attractive to many people, specially if their sales bring you some additional earnings. But the truth is that this companies can only be sustainable if they're capable of keep selling their products throughout the years to come. So make yourself this question: can I really earn money just bay selling their products or do recruiting people is the only way to make it profitable?

If you are being recruited to get into one of these MLM companies, ask as many questions as you can. Get to know the product and how they expect you to sell it.

And if at some point someone tells something like "forget about the product, that's not what's important. We care about people", run.

Run away and never look back