CAI

Consumer Awareness Institute

Non-profit Corporation

Red Flag #2:  Advancement in the scheme is by recruitment, rather than by appointment.

Important Background for Red Flag #2: 

The question could have been worded other ways: 

Does a participant (distributor, consultant, representative, etc.)  advance one’s position (and potential income) in a hierarchy of multiple levels of participants by recruiting other “distributors” under him/her, who in turn advance by recruiting distributors under them, etc.? – or – Must you “earn your way to the top” of the hierarchy of participant through recruitment and product purchases, rather than by applying for the position based on prior experience and training?  

In MLM programs, the position in the hierarchy is determined by time of entrance into the program, volume of  products purchased, and/or by success at recruiting, rather than by appointment. When consumers are recruited into such a program and then given incentives to buy products, they are being “leveraged” for the profit of those above them. They may think they are advancing, when in fact they are often being manipulated into buying more products and recruiting more people to benefit those above them.

Why is Red Flag #2 important? Historically, in most jurisdictions, the key factor in determining if a program is an illegal pyramid scheme is whether or not the primary emphasis is on compensation from recruitment, rather than from legitimate sales to end users who are not part of the network of participants. If the only way to earn significant income is by recruiting aggressively in order to advance to higher levels in the scheme, this criteria is satisfied.

Avoid falling for the line that you have a choice between merely selling products or building a business. MLM promoters typically tell prospects that they can choose to be a customer and/or sell products - or they can choose the "leadership" option. Usually a careful study of the compensation plan will reveal that the system is weighted heavily in favor of recruiting a downline. If you are able to get the names of more than one participant who actually profits from direct selling without recruiting, ask to see their tax return for last year. It is virtually certain that you will find few if any such persons.  

So be careful. For most MLM programs, it has become evident on close examination that both advancement and income are dependent primarily on recruiting a downline of participants who will buy products to “play the game.” If participants must recruit to be successful, or if the pay plan’s primary rewards are for building a downline, it should be considered a recruiting MLM, and an unprofitable chain selling scheme except for those at or near the top. You would likely do better selling pencils on a street corner.

 Are MLM “distributors” really distributors or “direct sales persons”? When the pay plan rewards recruits more for recruiting others than for retailing products or services, and when sales are “incentivized” (tied to qualifications for commissions or advancement in the scheme), it is a misnomer to refer to them as “distributors.”  This is why in these analyses the term is often placed in quotation marks. It is more correct to refer to them as “investing participants.” Correctly viewed, an accumulation of such incentivized purchases over a period of time constitutes a substantial investment in a pyramid scheme. (You will read more on this under Red Flag #3.)

To determine if Red Flag #2 applies to the program you are evaluating, ask yourself:  

Is advancement in a hierarchy of multiple levels of participants achieved by recruitment and/or by a combination of recruitment and sales volume, rather than by appointment, as in other work or sales settings?

 If the answer is “yes,” click “yes” to Red Flag #2 – Advancement in the scheme is by recruitment, rather than by appointment.

REMEMBER – Aside from the standard job market (and MLM) – there are many satisfactory alternatives for earning an income outside the convoluted world of network marketing. Almost any of them are superior to recruiting MLM's. Read more about them in the article "1,367 Ways to Make a LOT More Money than in MLM/Network Marketing"