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MLM and Network Marketing are two examples of legitimate Direct Selling business types, if they are run correctly. And that brings back an old objection handling script that goes like this:
“Never confuse structure with legality!“
Illegal Pyramids and MLM or Network Marketing can appear identical in structure. So what sets them apart? The way they conduct business is the simple answer.
The Koscot Test, which is another tab in this FAQ section on our site, contains an exact explanation of what makes a business legal or illegal. And there is an excellent article in that FAQ written by Jeffrey Babner and a PDF from the DSA.
However, in the interest of saving you time, here is the short version in two categories, the first being sales-related and the 2nd being related to Claims & Guarantees.
NOTE: product claims cause a huge issue too, but they are not related to illegal pyramids.
The case was brought by the FTC in 1975. It took 4 years to get all the way to The Supreme Court (U.S.) where Amway proved that MLM/Network Marketing is legal.
The conditions of legality are stringent. And since the case of the FTC vs. Koscot Interplanetary had been decided first, there was a legal precedent and The Koscot Test.
The Wikipedia page on Glenn Turner (of Koscot) is worth reading if you like to really understand how legal precedent was established in the U.S..
Here is a great resource on that landmark decision from Online MLM Community:
Jeffrey Babner’s article is even better:
In 1975, there was a decision in the case referred to as the FTC vs. Koscot Interplanetary, which established two prongs as a test to see if a business was an illegal pyramid or a legit Network Marketing company or MLM.
If a company offended both of the two prongs, it would be found to be illegal.
I will not try to explain the case itself or the two prongs here. Instead, I will link a great article about the decision written by Jeffrey Babnar, one of the most experienced ML lawyers who ever lived (the article is posted on MLMLegal.com). I will also list a PDF by the Direct Selling Association (DSA) entitled Legitimate Direct Selling vs. Illegal Pyramid Schemes.
I was reading a post with the title FAQs about Networking Marketing that suggested that if 50% or more of the company revenue—on which the compensation is based—is generated merely by recruiting and not by non-participant purchases, you are likely participating in an illegal pyramid. This statement or advice, though accurate, presents a major problem: if the company doesn’t share the percentage of retail sales versus sales by participants (or fakes them), you will not know or not know the truth.
So, how do you recognize an illegal pyramid masquerading as Network Marketing or MLM? Well, that is a little tricky but not that difficult to figure out.
First of all, most of the Direct Selling companies you can join are happy to tell you about their growth, as this is a selling point, known as a benefit. But few publish what percentage of sales is generated from non-participants.
In the Betting on Zero documentary, in which Bill Ackerman publicly claimed that Herbalife was an illegal pyramid, we discovered just how little most companies know (or care) about their own revenue.
Upon investigation, Herbalife could not prove to the FTC that the majority of its sales or profit was from purchases made by non-participants!
They knew their sales numbers and how many signed up, but not how many were just retail customers. And that is quite stunning!
Let that be a warning to the entire industry. MLM companies should know their numbers and be ready to prove them at any time.
Now, Herbalife has paid a $200 million fine to the FTC for this investigation and for “consumer redress” due to income claims and the fact that they could not prove they had more sales to non-participants than participants.
I should point out that they were able to provide it within the time allotted to them by the FTC, but how is it they didn’t know?
So, if Herbalife didn’t know if they were operating within legal compliance, how does the little guy figure out if the business opportunity they are looking at is legal?
For starters, you can read trusted sources like MLMinars and follow the links provided here to related articles on websites like the FTC.
One of the sure-fire ways to see if an MLM (Network Marketing) company is in danger of not being legal is the lack of quotas. But this might not be what you think.
If the company is only interested in revenue and not compliance, it might not have appropriate quotas. For instance, they might pay full overrides to someone who recruited one rockstar and no one else, which is a sign of that company not caring about the law.
You might even think the person who brought in one rockstar deserves this money. But if the company will pay them that money without requiring that they have a minimum number of sign-ups or enrollments, then the company might be full or recruiters only.
By requiring that you have 20 personals to get paid full overrides on that Rockstar, the odds are significantly higher that more than 50% of them are retail customers that are not involved in the compensation plan.
What happens when the sponsor of the Rockstar does not meet that quota? For starters, they receive a much smaller percentage of the total compensation that is paid out. And the sponsor’s sponsor now needs twenty personals to qualify.
In this way, with a quota, retail sales happen naturally.
The unnatural way to do it is for the company to design a retail customer quota. This forces people to have a narrow-minded focus when talking to prospects, which is never a good thing.
By focusing the independent reps on a narrow-minded focus of retail sales only, they can repel prospects who would be attracted by earning a side hustle income. Surprisingly, that means you lose a potential retail customer!
You see, many of the people who are retail purchasers of Network Marketing products today were attracted to the side hustle/extra income. Surprised?
That brings me to the next point: the products must be reasonably priced and must be the types of products people already buy. Both of these points are critical.
If the person who joined and quit the side hustle aspect of the business loves the products they will keep buying them if:
Do finances get tough for employees who don’t have a side hustle? 100%. That is why we have a tougher time of retaining at least the retail sales of the side hustle prospects that quit the business!
The three keys to an MLM business having lots of retail customers are quotas, products everyone buys, and those products must be reasonably priced.
Do your homework. And know that some MLM companies present their stats in a manner that is misleading, which is another issue known as Deceptive Marketing.
I will leave Deceptive Marketing as a special blog post all by itself.
“If it is my own business, why does the MLM campany require that I adhere to a code of conduct?”
Excellent question. The simple answer is: how you conduct yourself not only reflects on the company too, but what you do may be illegal, like income claims or product claims.
By limiting your behavuiour and having the willingness to policy their policies, the MLM company you represent can argue that the MLM is not illegal, it was just one participant.
If the company is unwilling to remove participants that behave illegally, they may be showing a court that they condoonne illegal activity.
For these reasons and more, a Code of Conduct mst exist and it is critical for a Network Marketing comapny to enforce the requirements within that section of the distributor agreement on its independent representatives.
For those who do not understand MLM, it is not how much money you can make that matters.
Let me demonstrate this by telling you a story. I know a fellow in his late fifties who makes an average of $12,000/month from his MLM business as an independent representative of a Network Marketing company.
If we assume he lives until he is 83, or 25 years, that business will earn him $3.6 million between now and then, if it does not start earning him even more.
We could put that another way and form it into a question that goes something like this:
“Can you use an extra $3.6 million dollars before you die?“
Now, I would not put that on social media. Nor would I want to write the disclaimer that would need to go with it, but that is what my friend stands to make as of this moment. And his income is stable.
Let’s change this a little. What if you earned an extra $900 a month from your MLM side hustle? And now let’s use the same formula that I use for my friendds by mutiplying by 12 months and 25 years.
Would that extra income allow you to live in a better house in a better neighborhood?
Or; would that income allow you to drive your dream car?
Or; would that income mean you could send your two children to University all expenses paid?
The real question is lifestyle. If you learn some skills and apply them, plus have some fun, you can end up living a much better life.
To get back to my friend for a moment. He kept his career, so he has always had a job.
His side hustle income, which is passing $3 million now, allowed him to pay for his kids education and he gave them a downpayment on thier first home or condo after they got married, too!
He even told me a story about how he paid for an $18,000 earn operatiob for his daught to hear out of one ear.
Imagine for a moment what it meant to him to be in the position to do all of these things.
It is hot the money, but what it will buy.
If you want to take your significant other on a round the world cruise, with a side hustle that is covering your bills at home, that would only require $100,000.
Put another way, a side hustle that earns you $333/month for 25 years will pay for your first-class, round the world cruise!
“Is this one of those pyramids?”
What do we say? Yes?
The problem with this question is that an illegal pyramid and a legal and ethical MLM company both appear to be pyramids in structure, at least to some degree.
In terms of pyramids, the real question is, “Are you involved in an Illegal Pyramid or a Network Marketing company?”
And, if prospects were really thinking this, “Can you prove it?“
Now let me do a 180 degree spin around on this whole question.
The subconscious mind of most people who ask this question is looking for a way out!
Yes, it is not an objection as much as a fishing expedition to confirm for themselves (not you) that what you are presenting to them is not for them.
In our MLMinar events, we spend a lot of time talking about most people and the subconscious mind.
We as participants in Network Marketing or MLM want to learn not how to deal with this objection but how not to hear it in the first place!
Of course, no matter how good you become at bypassing the defense programs in the subconscious mind, you will eventually hear this. And there is a great answer, “No. What else would you like to hear?“
It may be impossible to keep this offer up, so if you want time with Steven Peter Burke (Smiling Steve) for free, complete this form now.