Consumer's Edge: Pyramid scheme or legitimate multilevel marketing?

These days, many of us could use an extra buck.

And all things considered, we'd like to get an easier way rather than the hard way.

But Big Mama would have us putting our hands to the plow rather than going for the easy hit, which brings me to pyramid schemes.

A half-dozen Tampa Bay area residents recently sued a company called Amerireach.com LLC in Hillsborough Circuit Court, accusing the operation of running a pyramid scheme in the selling of its nutrition product.

The plaintiffs say the company portrayed itself as "a valid and legal multilevel-marketing enterprise for the purpose of selling nutritional supplements." They're suing the Miami company for $15,000, after they "invested" in the business and joined the enterprise only to find the company benefiting and not themselves.

First of all, there are such things as valid and legal multilevel-marketing enterprises. Multilevel-marketing is simply a compensation plan not a business plan.

(In the interest of full disclosure, my wife works for the corporate office of a company that operates a direct sales or multilevel-marketing arm in which she is a participant).

In light of the lawsuit against Amerireach and the tough economic times, I thought it instructive to note the distinction between the valid multilevel-marketing businesses and the so-called pyramid schemes, which are illegal.

Kevin Jackson, chief investigator for the Hillsborough County Consumer Protection Agency, has reviewed pyramid schemes for years. He said the key distinction is how revenue is generated.

"The key is, in my view, the product that you're pushing," Jackson said. "If the marketing material and your motivation are heavily weighted on the recruitment of other sales people on your down-line as opposed to selling the product … then you've got a problem."

He adds that if you have to buy a bunch of the product yourself to support your new enterprise, then that, too, is a problem.

"If the company has legitimate retail end users for the product, you can have some success. (Multilevel-marketing is) not necessarily a bad thing. There are some that have survived a long time."

Some popular examples of legitimate companies include Mary Kay, Amway, Avon, Pampered Chef and Tupperware.

The legitimate companies join such organizations as the Direct Selling Association, which maintains standards and a code of ethics for the member firms.

The association notes that while participants will benefit financially from the multilevel-marketing strategy, as Jackson said, it is the product that should drive the business.

"Recruiting is part of multilevel-marketing," Amy Robinson, spokeswoman for the Direct Selling Association. "That shouldn't be the base of your compensation."

And despite suggestions from some who talk of banking riches while sitting around eating bon bons, direct sales takes effort.

"In order to make money, you have to work the business," Robinson said. "This is not sitting on your couch and receiving residual checks. It takes work."

So here's the Edge:

• Look at the startup cost. Most companies have a startup kit. The median cost is $99, which includes a training manual. Some companies might have startup costs as high as $500 because the kit includes a wide selection of jewelry. What you want to look for is what you get in return.

• Check the company's buy-back policy. Make sure the company has a buy-back policy. Make sure you aren't stuck with a bunch of inventory.

• Do your homework. Check with the local consumer protection agency and the state attorney general about the company you are considering. Review complaints and the basis for the complaint.

Ivan Penn can be reached at ipenn@sptimes.com or (727) 892-2332. Follow him on Twitter at www.twitter.com/ Consumers_Edge.

Learn more online

For more tips and information about direct sales visit:

www.dsa.org

www.directselling411.com

Consumer's Edge: Pyramid scheme or legitimate multilevel marketing? 10/02/09 [Last modified: Wednesday, October 7, 2009 2:37pm]

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