Understanding Illegal Pyramid Schemes

Thinking of joining a direct selling business?

Make sure it is a legitimate direct selling business and not an illegal pyramid scheme.

Here are a few things to consider:

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IS THERE A PRODUCT?

Direct selling is a distribution path for quality and competitively priced products. Be careful if a product doesn’t seem genuine, appears speculative or is vaguely described. Pyramid schemes often use products to disguise attempts to secure payments for others in the scheme.

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ARE EARNINGS CLAIMS TOO GOOD TO BE TRUE?

Earnings from direct selling are from a distributor’s sales and sales by others the distributor brings to the business. Direct selling can be very rewarding but it takes time and effort to establish a successful business. Be wary of “get rich quick” claims and assurances of easy money and passive income.

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WHAT DOES IT COST TO JOIN?

There is some cost in starting a direct selling business but it is usually small and subsidised to attract people to the industry. Pyramid schemes typically profit from upfront payments for the right to distribute products and recruit others into the scheme. Beware of substantial startup costs and financial incentives for progressing in the scheme.

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DO YOU UNDERSTAND THE MARKETING PLAN?

Direct selling uses innovative multilevel reward structures to encourage and compensate distributor productivity. Be certain you understand the rewards on offer and they only come from selling products. If the commission structure is complicated or difficult to understand there may be a reason for this, so be careful.

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ARE PRODUCTS USED BY CONSUMERS?

Distributors and consumers use the direct selling channel to acquire products for consumption. Be wary of schemes if there is little or no supply of products to consumers. Also be very wary of schemes that encourage distributors to make large inventory purchases.

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IS THERE AN EMPHASIS ON RECRUITING?

Recruiting and retaining distributors is important for a successful direct selling business. But success comes primarily from product quality, sales and service. Recruiting new distributors is secondary. Be careful of schemes that focus on recruiting, not selling products.

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WHAT HAPPENS WITH UNSOLD INVENTORY?

Reputable direct selling companies will buy-back unsold and marketable inventory at either the purchase or a discounted price. This is a requirement of DSA membership. Be wary of schemes that encourage large inventory purchases without this guarantee.

IMPORTANT

Don’t let yourself be pressured into any business opportunity. Thoroughly research what is being offered and if necessary seek independent advice from a professional advisor, the ACCC or other Fair Trading Agency or the DSA.