What is an MLM scheme?

MLM (Multi-level marketing) also called “Pyramid selling”, “Network marketing” or “Referral marketing”. It is a marketing strategy for the sale of products or services where the revenue is derived from a non-salaried workforce making the sales.

Participants’ earnings are derived from a pyramid-shaped or binary compensation commission scheme. A study by the Federal Trade Commission (FTC) in the U.S. of 350 MLM companies found that at least 99% of participants lost money in these schemes* (JM Taylor FTC, 2011).

* After subtracting any purchases made in order to qualify for the commissions.

What is a Pyramid Scheme?

Pyramid scheme is a business model/structure that can take many forms. It offers financial gain/return dependant upon payments made by new recruits.

This return for members is based primarily on the continued recruitment of new members (and not the sales of a product or service). It’s primary motivation is to entice participants to make money by recruiting others.

These schemes may often involve “gimmick” products (such as certificates) or overpriced products and services that have little to no resale value and are not likely to be purchased again (such as personal development programmes or general financial information).

They often seem enticing for their ability to deliver a high rate of return to early investors before they run out of new recruits and inevitably fall apart – leaving the later investors at a loss.

See these links for more information on Pyramid schemes here in New Zealand.

https://comcom.govt.nz/consumers/dealing-with-typical-situations/pyramid-schemes

Commerce Commission’s Pyramid Selling Schemes Fact Sheet