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Direct sales companies, pyramid schemes, multilevel marketing (MLM)—people often lump these three types of businesses together. However, they aren’t the same thing.
While pyramid schemes and MLMs use predatory, often illegal practices that can seriously harm the people who work for them, direct sales companies are often legitimate businesses that offer many people a chance to earn good income from their selling techniques.
Unfortunately, it can be hard to tell the honest direct sales companies from the scammers and schemes out there, because the nefarious businesses are doing everything in their power to appear legitimate.
So let’s break down the difference between these types of businesses, and go over the red flags and green lights you should look for when vetting a company you’re considering working for.
What is a direct sales company?
Simply put, direct sales companies employ sales representatives who sell products or services directly to consumers. Representatives earn income by connecting with people and making sales.
You might know of the bygone practice of door-to-door salespeople, when folks would knock on a door hoping to sell things like encyclopedias, makeup, or vacuum cleaners.
Today, most legitimate direct sales companies have abandoned the door-to-door practice, and instead rely on a number of other methods to sell product:
Personalized customer relationships: Representatives often focus on building strong, personal relationships with their customers, offering product recommendations tailored to their needs.
Flexible work models: Direct sales businesses allow employees to work at their own pace, making it an attractive option for those seeking flexible income opportunities.
Training and support: Many direct sales companies provide training, marketing materials, and ongoing support to help their representatives succeed.
The dark side of direct sales: MLMs and pyramid schemes
While MLMs and pyramid schemes are technically “direct sales companies,” they are different because of the shady methods they use to entrap both their employees and customers.
Instead of focusing on selling products to people who want or need them, MLMs often emphasize recruitment as a path to earning income. Newly onboarded individuals will be told they only need to recruit a certain number of other employees to gain status and earn promotions.
MLMs and pyramid schemes may also require employees to purchase large amounts of inventory to begin working, and in the worst cases, sales reps at these companies will end up losing money because of the products’ inability to sell.
Pyramid schemes are the shadier cousins of MLMs, offering extravagant rewards for recruitment, often with little real product involvement. These businesses often collapse, and the employees are typically the ones that suffer most.
Fortunately, most pyramid schemes are illegal in the United States, but that doesn’t stop new MLMs and pyramid schemes from popping up and trying to recruit new staff.
If you’re looking for a good example of a true pyramid scheme or MLM, check out the excellent documentary LuLaRich, which chronicles the rise and fall of the MLM scam LuLaRoe.
Red flags and green lights: How to vet direct sales companies
If you’re on the hunt for a job in direct sales, it’s vital you develop the ability to decide which opportunities are legit and have potential, and which ones are likely to only cost you time, energy, and money.
Below are some of the biggest red flags that should set off alarm bells in your head, coupled with their green-light counterparts that indicate you’re dealing with a legit direct sales organization.
🚩 Red flag: Misleading income promises that seem too good to be true
“Make thousands of dollars in your first week!”
“You’ll be working from your pool in the Maldives in no time!”
“Earn money while you sleep!”
If a direct sales company is making promises that sound too good to be true, then trust your instinct and step away.
They may promise lavish getaways and a fast pass to the easy life, but the reality will be very different—long hours, low pay, and scammy techniques that keep you stuck in a bad job.
To protect yourself, always investigate the company’s income disclosure statement. This document provides valuable insights into the average earnings of representatives. Compare these figures with the promises made in recruitment pitches.
A genuine opportunity offers realistic income potential, steering clear of empty get-rich-quick assurances.
✅ Green light: Transparent compensation structures & realistic testimonials
On the flip side, legitimate direct sales companies will have compensation plans that are straightforward and transparent.
You’ll see clear explanations of how you’ll earn income, without any complex, convoluted structures that obfuscate actual earnings. In legitimate opportunities, you should be able to easily understand how your efforts translate into income.
To complement transparency, seek out testimonials from representatives who have achieved success within the opportunity. Real-life experiences are invaluable when evaluating the legitimacy of an opportunity.
While the company you’re considering may offer testimonials to you, it’s always wise to do your own research on websites like GlassDoor, to see what employee consensus looks like.
🚩 Red flag: Emphasis on recruitment over products
One of the telltale signs that a direct sales company isn’t acting honestly is when they focus more on recruitment than the actual sales of products.
They may use phrases like “downline” or “team” to indicate that you’ll be responsible for recruiting as many other people to the sales team as possible.
This is how pyramid schemes got their name—because there are only a few people at the “top” of the company earning money, and more and more people (earning less and less) beneath them.
The issue here is that this is an unsustainable business model, where only those at the top of the pyramid benefit, while the majority struggle to make any income.
Legitimate direct sales companies may offer referral bonuses for bringing in new representatives, but these bonuses are typically a modest component of your potential income.
If you notice that the majority of your potential earnings are dependent on recruiting, that’s a clear red flag.
✅ Green light: Focus on high-quality products and customer satisfaction
If you want to understand whether a direct sales company is legitimate, look at its products.
If you see lots of happy customers and positive reviews, you know the company is focused on creating high-quality products that people actually want—not just turning around crappy products for maximum profits.
During the recruitment or training process, you should get a chance to sample the products (without having to pay exorbitant “inventory” feeds), so you can make sure you can stand behind whatever you’re selling, without making customers angry or disappointed.
🚩 Red flag: Pressure to purchase expensive inventory
You’ve just taken the new job, gone through the training, and you’re ready to start selling.
The only problem?
Your manager wants you to shell out hundreds or thousands of your own dollars to buy inventory before you can sell it.
This is a major red flag, because companies that employ this practice are looking to earn money off their employees rather than honestly selling high-quality products, while inflating their revenue at the same time.
While some legitimate companies require you to pay a small fee to start selling, in most cases, you shouldn’t have to invest a significant amount of your own money before you can sell products to wanting customers.
If you’re feeling overly pressured to invest or told you must spend to succeed, it’s best to look for opportunities elsewhere.
✅ Green light: An onboarding process that sets you up for success
Legitimate direct sales companies want you to be successful. They know that your ability to sell products and generate happy customers is directly linked to the company’s profitability.
This is why the best direct sales companies have a thorough training process that will leave you feeling confident in your ability to move product.
You should finish onboarding knowing and trusting the products you’re selling, with a deep understanding of the best sales methods to convert leads into happy customers.
If you are forced to pay for your own training, or you find training to be chaotic, stressful, or downright shady, that’s a big red flag that you should quit while you’re ahead and look elsewhere for your next job.
Plenty of people earn honest livings as sales representatives for direct sales companies.
But anyone looking for roles in this industry should be aware that there are predatory MLMs and pyramid schemes operating in the same space.
Knowing how to separate the legit opportunities from the shady ones could mean the difference between a lucrative and happy career, and a job that leaves you worse off than you were before.
Use this guide as you hunt for opportunities, and you’ll be on your way to a safe and secure career in direct sales.