Multi-level marketing, sometimes known as affiliate marketing or home based businesses, tend to sprout up during down times since it is typically marketed as an opportunity to earn revenue outside of a conventional job . Unfortunately, multi-level marketing tends to share many of the same characteristics as ponzi schemes or pyramid schemes. Thus, it is hard to differentiate between legal and illegal multi-level marketing opportunities for the uneducated.

The close association of multi-level marketing with ponzi schemes tends to cast multi-level marketing in a bad light. However, before one paints the entire industry with a broad brush stroke, remember that Avon is a publicly traded,  multi-million dollar company built on multi-level marketing and was instrumentally in giving women opportunities in an economic time when there was little other opportunity. The key then is to differentiate between good and bad multi-level marketing.

At its core, multi-level marketing is not a business or even an industry but a distribution method. At the top of the food chain is the business who distributes the goods. Distributors/dealers/associates or other similar named titles represent the company and build out downline distribution. These distributors are compensated by sales they make directly as well as the sales volume from their distribution channels (the over-ride).

Each person in the distribution levels below are compensated on a similar basis, mainly direct sales and sales made by their team below them. Thus, there are greater number of people in each sales level as each salesperson wants to recruit a team below them to earn an over-ride. Ergo, a sales pyramid is formed where the higher you are in the pyramid, the more people are paying an over-ride.

Since it is easier to make income by earning over-rides  (a type of passive income) than direct sales, a poorly or illegal designed multi-level marketing structure tends to degenerate into a recruitment drive of salespeople rather than a sale of product and this is where the critical distinction between a legal and illegal multi-level marketing scheme must be made.

An illegal multi-level marketing scheme usually has the following characteristics  (not hard and fast rules but things to watch out for):

1. The company does not remotely pitch product, it only wants you to sign up new members.  If there is not even a mention of a product but of recruiting your friends and family into an “opportunity,” this may be a ponzi scheme.
2. If someone receives commission for recruiting new members (i.e. you get paid to bring people in regardless of whether they actually sell anything); this practice is illegal in some jurisdictions.
3. If someone has to pay for the right to receive an over-ride for recruiting new members.
4. A new participant has to buy a certain quantity of goods as a condition of joining a multi-level marketing structure.
5. You cannot return goods on commercially reasonable terms.

As you read what constitutes multi-level marketing and the list of illegal multi-level marketing tactics, you may have noticed that parts of the structure and the list contain practices which are found in more reputable business such as franchising, car dealership (dealers are forced to buy allotments from manufacturers with little right of return), real estate brokerage houses and the financial services industry (I am not even talking about Primerica but of blue-blood firms).

Thus, it is a bit of a misnomer to describe multi-level marketing as a business per se. Instead, it is a distribution method and the due diligence should really be focused on the product being sold and not the method of distribution. If, in fact, no product is being sold or no attention is being paid to the product being sold, it may be a sign this is badly designed or illegal multi-level marketing structure.