Do the words "network marketing" and "scams" even belong in the same sentence? No. Why? Because true network marketing is a legitimate business.  Network marketing is a legal and effective business model based on marketing to and with a network, direct selling, leveraging your efforts, incorporating duplication and geometric growth, and creating residual income. Scams do exist.  Sometimes they try to disguise themselves as network marketing.  However these aren't true network marketing opportunities.

So, What is a Scam?

A scam is something illegal, illegitimate, and deceptive. It's a fraudulent business scheme.  A pyramid scheme is a scam.  Many people mistake network marketing companies for pyramid schemes so they think that network marketing is a scam.  However, there's a difference between the two.  The DSA (Direct Selling Association) is an organization set up for the purpose of ensuring that member companies adhere to fair and ethical business principles and practices. Companies that operate pyramids are illegal and aren't allowed to be members of the DSA.  The DSA states, "Pyramid schemes are illegal scams in which large numbers of people at the bottom of the pyramid pay money to a few people at the top. Each new participant pays for the chance to advance to the top and profit from payments of others who might join later. In other words, you buy in to the "business" and receive a spot at the bottom of the structure. Some of your money goes to the person at the top of the pyramid. If all the spots at the bottom fill up, the person at the top is paid a significant amount of money and his or her spot is removed.  The second level becomes the top level and a new level is added at the bottom, larger than the one before (continuing to form a wide pyramid shape). If enough new people join and fill the spots, the people at the top make money and their spots are removed.  This process continues.  And huge numbers of people end up having to be recruited in order for lower level people to ever make money because the lower level keeps becoming bigger. The pyramid usually collapses, or is closed down, before this happens and many people lose money. That's why it's a scam.  Some pyramid schemes are more obvious e.g. chain letters that require you to donate money to people on the list. Others make themselves look like multilevel marketing, or network marketing companies. As the DSA states, "To look like a multilevel marketing company, a pyramid scheme takes on a line of products and claims to be in the business of selling them to consumers. However, little or no effort is made to actually market the products. Instead, money is made in typical pyramid fashion, from recruiting. New distributors are pushed to purchase large and costly amounts of inventory or services when they sign up.  The products or services usually have no real value. They're things like miracle products or cures. You're really not paying for a product or a service, you're just spending money to be able to bring more people into the system and for the chance to possibly make a lot of money . . . which you won't.  

The DSA's Code of Ethics helps to clarify what a pyramid scheme is:  "The definition of an 'illegal pyramid' is based upon existing standards of law as reflected in 'In the Matter of Amway, 93 FTC 618 (1979)' and the anti-pyramid laws of Kentucky, Louisiana, Montana, Oklahoma, and Texas. In accordance with these laws, member companies shall remunerate direct sellers, primarily on the basis of sales of products including services, purchased by any person for actual use or consumption. Such remuneration may include compensation based on sales to individual direct sellers for their own actual use or consumption. " The DSA continues: "High entrance fees can be an element of pyramid schemes, in which individuals are encouraged to expend large upfront costs, without receiving product of like value. These fees then become the mechanism driving the pyramid and placing participants at risk of financial harm." The FTC (Federal Trade Commision), an independent agency that protects American consumers from unfair methods of competition and unfair or deceptive acts or practices in the marketplace, also describes what makes up a pyramid scheme:  "Such schemes are characterized by the payment by participants of [a large sum of] money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users. " They also state that the entry fee, in a pyramid, could also be for the purchase of a large amount of nonreturnable inventory.  The Canadian Competition Act, Section 55, states: "A multi-level sales procedure is a pyramid if:

There is compensation paid for recruiting a new salesperson

There is inventory loading, that is, the recruits must purchase an unreasonable quantity of product

Purchases are required as a condition of entry (you may, however, be required to pay for a sample kit, but this kit must be at cost)

The company does not have a policy to refund any product you have bought and does not state the exact costs for restocking 

The company overstates earning potential

Is an Opportunity a Pyramid Because of its Shape?

Many people think so. However, no. Most organizations have a pyramid shape. Think about corporations, governments, or other organizations. There's usually a CEO or president at the top. Under that person may be a vice president, or several high level managers. Under that are lower level managers. Under those managers are sales reps or other employees or officers. The people at the top make more than the people at the bottom. It's just how things work.  As well, Ponzi schemes are scams, but they aren't necessarily shaped as a pyramid. Usually, one person takes people's money as an investment and then pays them returns from other investors, or from fraudulent activities. Usually, the operator will take off with the money, it will collapse because the operator can't pay out the returns or it is shut down by law enforcement. Paying on multiple levels also doesn't mean that an organization is a pyramid scheme. Often, managers get a portion of the sales that representatives make. 

So, How Can You Tell the Difference Between a Legitimate Business and a Scam?

From the DSA: "Multilevel marketing is a popular way of retailing in which consumer products are sold, not in stores by sales clerks, but by independent businessmen and women (distributors), usually in customers' homes. As a distributor you can set your own hours and earn money by selling consumer products supplied by an established company. In a multilevel structure you can also build and manage your own sales force by recruiting, motivating, supplying and training others to sell those products. Your compensation then includes a percentage of the sales of your entire sales group as well as earning on your own sales to retail customers. This opportunity has made multilevel marketing an attractive way of starting a business with comparatively little money." Pyramid schemes seek to make money from you (and quickly).  Multilevel marketing companies seek to make money with you as you build your business (and theirs) selling consumer products.  Before you sign up with a company, investigate carefully. A good way to begin is to ask yourself these three questions:

How much are you required to pay to become a distributor?

Will the company buy back unsold inventory?

Are the company's products sold to consumers?"

The products or services sold through network marketing have value, whereas in a pyramid scheme, they don't.  And, in network marketing, you can make profit from the sale of the product or service, even if you don't recruit any other distributors. The DSA advises that you watch for these warning signs:

Pressure to sign a contract quickly and agree to pay a large sum of money before sales claims can be investigated or legal advice obtained.

Promises of extraordinarily high or guaranteed profits.

Claims that profits can be achieved easily.

A required initial fee which greatly exceeds the fair market value of any products, kits or training.

A large fee payable before you receive anything in return.

Evasive answers by the salesperson or unwillingness to give disclosure documents required by law.

Another thing to watch out for is claims that the opportunity is perfectly legal. If it is, they shouldn't have to say that!  The DSA also suggests that you should "avoid dealing with salespeople who:

Disparage other products or firms.

Confuse you, abuse your trust, or exploit your lack of experience or knowledge.

Try to make you cancel a contract made with another salesperson.

Falsely tell you they're taking a survey or you've just won a contest."

Avoid dealing with companies that:

Charge a substantial entry fee (more than the cost of a sales kit).

Pressure you to purchase large quantities of products.

Do not repurchase inventory if you decide to leave the business.

Sell few or no products to consumers.

Make sure to get the company's literature, information on the compensation plan and their policies and procedures and take time to review them. Legitimate network marketing companies, incorporate the 70% rule (70% of the product purchased by a distributor must be sold or consumed before more is purchased, thus preventing inventory loading) and the buy-back rule (the company buys back currently marketable products and sales aids from distributors who leave the company). These are based on the Amway decision. 

There are some vital characteristics that you need to consider as you think about how to choose a network marketing company

Is the product or service:

consumable?

in demand?

unique?

high quality?

reasonable priced?

drop-shipped?

central to the company?

something you'd purchase even if you weren't in the company?

What are you required to purchase each month, if anything, in order to qualify for commissions?

Marketing system questions to consider:

Does the company have an effective marketing system in place?

Is the company open to alternate systems and online marketing?

What materials does the company offer?

Are these materials required, or optional?

How expensive are they?

Upline support questions to consider:

Is your upline available?

Do you and your upline connect on some level?

What's your upline's philosophy on leadership, building the business, your uniqueness, online marketing?

How do they train?

What kind of example are they?

Does the company offer company support?

a distributor-first philosophy?

regular communication?

a support system for handling issues or concerns?

an effective training system?

Financial stability?

backed by solid financing?

debt-free company?

Timing?

how does the product or service fit in terms of market trends and needs?

Compensation?

Is the compensation plan fair?

structured to provide immediate earnings?

structured to provide residual income?

realistic and attainable?

simple and easy to understand?

simple and easy to explain to others?

Growth?

How much has the company grown in the last year? Two years? Five years?

Does the company have a global reach, or are they moving in that direction?

How many countries does it operate in?

What does the company stand for?

Where is its focus?

Is it looking to something bigger than itself (e.g. making a difference in the world)?

How is it living out its mission?

Does the company offer:

a low initial investment?

low monthly overhead?

money-back guarantees or something in return?

Does the company align with your:

values?

beliefs?

personality?

vision & goals?

life purpose or mission?

passions?

lifestyle?

Watch out for initial investments that are too high and/or promise too much.

Ask questions.

Get company literature and read through it.