Network marketing or pyramid scheme? Often considered a road to riches, direct selling can lead to financial disaster without the proper research. Consider these tips before you sign up

Black Enterprise, Nov, 2004 by Wendy Harris

WHEN HE SIGNED UP TO BE AN INDEpendent associate for Pre-Paid Legal Services Inc., Cameron Brickey thought network marketing was an easy way to make a buck. Several weeks and $800 later, he thought otherwise.

Brickey heard of Pre-Paid Legal, a network marketing company that provides affordable legal services for low- to middle-income individuals and families, while attending a job fair last October. He borrowed money from his girlfriend for the membership fees--three payments of $50--and another $300 to $400 for the starter package and other required tools, which included business cards, stationery, flyers, training materials, and handfuls of DVDs, videotapes, and books that explained the particulars of the company.

Working 20 to 30 hours a week, Brickey says he participated in mandatory conference calls with other Pre-Paid Legal associates to talk about sales and ways to generate more business. He also says he held in-home presentations to try and sign up new customers, placed flyers at the public library and on parked cars, and passed out business cards in front of the neighborhood grocery store. But three months after joining and with virtually no income to show for it, Brickey was ready to call it quits. "I'm really frustrated with the whole thing.... I was in an income crunch and I was trying to be positive and give it a chance."

THE REAL WORLD OF MLM

Whether it's lack of sales experience or bad luck, many people fail at network marketing, or multilevel marketing (MLM), as the industry is also called. And while many MLM companies are legitimate, others--better known as pyramid schemes--prey upon the unsuspecting. Determining how much money you can really make and identifying the schemes can sometimes be bigger challenges than selling the products or recruiting people into the network.

Network marketing is a system in which a manufacturer pays people outside the company to sell its products and services directly to consumers. In return, each salesperson is given the opportunity to build his or her own independent sales force, called a downline, by recruiting, training, and motivating others to sell the same products and services. The products are sold outside of a fixed retail location, primarily one-on-one, at in-home gatherings, and product demonstrations. Typical products include personal care products, wellness items, cleaning compounds, educational tools, and home decorations.

Pyramid schemes (which are illegal) require people to invest money up front, based on the promise that others will put more money into the system, some of which will filter back to the original investors. A pyramid is strictly a money game that rarely deals in real commerce. In most cases, there's no product involved at all; only money exchanges hands. And while some pyramids may have a product, it's there solely to disguise the money game.

Direct sales for 2003 totaled $29.55 billion, according to the Direct Selling Association. The DSA is a Washington, D.C.-based national trade organization comprising firms that manufacture and distribute goods and services directly to consumers. According to the organization, 13.3 million people in the United States participated in direct selling last year. These figures are up from $28.69 billion and $13 million, respectively, for 2002. And while some have earned a decent wage directly marketing the products of legitimate businesses, this area is fraught with pitfalls and scams.

Compensation varies with each company, but in most cases, representatives receive a percentage of their sales and the sales made by members of their downline. According to John P. Hayes, co-author of Network Marketing for Dummies (For Dummies; $21.99), the percentage of a representative's own sales can be as much as 25%. Therefore, the more people you bring in to sell under you, the more you make.

Keep in mind that legitimate businesses will not promise you wealth beyond your wildest dreams, because most network marketers don't come close to achieving the picture-perfect lifestyle of lavish houses and luxury cars guaranteed by some network marketing companies. While a handful achieve millionaire status, it's far more common to end up spending more than one makes. Most network marketing people fall somewhere in between, carving out a modest income of a few hundred dollars a month--fine as a supplemental income, but not enough to live on.

"The average direct seller makes about $13,000 a year," says Amy Robinson, director of communications and media relations for the DSA. "The median income is about $2,400 a year, Now that's an important distinction, because the average is skewed by the people who are making a lot of money compared to the people who are in it as a hobby. So when you look at the median--which of course means 50% make more, 50% make less--you're only looking at about $2,400 a year."

For most people, network marketing is not a road to riches, but it can be a viable business opportunity if one sets realistic goals and works hard. Before you get involved, however, consider your motive for wanting to become a distributor. Then carefully investigate the company, costs, product, and pay (see sidebar).