You’ve probably heard the stories—maybe you’ve even attended the home demos or seminars. Someone will introduce a product, company, or investment that promises to change your life. They’ll tell you that you can make big money and “quit your day job” with an exciting new “business opportunity.” And if, like many of us, you’re tired of a desk job or need extra cash, it’s hard to resist the siren call of an opportunity that promises easy money. So, if you’re in the market for a side hustle, be careful. You might be signing on to a pyramid scheme, Ponzi scheme, or a multi-level marketing (MLM) scam. These schemes (especially when peddled to us by our friends and family members) often disguise themselves as legitimate businesses—and they can cost you dearly if you don’t spot the signs.
What is a Pyramid Scheme?
A pyramid scheme is a business model in which participants earn money by recruiting others under the guise of selling products or services. Financial Education Services, for example, was a pyramid scheme shut down in 2022 by the Federal Trade Commission (FTC)—but not before it cost consumers more than $213 million.
The structure of a pyramid is so named because it looks like a pyramid. The people at the top make money by recruiting others, who must pay to join. Those recruits then bring in more people, continuing the cycle. But, because the system depends on constantly bringing in new recruits, most people end up losing money. Pyramid schemes are illegal in many countries, including the U.S.
What is a Ponzi Scheme?
Ponzi schemes are often confused with pyramid schemes, but they are, in fact, different. Like a pyramid scheme, a Ponzi scheme is a financial scam that promises high returns with little or no risk. However, instead of generating real profits, the scheme uses money from newer investors to pay earlier ones, creating the illusion of success. But once new money stops coming in, the whole system collapses. Also, unlike pyramid schemes, which depend on recruitment, Ponzi schemes are typically run by a single operator (such as Bernie Madoff), who fraudulently manages investor funds.
How MLMs Differ (and Don’t)
Multi-level marketing (MLM) companies like Pampered Chef, Amway, doTerra, and LuLaRoe sell products through independent representatives rather than in stores. The MLM model evolved from direct sales, a practice popularized by companies like Avon and Watkins, which pioneered door-to-door selling and in-home product demonstrations, primarily targeting women. While not all MLMs are illegal, some operate in legally ambiguous areas, prioritizing recruitment over product sales in ways that resemble pyramid schemes.
Red Flags to Watch Out For
1. High Upfront Costs.
If you have to pay a significant sum to join or buy starter kits, it’s a red flag.
2. Emphasis on Recruiting Over Sales.
If you are encouraged to recruit others more than selling products, the business is a pyramid scheme.
3. Overpriced, Over-Hyped, or Low-Quality Products.
Some MLMs use products as a cover to make the business seem legitimate. Watch out for businesses that claim to sell “miracle” products or those that have questionable benefits. Also, look for a lack of consistency in quality and design (as was the case with LuLaRoe),
4. Promises of Easy Money and Financial Freedom.
If it sounds too good to be true, it probably is. Be wary of claims that you can “be your own boss” and earn a big income with little effort.
5. High Pressure to Recruit Friends and Family.
Many MLMs encourage you to sell to people you know, which can strain relationships. So, if your “business” relies on pressuring loved ones, it’s a red flag.
6. Complex Compensation Plans.
Legitimate jobs have clear pay structures. If the earnings model is confusing or full of fine print, the company may be hiding something.
7. Pressure to Stay or No Refund Policy.
Some MLMs require members to make regular purchases to remain active, even if they are struggling to sell the products they already have. Also, reputable companies stand behind their products. So, if they make it difficult to return unsold inventory, it’s a bad sign.
How to Protect Yourself
- Do Your Research. Look up the company’s history and reviews.
- Watch for Legal Warnings. If a company has been flagged by the FTC or other consumer protection agencies like the Better Business Bureau, steer clear.
- Ask Questions. Find out how much money people at all levels actually make—not just the top earners. If you can’t make money without recruiting, walk away.
- Trust Your Gut. If something feels off or you’re being pressured, walk away.
Pyramid schemes, Ponzi schemes, and shady MLMs thrive on hype and desperation. Before investing time and money, make sure you’re joining a real business—not just funding someone else’s paycheck. If you’re looking for a side hustle, there are plenty of legitimate ways to earn money without getting caught in a financial trap.
Want more tips on how to avoid scams?
- Test your scam detection skills with our “Are You Scam Savvy?” quiz.
- Learn how to secure your Alexa, Siri, or Google Assistant device.
- Find out how to protect your data and finances using mindfulness tactics.