There’s a lot of money to be made in direct sales and a number of business models to build your strategies around. But there are a few methods you should absolutely avoid, the foremost being anything that resembles a pyramid scheme.

1. What is a Pyramid Scheme?

This is a business model that recruits members to sell products or services. In return for payments or other rewards, each member is encouraged to recruit additional members. The difference between this and a legitimate marketing operation is that there is little or no profit from actual goods or services changing hands; success and profits are entirely dependent on expanding the network of members, or “downline,” through each senior member.

The problem is that you may get an exponential growth in membership that makes further recruitment nearly impossible in any given area or medium. Newer members have increasing odds against success, and someone always loses.

2. A Bad Example

Pyramid schemes are not only frowned upon but considered illegal. One good example of this is a company operating an internet mall out of California, calling itself Big Co-op, Inc. Members joining the co-op were required to purchase a “license” in order to sell Big Co-op products and make commissions, including selling licenses to new members. They were also charged monthly dues for the use of these licenses.

However, the vast majority of the company’s profits came from selling these licenses and collecting membership fees, and not the product sales. In 2010 they were charged with cheating California residents to the tune of some $8.2 million. The following year, the two chief principals of Big Co-op, Inc. went to prison on felony convictions with 30+ year sentences.

3. Multi-Level Marketing (MLM)

This is a strategy where the sales members are compensated both for the products they sell, and a portion of the sales generated by successive recruiting cycles of their own immediate recruits. This has a cascading effect where the original recruiters get compensation from all the sales made by members in their downline. A large downline can result in significant income even for someone doing minimal selling on their own.

The difference between this and a pyramid scheme is that profits are coming from actual sales, not from the recruitment itself. Some companies seem to do both, which is why MLMs are also illegal in China. It can be a fine line; there are a number of legitimate MLM companies operating in the US today, but still answerable to the FTC.

4. What Not to Do

The public may have biased ideas on what constitutes a pyramid scheme. If your own sales plan is based on expanding your sales force through independent agents rather than legal employees, it’s important to stay on the legal side by structuring profit margins and compensation on actual sales, not membership fees. Try to avoid:

  • Paying bonuses or offering rewards for the number of people recruited.
  • Charging large fees or requiring substantial purchases of inventory as a condition of membership.
  • Obligating members to meet sales or recruitment quotas to retain membership.

For instance, the direct marketing firm ACN offers independents the opportunity to make money by receiving a portion of each bill paid by clients they sign up. Though some negative reviews online charge that ACN is a pyramid scheme, the company makes it clear that earning in this way requires some genuine sales and marketing skills.

Networked marketing is a viable business model that has worked for many successful companies. Pyramid schemes depend on expanding recruitments and amassing membership fees rather than selling goods—which is both unsustainable and highly illegal.

A recent college graduate from University of San Francisco, Anica loves dogs, the ocean, and anything outdoor-related. She was raised in a big family, so she's used to putting things to a vote. Also, cartwheels are her specialty. You can connect with Anica here .