Follow the checklist below when meeting a new direct seller at your home/office:
- Make an appointment prior to the visit
- Check the identity of the direct seller on arrival
- Ask to see product literature and order forms - all literature should have the company's name, address and telephone number. (Most DSA member companies will also have the DSA logo on their literature)
- Do not sign any order forms or contracts until you are absolutely sure of the identity of the direct seller and the company they represent
- Do not make any cash, cheque or credit card payments unless you are completely satisfied with the credentials and integrity of the direct seller
- Once you have made payment, ensure you are given a proper receipt
- Beware of verbal promises on special prices and terms of delivery - check that special terms are clearly written in company literature
- Check that the product you are being offered is covered by a GUARANTEE
The ever-growing popularity of direct selling often motivates dishonest individuals and companies to misrepresent themselves as legitimate direct selling businesses in the hope of enticing victims. Thousands of people have lost money participating in scams and pyramid schemes.
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. This amount could be a small investment or several thousand Rands. Legitimate companies rely on solid product sales over time. A strong base of customers who love and use the products is key to their continuing success. Scams like pyramid schemes, on the other hand, count on you to make a large upfront payment, from which the scheme promoter derives his profit. Building a business over time is not important because the promoter knows the scheme will likely collapse. However, by that time the promoter will likely be long gone - with your money.
Before you sign up with a company, investigate carefully.. ask yourself these three questions:
- Are the company’s products sold to consumers?
If the answer is no (or not many), stay away! This is a key element. Direct selling (direct selling, multi-level/network marketing and referral marketing), like other methods of retailing, depends on selling products to consumers and establishing a market. This requires quality products, competitively priced. Pyramid schemes, on the other hand, are not concerned with sales of products to end users of the products. If there are products, profits are made on volume sales to new recruits, who buy the products, not because they are useful or attractively priced, but because they must buy them to participate. Inventory purchases should never be more than you can realistically expect to sell or use yourself.
- How much are you required to pay to join?
If the start-up cost is substantial, be careful! The start-up fee in legitimate direct selling companies is generally small (usually for a sales kit sold at or below company cost and possibly a small administrative joining fee). These companies want to make it easy and inexpensive for you to start selling. Pyramid schemes, on the other hand, make nearly all of their profit on signing up new recruits. Therefore, the cost to join is usually high. CAUTION: pyramids often disguise entry fees as part of the price charged for required purchases of training, computer services, product inventory, etc. These purchases may not be expensive or "required," but there will be considerable pressure to "take full advantage of the opportunity."
- Will the company buy back unsold inventory?
If you could be stuck with unsold inventory, beware! Legitimate companies which require inventory purchases will usually "buy back" unsold products if you decide to quit the business. Pyramid schemes, on the other hand, most often do not.
A Ponzi scheme (named after an Italian immigrant, Charles Ponzi, who became notorious for using the scheme to defraud thousands in the early 1900s) usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and initially pays) require an ever-increasing flow of money from investors in order to keep the scheme going. The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. Several characteristics distinguish Pyramid schemes from Ponzi schemes:
- Ponzi schemes involve a schemer who acts as a "hub" for the victims, interacting with all of them directly. In a Pyramid scheme, those who recruit additional participants benefit directly (in fact, failure to recruit typically means no investment return).
- Ponzi schemes claim to rely on some esoteric investment approach or insider connections and often attract well-to-do investors. Pyramid schemes explicitly claim that new money will be the source of payout for the initial investments.
- Ponzi schemes collapse more slowly, because Pyramid schemes require exponential increases in participants to sustain them. Ponzi schemes can survive simply by getting most participants to "reinvest" their money, with a relatively small number of new participants.