MLM AND FINANCIAL PYRAMID
In many cases, MLM (multi-level marketing) is very easily confused with activities in the form of so-called financial pyramid. How to distinguish these forms of activity? Which of these forms complies with the law? Is MLM activity an act of unfair competition? You will find answers to these and other questions in the following legal notice. We invite you to read.
The basic problem is deciding whether the activity is sales in the form of multi-level marketing, or whether it can be described as the so-called financial pyramid.
First, MLM (multi-level marketing) characteristics should be indicated. Multilevel marketing activities are primarily the transfer of a product or service from the service provider to the recipient. The multi-level term refers to the system of remuneration charged by persons who ensure that a given product or service is delivered. Therefore, activity in this form consists in building an organization in which a lot of people sell very little or do not sell products, but only buys them for themselves.
In turn, the financial pyramid is a financial structure modeled on multilevel marketing and often mistaken for it. This activity is also referred to as avalanche sales. The profits of the financial pyramid node do not come from the sale of goods or services. They come (profits) entirely from the entry fees paid by new members of the structure, obtained by the node and child nodes. Only people who are at its peak and who joined it early enough benefit from the financial pyramid.
As indicated above, multi-level marketing is often confused with the structure known as the financial pyramid. In MLM, each node of the sales tree can have its own customers, through which it delivers goods according to their needs, while their quality, as a rule, corresponds to the price - and often the price is competitive compared to items of similar quality in stores - due to the smaller number of intermediaries.
There are usually no goods in the financial pyramids. In MLM, the node earns on sales in person and on sales of partners gathered in nodes below its own. It should be noted that the node does not earn on the mere acquisition of new nodes below. In turn, in the financial pyramid, the node's earnings come only from a very high entry fee, paid by new members of the structure for the right to join the structure.
As it results from the above, the pyramid system is characterized by the fact that profit depends on acquiring new people investing money. On the other hand, MLM (multi-level marketing), though similar, differs in the relationship between profit and actual sales, and not with the number of people financing profits. This method of sale is based on the fact that the buyer of some good also acquires the right to sell certain products in exchange for a commission or interest on turnover. Therefore, MLM distinguishes from the pyramid primarily the purpose of business - sales.
The commission or interest on turnover is a reward for the sale of certain products and is part of the system.
Unlike financial pyramid, activity in the form of multi-level marketing is not an act of unfair competition.
According to laws in many countries on combating unfair competition, MLM should meet two conditions:
tangible benefits obtained as part of such activities must result from the profit on the sale of goods or services, while prices may not grossly exceed their actual market value,
a person who resigns in this form has the right to resale to the system organizer previously purchased goods, instructions, samples, etc. for a minimum of 90% of the purchase price; this applies to products purchased within 6 months preceding the date of resignation from the sales system organizer.