Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it's not. It's a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.



Determining whether a multi-level marketer is a pyramid scheme is difficult, however.

"Identifying a pyramid scheme masquerading as an multi-level marketer requires a fact-intensive inquiry," the FTC said in one report. It "entails a complex economic analysis including an in-depth examination of the compensation structure and the actual manner in which compensation flows within an organization."

The Direct Selling Association downplays concerns about pyramid schemes and even losses from those who participate in mulit-level marketing. On its website, the trade group says a random survey in 2002 shows more than half of all "direct sellers report their net income from direct selling, after taxes and expenses, is positive."



The group also says its surveys show that from 2001 to 2003, the average annual turnover rate in direct sales was 56 percent. (Read More: Multi-Level Marketing Critic: Beware 'Main Street Bubble'.)



But plenty of critics, including Robert Fitzpatrick, who operates the website Pyramid Scheme Alert, insist that more than 99 percent lose money, with the turnover rate at some companies exceeding 90 percent every year.



"If you have to recruit—then the ones you recruit have to recruit," Fitzpatrick said. "Now you're in a chain letter. And on a chain letter, most people are going to lose. Most being 90 percent to 99 percent."



Perhaps nothing is more important than understanding the company's compensation plan. However, it's often easier said than done, because most plans contain complex payout formulas.

