Q: It seems like the Internet is full of multilevel marketing (MLM) opportunities, many of which are based on self-replicating Web sites. A few of them sound like wonderful business opportunities, but they seem almost too easy. I was thinking of joining one of these, but have a few lingering doubts. Could these be Ponzi schemes, or are they legitimate businesses?

A: A Ponzi scheme, by definition, is a fraudulent scheme whereby an operator presents a business opportunity, but pays participants their dividends with the cash flow derived from other participants as they sign up, instead of deriving profits from offering goods or services of real value and then sharing those profits with the distributors. The first question you should ask before signing up is, "Does this company offer something of real value, or is the main 'product' the multilevel scheme itself?" If the latter is true, then that would be one opportunity to avoid.

MLMs that sell household products, for example, don't fit the definition of Ponzi scheme. Here's how these work: You buy your monthly supply of laundry detergent from the MLM instead of the grocery store, and then you sell a few boxes to your friends and family. Your downline does the same thing, and you get a percentage off of everything. Now since the MLM sells a legitimate product, there's no problem. It's easy to tell whether it has value. If you use it and your clothes get clean, it's legitimate. MLMs that sell information are a trickier business, since determining the quality of the information is a fuzzier proposition.

When you hear the presentation, it sounds simple: All you have to do is sign up 10 people, and then the "multiplier effect" kicks in. But is it really that simple? Unfortunately, no. There is about a 20-80 ratio that carries through here, regardless of what program you're participating in. First of all, you have to not only get 10 people, you have to get 10 active people to make up your first layer of downline. There's about a 20-80 ratio here, which means that out of every five people you sign up, only one will remain active. That means that instead of 10, you really have to sign up 50. Now about one in five who hear your presentation will sign up, so to get those 50, you have to make a presentation to 250. Of course, not everyone you ask will agree to listen to a presentation, so again using the 20-80 ratio, you have to ask 1,250 people if they'll agree to listen to your presentation. Do you know 1,250 people? Does it still sound like an easy way to make a million bucks? It's not a hopeless proposition; some MLMers do make their numbers. I've met people who've made a lot of money this way, but these are the ones who are constantly doing the road shows in hotel meeting rooms and restaurants, and it takes a certain type of personality to be able to do that.

In fact, most people involved in MLM don't make the millions of dollars they dangle in front of you. These road shows are often misleading, because they focus so much on the relative handful of millionaires in the program and don't give you the real metrics. Most participants will make an extra hundred or two per month. Now there's nothing wrong with making an extra hundred dollars per month; we all can use a little extra. But there is something wrong with making a hundred dollars per month when you were expecting millions.

To get a feel for the true potential of MLM, have a look at a program called Melaleuca. This is the only MLM program I know of that is perfectly honest upfront about what the earnings potential really is, and the metrics they provide are fairly universal regardless of which program you sign up for.

They have an enlightening document that lays out the exact percentages for all the world to see, showing what the average earnings are for each level, how long it takes on average to achieve that level, and what percentage of people attain each level. I've yet to find another program that will provide such a document. For example, in their "developmental" level, the lowest rung on the totem pole earns an average of $92 per year, with a $24 low and a $1,538 high. The third developmental level earns an average of $427 per year. One in five advance to the "leadership" level, which again has several rungs. The lowest leadership level averages $1,511 per year, and the highest averages $170,229 per year. And 1.3 percent of those who achieve leadership status get to the highest point.

Can you get rich running these types of programs? Sure. But don't be misled. Know ahead of time how much work is really involved, and be prepared to give public presentations. Above all, don't exaggerate the potential. Those who know the reality of the game ahead of time are more likely to stick with it for the long haul.

Dan Blacharski has more than 15 years of industry experience, has written several books and writes about business and technology for a wide variety of trade publications. A Silicon Valley refugee, Dan now lives in South Bend, Indiana, and covers high-tech start-up news in his Startup Trends newsletter. Free subscriptions are available at http://www.startuptrends.bigstep.com.


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.