A closed system is when sales are within the company participants or to new recruits, rather than the general public.
Participants themselves may make most of the purchases. Distributors at closed system companies may also sell products to cooperating family members. Retail sales to people truly unaffiliated with the company are rare. A trivial or small portion of retail sales outside the network still indicates a closed system.
Closed system companies should be viewed as a red flag.
A closed system is an indication that an MLM or network marketing company may be an illegal pyramid scheme.
It’s from science!
The term “closed system” is actually from science. It means that there is no transfer of various things (heat, energy, etc) in or out of the system. Learn more here.
In the case of these companies, there is no transfer money IN from the general public or product OUT. Instead, the money is only coming in from new recruits, and the product stays with the system. This is why it is often an indicator of an illegal pyramid scheme.