What Is The Difference Between MLM And A Pyramid Scheme

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Are you looking for ways to make money? Surely, you have come across several multi-level marketing (MLM) companies and their promises of income potential.

 If you have the right skills to be a salesperson and love to interact with people, joining an MLM can be a promising endeavour.

 MLM promoters are trained to speak and influence your decision. They are usually armed with enticing marketing pitches to lure you to join their business.

However, with the widespread occurrences of MLM companies being sued for alleged pyramid schemes, it is important to be knowledgeable and wary when choosing an MLM company to join.

 Because, joining MLM companies requires time, effort and investment so it is always important to protect yourself in the best way you can. 

In this article, we will be giving you some useful information in differentiating a legitimate MLM company from disguised to straight up pyramid schemes.

We hope that after reading this article, you will have knowledgeable in spotting pyramid schemes yourself and keeping a safe distance from such unfair and fraudulent practices.

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What Is The Difference Between An MLM And A Pyramid Scheme 

What Is Multi-Level Marketing (MLM)?

Multi-level marketing or (MLM) is a business model that uses person-to-person sales or sometimes called direct selling or party plan through independent distributors, contractors, affiliates, members or consultants.

In this kind of business strategy, a member of an MLM company sells products directly to prospective customers from home, online or can be in a physical store.  From selling products directly to other people, MLM members earn retail profit or retail commission.

Another way for an MLM member to earn is by recruiting or sponsoring other people to join the MLM company.

 If you are the sponsoring member, you can earn some bonuses from sponsoring alone and from the sales of your recruits later on. 

Oftentimes, there are ranks to advance to in an MLM company and usually each promotion unlocks additional bonuses and benefits.

The Good Thing About Multi-Level Marketing (MLM)

If done well and with good intentions, legitimate MLM companies can bring more advantages to their members.

  • MLM companies allow members to work from home and work on their own chosen schedule. This is especially beneficial to mothers who need to spend more time with their kids and family.
  • They allow members to start a business with minimal investment/cost. Some MLM companies are involved in charity works and helpful advocacies as well. 
  • Direct selling offers a convenient way for customers to purchase products because it brings products closer to customers.
  • MLM companies help struggling persons to earn extra income easily by just selling the products to friends, family and acquaintances. In a way, it is an easier option for many when looking to add other streams to their income. 
  • There are several companies out there that have risen to the top using the MLM business model and have been around for a long time already, take the example of Avon, Tupperware, Mary Kay and many more. 
  • There are products that are only offered by MLM companies and are not available in other marketplaces.


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Problems With Multi-Level Marketing (MLM)

Several MLM companies are previously used to cover several pyramid schemes. These are called product-based pyramid schemes. Because of the commonality of practice in terms of earning from recruiting people, oftentimes MLM companies are approached with caution by entrepreneurs. Here are some of the problems that are common with MLM companies.

  • Several MLM companies, even the biggest ones are sued for doing alleged pyramid scheme practices.
  • It is inevitable for some MLM promoters to make deceptive statements especially on income claims just to lure prospective members to the business. The companies have no way to regulate the actions of their members. 
  • Most MLM companies offer relatively higher-priced products than their non-MLM competitors. Sometimes, this poses an issue on the retail viability of the products. 
  • Some MLM companies do not have an income disclosure statement. Those companies with income disclosure statements however show a wide gap of earnings amongst members. This can be at the worst scenario where less than 1% of the members are getting rich while the rest struggle. The problem with this business model is that there’s a tendency for the people on top of the organization to just exploit the efforts and sales of the members at the bottom to make themselves rich. As a result, more members are losing.

What Is A Pyramid Scheme?

Better Business Bureau explains that “pyramid schemes focus on making quick profits that are earned by selling the right to recruit others.” “The entire purpose of the scheme is to get your money up front. There is no real product to be sold as it’s a scam.”

Here are some indications of pyramid schemes as detailed by Better Business Bureau and Federal Trade Commission (FTC).

  • If you are promised that you can earn money by just recruiting other people.
  • If you will be required to make recurring say monthly orders even if you still have enough. 
  • When you are asked to buy a product so you can earn from the purchase you make.
  • You will be asked to pay for other unnecessary items such as training and marketing resources. 
  • When the promoters are employing high pressure tactics to lure you in joining the program.
  • When you are promised of high returns in just a short period of time.
  • You are required to shed a high amount of start-up investment.
  • If the products or services offered are not retail viable and there is really no demand for such products.

The other obvious characteristics of the pyramid scheme are as follows:

  • The company is operating without any registration from any government entity.
  • The profiles of the company founders and leaders are not disclosed as well as the office address, phone numbers and other contact details.
  • The company is not offering any products that you can legally or actually sell.
  • If the company has a website and there is no decent content as well as there are no privacy policy or terms of use. 
  • If the company only accepts shady payment methods such cash payment or deposit before you can actually get the products. 

Differences Between MLM And Pyramid Scheme

There are several instances when pyramid schemes are disguised as MLM companies hence our main question.

Also, the MLM business model is making a lot of people lose money because the mix of sell and recruit strategy tends to crowd the market making selling and recruiting harder after some time.

So, what are the differences between MLM and pyramid schemes really? Let’s start with the obvious differences,

  1. MLMs are operating legally while pyramid schemes are illegal.
  2. MLMs offer real products with consumer demands and are really retail viable while pyramid schemes are not offering real products. The latter solely depends on recruitment. You earn when you are able to recruit people to your team.
     There can be the case when pyramid schemes offer real products however they are impossible to sell and are priced too high.
     In some cases, as an independent distributor, you will be required to have recurring monthly purchases where you will be spending more than you can actually sell making you lose money eventually. 
  3. MLM companies require minimal start-up cost while pyramid schemes require you to invest a large amount of money upfront. 
  4. MLMs’ compensation plan rewards both product sales and team sales. In some cases recruitment is not rewarded rather it is being used as a requirement to advance in ranks and to get a higher team bonus. However, in a pyramid scheme you are rewarded just by recruiting people to the company. 

The blurry lines between legitimate MLM companies and pyramid schemes are always hard to spot but here are some of these.

  1. MLM promoters are not allowed to make income claims at least as stated usually in most distributor’s contracts however pyramid schemes make extravagant promises on income potential. 
  2. A legit MLM promoter should not employ high pressure tactics to lure you to join or purchase the products but a pyramid scheme promoter will employ all kinds of emotional play to make it difficult for you to reject the offer. 
  3. MLM companies won’t let you purchase products that you cannot really sell. They even buy back unsold merchandise from their representatives in some cases. But, in a pyramid scheme, you will be asked to pay for you to be able to sell the products. Oftentimes, you will be asked to make recurring purchases to remain active even if you cannot anymore sell the products. 
  4. Legitimate MLM companies stay around for long while pyramid schemes tend to collapse after some time when members start to lose and fail to recruit more members. Only the people who are on top of the organization earn. 

Some Tips in Avoiding Pyramid Schemes

We’ve learned that there are some blurry lines between legitimate MLM businesses and pyramid schemes as a lot of MLM businesses are actually pyramid schemes in disguise. To avoid falling victim of these pyramid schemes, you can refer to some of our tips below.

  1. Do your research about the company. Make sure that the founders and leaders are real and are accomplished personalities. Ensure that the address and other contact details are existent. You can refer to some reviews and complaints about the company on websites like Better Business Bureau (https://www.bbb.org/) or you can do a simple Wikipedia (https://www.wikipedia.org/) or Google search. You can check out independent reviews from some Blogs as well. 
  2. Make sure that the compensation plan, distributor's contract and similar documents are clear and understandable. Understanding the numbers on the income disclosure statement are also important. From there, you can at least know the income potential of the business opportunity you are joining. You can also verify the earnings of other members. 
  3. Research about the saleability and demands of the products. You can also check the product status and pricing of the competitors.
  4. Know the return and refund policies if they are fair.
  5. Find out the start up cost and create your targets in getting the returns of your investment if they are reachable.
  6. Check about the company with proper authorities like the Federal Trade Commission (https://www.ftc.gov/).

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By now, it is already clear how to spot a legitimate MLM company from unscrupulous pyramid schemes. Straight up pyramid schemes are actually easier to spot but uncovering disguised ones are a totally different matter.

 There are several MLM companies out there that have been around for several years. Even the biggest ones are sued for alleged pyramid schemes. The landmark case of Amway that set some retail rules in differentiating a pyramid scheme from MLM is said to weaken in some ways the laws regulating MLM companies.

 In a way, this leads to product-based MLM companies becoming exploitative pyramid schemes in actuality. 

In addition to this, more and more members of MLM companies, even that of legitimate ones are losing money. This is very evident in all income disclosure statements that I have seen from these MLM companies.

 In this article, we hope we’ve covered all things that you need to know in spotting the differences between a legitimate MLM company from a pyramid scheme. We hope that we have also taught you how to spot pyramid schemes disguised as product-based MLM companies as this is the harder part.

Finding easier ways to make money can lead us to exploitative opportunities that will just eventually bury us to a mountain of more financial problems if we are not cautious.

So, we hope that knowing more about different types of pyramid schemes and how they work brings us to a safer place where we can protect ourselves from the lure of these deceiving tactics. 

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