Many of us had, if not all, a close encounter with either multi level marketing or a pyramid scheme. Perhaps a friend told us of great opportunity where we only need to invest some money and invite other people into the business and then we will generate a steady income if they do the same.
And while it does look the same, MLM (multi level marketing) and pyramid scheme are different. Here I will explain what the difference between multi level marketing and a pyramid scheme is, the difference between those two, and what you should look out for.
Multi Level Marketing
Not so long ago, I got a call from a friend that I lost touch with. Life took as in separate directions, it happens. He asks me to meet up.
After a short chat on catching up what each other have missed, he tells me about a new product and how can I get rich by selling it. He starts telling about passive income that I could get from my downline, and I realize I am being pulled into the dream he is selling.
Has this ever happened to you? Is multi level marketing really a bad thing? Let’s see what MLM is. Multi level marketing or also called network marketing is a business strategy where a person is selling a product or a service.
It can be by direct sales or by word of mouth. The main idea for multi level marketing strategy is to get a maximum number of distributors for a specific product and in that way to increase the sales force.
Income is generated through your own personal sale and from a percentage of his group sales, which is commonly known as his “downline.” Sign up fee, in most cases, is the purchase price of the product.
In a practical way, imagine you are promoting a vacuum cleaner. So you sign up two of your friends. Let’s say their names are Jack and Jim. And they are also promoting the same product. Now Jack and Jim also sign up two of their friends. This means you now have a downline of six people. And each sale these six people make, you are getting a certain percentage from them.
So each sale from someone in your downline will generate you a percentage to your income. The commission depends on the total volume of sales generated obviously.
Pyramid Scheme
According to Wikipedia, “pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products.”
Pyramid scheme works on the same principle as multi level marketing, but with one difference: no product is involved. In a pyramid structure, the member pays a fee to join.
A percentage of that money will be paid back to them only at the point when they recruit a new participant in the scheme. The more people they recruit, the more money they get back.
The main feature of these schemes is the promise of high returns in a short period for doing absolutely nothing other than handing over your money and getting others do exactly the same.
Similar But Different
Even though multi level marketing and pyramid scheme look alike, it can be confusing which one is legit and which one is pure fraud.
The clear difference between them is that income from a pyramid scheme comes at the expense of another person. So a win-win situation is never possible. In MLM on the other hand, revenues from sales can generate sustainable income for everyone in their line.
Both multi level marketing and pyramid scheme depend heavily on recruiting people to become their members. And while MLM companies are MOSTLY legal, pyramid schemes aren’t.
Federal Trade Commission warns: “It’s best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products.”
Participating in a pyramid scheme is an offense under the criminal code in many countries and can be punishable by up to five years imprison.
Purpose of a pyramid scheme is to get your money after which they will use you to recruit other people to get money out of them also. On the other hand, the purpose of MLM is to sell a product. The more extensive the network of distributors, the more products will be able to sell and make more profit.
Word Of Caution
While traditional marketing goes through media, MLM marketing advertises their products through aggressive sales agents, so that can be annoying sometimes, not to mention on the edge of ethical.
Sometimes it is hard to represent vacuum cleaner to parents of three children where only one of them work and hardly making money to pay their bills and food. You know that if they purchase that product, most likely they won’t have money left.
An MLM marketing is known for getting you on the bad reputation to your friends and family, so that is certainly something to consider before venturing in those waters.
f you don’t understand something, ask for more information until it is perfectly clear to you. Don’t pay or sign a contract or an offer on the first, “opportunity meeting.” Take your time and think over your decision. This is your money involved, so don’t rush it without doing some research first.
Things To Look Out For
When you are investigating a potential business opportunity, you want to gather as much information as possible about the company, its products, and operations.
Do an internet search with the name of the company and words like review, scam, or complaint. Look through several pages on search results, not just a few first ones.
Find any articles about the company in a newspaper, magazine, or online. Things that you want to look for are:
- How long has the company been in business? If it is short, you may want to think very carefully is the risk worth.
- Does it have a positive reputation for customer satisfaction? Plain simple: if there are many unsatisfied customers, the probability of it to be a scam is high.
- Does it have TOO MANY positive reviews? Sometimes scammers try to hide their identity by paying actors to give false testimonials to encourage you to step into business with haste.
- Has the company been sued for something, example deceptive business practice?
- What is the focus of the business plan: making money through sales or by recruiting new members? Remember, the big difference between multi level marketing and a pyramid scheme is in focus: the pyramid scheme focus is purely on signing new people up and getting their money fast.
- Are you required to invest a more significant sum of money up front? It may be disguised as an inventory charge. Legitimate MLM business does not require a big cost to start up.
- If you do have to pay for inventory, does the company offer a buy-back of unsold inventory? Many MLM companies will offer an inventory buy-back, in most cases for about 80% or even more of the paid price.
- Does the company provide any training? While serious MLM companies will provide you with the required material or video tutorials to get you started, the pyramid scheme will just give you “education” how to invite other people.
Conclusion
Obviously, there are more pyramid schemes than legit multi level marketing business, but that should not concern you now that you know the difference and how can you protect yourself.
Do your research, don’t jump on the first ball when you are presented with great opportunity. Your money is in the game, and you should be very careful how, when and where will you invest it.
Avoid any plan where the reward for recruiting is greater than it is for selling the product. This is the traditional pyramid scheme design.
I hope you have learned something new today. If you like this article, share it on social media, with your friends. You can never get too cautious when it comes to recognizing potential fraud.
If you have any questions, write them in the comment below. Also, I would like to hear have you ever find been invited in some pyramid scheme or MLM? What are your experiences with them? Please, share your story, and maybe you can help someone that way.
Best wishes,
Dalibor.
2 thoughts on “Difference Between Multi Level Marketing And Pyramid Scheme”
Thank you for this post! I always wonder what the real difference actually was. I thought I knew but now when reading this it became more clear. I wonder, can it be that it sometimes is a little bit of both?
Hello Ellen,
Thank you for your comment. To answer your question: no, it can’t be a bit of both. They are similar but different in a way that both the pyramid scheme and multi-level marketing depends on recruiting people.
However, profit in MLM can be achieved by yourself and your effort, while in the pyramid scheme your profit depends on those that are under you in line.
It is often not so easy to clearly see the difference, but if you can follow the guidance in this article, you could be avoiding the pyramid scheme and scam.
If I can help you in any way, please do ask, and I will do my best to give you an honest answer.
Best wishes,
Dalibor.