What is the Difference Between Multi-Level Marketing and a Pyramid Scheme?

By | March 2, 2017

pyramids

What is Multi-Level Marketing?

Multi-Level Marketing, or network marketing is a legal business model which operates using a tier based system. If you join a MLM and you recruit more people in you will be able to earn a portion of their sales. Those under you are called your down-line.

I do want to stress that MLM is nothing more than a term used to describe this business model. There is nothing illegal about it and you can make money with it.

They main point of a MLM is still to sell a product. The extra incentive of earning sales from your down-line is sort of like self advertising to get more salesmen.

How do you make money with MLM?

A MLM company works like this : you get a product and the more you sell the more you earn, which is normal. Additionally you are also encouraged to build your own team to help you sell.

Your team members also sell that same product but you can get a cut of their earnings.

At the end of the day it is still about selling the product and everyone can eventually make money with some hard work.

What is a pyramid scheme?

Pyramid schemes or ponzi schemes are tier based as well. The difference is they are illegal and this is the one that you should watch out for.

Even if you can make money from your down-line like a MLM, the focus of the 2 is completely different. A pyramid scheme will prioritize recruiting new members, and have those new guys recruit more and more.

They do not prioritize the product that they sell and honestly many of the pyramid schemes out there don’t even have a product.

How do you make money with a pyramid scheme?

The only way to make money is to recruit other members. There will be no product to sell, or in most cases there will be a product but it is close to useless.

Pyramid schemes will also encourage you to buy the highest membership option to earn more commission. If you don’t whatever you earn gets passed up.

This is how they convince people to buy into the membership.

Are MLMs a scam?

The problem is a lot of pyramid or ponzi schemes out there disguise themselves as a MLM. I’ve seen a lot of MLM companies that claim they offer some sort of digital product, but the product is close to useless and offer no actual value.

It is extremely obvious that even the sales people themselves don’t use the products. The only reason they buy it is because if they don’t they won’t be able to make a commission. This is how they claim to be legal but the way they function is very much like a pyramid scheme. The only difference is that they have a product to cover it up.

The commission

The main difference between the 2 is when a comission is made.

For a MLM you make a commission when your down-line sells the actual product, for a pyramid scheme you make a commission when your down-line recruits someone in.

How to spot dodgy a MLM

There is a fine line between MLMs and pyramid schemes. Sometimes it can be hard to tell them apart.

Whether they call themselves a MLM or pyramid scheme if you see these points run for the hills :

  • False promises, telling you how much you can or how fast you can earn
  • No one talks about the products, not even the salesmen or affiliates
  • Affiliates only ask you to join their team
  • Buying higher tier products are for the sole purpose of gaining more commission only

General structure of a scam

I’ve seen a lot of MLMs on the Internet. Make no mistake they do have a product and are perfectly legal.

In my opinion though they are just pyramid schemes disguised as a MLM. Everything boils down to the product their offering. If the product is severely overpriced or offer no value you can be 100% certain the focus is just on getting new members.

Upon joining these scams, you will be offered different tiers of products. Almost 100% of the time in order to make a commission for selling one of the products you have to actually buy it.

Meaning if you make a sale on the most expensive tier of products but don’t actually earn it yourself you will not make a commission. Instead it gets passed up to who ever brought you in.

Why you should stay away

MLM or pyramid scheme is just a terminology to me. You have to check out whatever program you plan on joining yourself, just because it is legal doesn’t mean you will make money.

If the program is focused on recruiting people, you can bet the it will crash sooner or later.

If everyone joining the program becomes a seller, how will newcomers find a buyer? Eventually there will be more sellers than buyers and the program will crash on it’s own weight.

This is why those who go in early make the most money and those who come in late only serve as fodder for those on top. The problem is you won’t know at which stage the program is.

Is it still in it’s early stages? Will you be able to recruit new members easily?

Can you make money joining these programs?

Honestly whether it’s MLMs or pyramid schemes if you’re a newbie in Internet marketing I don’t think you’ll make money.

Even though network marketing is completely legal, it still takes some skill. Those that claim anyone can do it or make $1000 a week is a lie. Just think about it for a second, how can you achieve this if you don’t know anything about advertising, SEO, internet marketing and so on.

There are skills you have to learn to make money online.

My point for writing this post is, I want you to understand how these things work and see the bigger picture. Don’t go for shortcuts or fake promises because you will only end up wasting your money.

I suggest you check out Wealthy Affiliate ( free sign up ) to get at least some basic knowledge about Internet marketing. If you understand the basics you can make money with whichever program you want.

Do leave a comment below if you’ve found this post useful !

Lucas

 

 

 

8 thoughts on “What is the Difference Between Multi-Level Marketing and a Pyramid Scheme?

  1. Cordelia Robinson

    I found some of you information useful but as far as the MLM I don’t agree with you. I have been with a company for over a year and half and I make 50% profit off everything I sell and I don’t need a downline to make that profit. This company has been in business over 37 years it hasn’t collasped yet and mostlikely it won’t. They do have a very good support team and training that is all free no cost to the anyone for training. There are people making some serious money why becasue they work hard to get where they are today and I plan to do the same thing. Now does a downline help yes you can make more money and so can they so I just wanted to share my thoughts back thanks.

    Reply
    1. Lucas Post author

      Hey Cordelia thank you so much for your input on this !

      I’m happy that someone with real experience with a MLM is sharing her experience. The reason I don’t like MLMs is because nowadays on the Internet a lot of pyramid schemes disguise themselves as an MLM. Honestly speaking your program sounds amazing to be able to survive for 37 years. The fact that you can make money without a down-line just proves that it is legit.

      My reason for writing this post is to share my thoughts on most MLMs online, in which case most of them require you to recruit ( not much of a product to sell unlike your program ) but yours seem more of a physical product based MLM. I really appreciate your thoughts and have a nice day 😀

      Reply
  2. Thomas

    Thanks for this informative post. It explains very well the setup and difference between these two. I have been in some MLM programs and have always had a hard time to get people to understand the difference between MLM and Pyramide.

    Reply
    1. Lucas Post author

      I myself was confused at first, I thought that both were illegal but it turns out that wasn’t the case. But what I did find out was that most MLMs are just pyramid schemes in disguise ( mostly those with digital products ) which is why I decided to write a post about it.

      It might be hard to tell the difference because they are pretty similar but the general rule of thumb is that if 70% of the product sales of a MLM is sold to a non-vendor ( their own member ) then it is legit.

      Reply
  3. Minhaj

    Great article, I hope more internet marketers expose the unethical business practices of the MLM industry. The odds are stacked against the majority of those who participate in any MLM scheme.
    The sad fact about those in the digital MLM space is that the big players promote multiple MLM schemes when one well runs dry they jump to another. One of the great things about the internet is you can research about these so called leaders and see just how many business opportunities they have been involved in.

    Reply
    1. Lucas Post author

      I fully agree. MLMs are actually a legit business model but the fact is that with most digital MLMs out there you are more likely to find a scam. As you said, I’ve actually seen the same guys on multiple MLM programs promoting each of them.

      Thank you for your input by the way really appreciate it !

      Reply
  4. Sean

    This answers my questions !! Thank you very much. Great site! I will be adding this to my favourites, look forward to your blogs to come !!

    Reply

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