Technically, Multi-Level Marketing (MLM) is a Pyramid Scheme because its structure looks like… a pyramid scheme, where a pyramid is a mathematical shape and a scheme is a mathematical diagram.
Most traditional companies also have an organizational chart in a shape of a pyramid. The earnings are low at a working bee level and are higher upward the line of the position and seniority hierarchy with a disproportionate increase in the executive management level. Wouldn’t you agree?
However, the common use of a “Pyramid Scheme” term is to reflect on a scam within the business. The definition of “scheme” in such case is “a devious plan of action”. In this sense…
What is the difference between Multi-Level Marketing and a Pyramid Scheme?
Multi-Level Marketing (MLM) is a strategy for the sale of products or services, where the company’s revenue is produced by the independent distributors. The MLM companies encourage their existing distributors to recruit new distributors. A percentage based on the sales of a participant’s sales force would be his/her compensation, in addition to his/her personal sales. The compensation packages are defined as a pyramid-shaped commission system.
Multi-Level Marketing business model is a legal entity.
Yet, there is a very fine line between legitimate and fraudulent MLM businesses. We’ll look deeper into these differences once we set definitions clear and get Pyramid and Ponzi Scheme explained.
Pyramid Scheme is where a participant makes all of his/her money by recruiting others and there is no product or service being exchanged. Or, there might be a product, which participants buy and sell to new recruits, but there are none, or a low percentage of the customers, who value the product and want to buy it, and who are not a part of the compensation plan.
Pyramid Scheme is illegal.
Ponzi Scheme is a fraudulent investment arrangement. The investors are promised low risk and high return. There is no actual investment at all. Instead, the money is being shifted from the larger pool of newer investors to the smaller pool of older investors. Older investors receive their high returns as they were promised. Based on their personal experience, old investors build a good reputation for the arranger. More and more of new investors get attracted by this good reputation of a schemer. Redistribution of money continues until the pool of newer investors becomes not large enough to sustain the demand of the older investors. Then, the whole scheme collapses and the “investors” lose a lot of money.
Charles Ponzi was an Italian emigrant who in the 1920s became known in the United States and Canada as a swindler. Ponzi promised his clients to double their investments in 90 days by buying discounted postal reply coupons in other countries and redeeming them in the US at face value. In reality, he was paying to earlier investors from the money collected from the later investors. Charles Ponzi wasn’t the one who originally came up with this fraudulent investment idea, but he ran his campaign for over a year, and when it collapsed, it cost his “investors” over $20 million. His name became so identified with this type of fraud that it is now referred to as a Ponzi scheme.
Ponzi scheme is illegal.
This video below illustrates the difference between Ponzi and Pyramid Scheme
My personal experience with MLM business model as an outsider, customer and later… a member
I first heard the words “multi-level marketing” over 30 years ago. Back then the name was applied to a pure Ponzi Scheme. I knew nothing about Ponzi at that time, but I was an A+ math student and loved mathematical logic. When a friend, who wanted to get me involved, explained how it works, I immediately realized that there was nothing of value, and so-called “MLM” was a simple redistribution of money. Thus, I decided for myself that MLM is a fraud and I don’t want to be around any of it. For several years, I’d walk away as soon as I hear the term, without even listening. Therefore, I didn’t know that there was more than one scenario and even a legitimate option existed.
Several years later, on a local fair, I bought some cosmetics by Mary Kay and liked it a lot. The salesperson gave me her business card, and I called her when I needed a refill. Only when she tried to recruit me I realized that I was using a product from an MLM company. That was different from my first encounter with the MLM term. However, I was so turned against it, that I assumed that there will be another dupe somewhere down the road. Besides, I never wished to work as an independent distributor. I turned that offer down.
Years later, I purchased an eye mascara from Avon, and was so happy with it, that I still use only this particular type of Avon mascara.
The prices on either Mary Kay or Avon products are in average range, or even on a lower side. I am fully satisfied as a customer. No wonder Avon Products, Inc., a multi-level marketing business has been in business for over 130 years. The California Perfume Company was founded in 1886 by David H. McConnell and renamed to Avon in 1932.
Now, that I became a customer of a couple of MLM companies, I stopped being so negative about this business model. I knew that at least some of them offer quality products at a reasonable price. I’ve gotten to know a few people working as distributors for MLM businesses. I’ve seen that their work was a very hard, time-consuming and energy-depleting. I didn’t know these people long enough to see whether they were able to move up in the levels of hierarchy.
Three years ago, I came across another MLM company – this time, it was in a financial industry. The time was right and I had a need for their services. I saw a lot of value in what they had to offer: education, the variety of quality financial products, a new professional occupation, personal earnings if I become their associate, and own business opportunity. One product that I got interested in offered a life insurance now and a supplement to the retirement income later. Considering all the positive facts, I started looking carefully into what negative could come up later if I decide to join.
During these three years that I was making baby-steps of getting more and more involved with the company, I made some friends, observed them working their butts off, witnessed a friend’s promotion from a Marketing Director (MD) to a Senior Marketing Director (SMD).
The MLM company I am talking about is World Financial Group, which has been in business for over 25 years.
What should you look for when choosing an MLM opportunity? What are the warning signs?
As I mentioned at the beginning of my post, most organizations are shaped in a pyramid form. The dollar amount is higher at the top of either pyramid: a traditional company or MLM business. However, a legal pyramid (MLM or non-MLM) offers a valuable product or service to its customers. There are customers, who are not members of the business. Customers willingly give their money to the organization in exchange for the valuable product or service. The product(s) or service(s) offered by MLM company is not overpriced.
Since in a multi-level marketing business model, “upline” participants receive a portion from the sales performed by their “downline” distributors, the overall price of the product could grow too high. In a legitimate company, distribution of compensation inside the MLM pyramid should not affect end-customers. The product delivered to clients must be an average market price for the product of similar functionality and quality.
How can you recognize a scam company from a trustworthy one?
10 Red Flags of Scams:
You’ve been promised quick money at a little effort – that’s the most obvious lie.
While the business itself might still be legitimate, the person, who is trying to recruit you, is not being honest. There is no such thing as quick and easy money. You need to work hard and smart to start a career or a business. Don’t fall for “get-rich-quick” scheme.
There is no product or service for sale.
Lack of a product is the most alerting sign that the business might be a pyramid scheme.
There is no demand for the product or service.
Such company would push the recruiting over the sales of the product. If a company is focused on “building a team” of new distributors rather than acquiring new customers, consider it a clear and loud warning – bright red flag.
The product(s) or service(s) is overpriced.
An overpriced product might be a direct result of an MLM structure: the distributor and too many people above him/her are being fed from a sale. If a number of layers in the pyramid noticeably affects product’s price, then it will become difficult to interest more customers.
The company and its founder do not have an established good reputation.
The reputation is important but doesn’t mean much as a single factor (remember the Ponzi Scheme!)
A company is in business for a short period, there is no known physical location of the headquarters.
You are safer to go with a company that has been around for a number of years than with a start-up. Even though, you might be attracted by an opportunity to get to the ground floor – that’s a wrong call. With the direct sales, it doesn’t matter at what point you start.
High-pressure recruiting tactic.
Your recruiter is trying to lure you by an unsupported benefit of enrolling quicker, not giving you time to research the company and think over the opportunity. Such behavior should raise a doubt. Does your recruiter fear that if given more time, you’d find out something about the company that will prevent you from participating? You don’t want to make a rushed decision.
High start-up cost
To enroll, you may be asked to pay a significant amount of money in immediate exchange for nothing valuable – plain promises of the future revenue. Every MLM company would have some start-up cost, and a low enrollment fee is okay. Higher amounts are a red flag. There should be no requirement to purchase training or marketing materials or to pay to attend training seminars.
Watch out for a pressure to buy and stock inventory.
Buying a few popular items to have on hand is okay, but don’t fill your garage with the products, especially if you don’t know for sure that you can sell them all.
Find out if a company buys back an unsold inventory and at what price.
In the United States, if a distributor cancels his/her contract of participation, MLM company is required by law to buy back inventory at a price not less than 90% of the distributor’s original net cost.
There is one more problem I’d like to address. It’s an ethical issue…
You Risk Your Reputation, and Thus Your Circle of Friends.
This is a nature of the business. It has nothing to do with the MLM scams. Let me explain, please…
To be successful, any direct salesperson, whether (s)he is associated with single-level or multi-level marketing company, must be
passionate about his occupation,
highly engaged in his business,
What is a recruiter? A recruiter is a salesperson, who sells an opportunity. To be successful, any recruiter must have exactly the same qualities as listed above.
While most of these qualities are positive and well accepted by others, the whole set together is not as enjoyable as may seem from a first sight. When you are associated with an MLM business, you are a direct salesperson and a recruiter at the same time.
To become successful, you must have all of these characteristics, and double the power. For your financial gain, you must sell product or service and grow your team by recruiting new members. Wherever you go, your goal is to expand your social circle – so, that you get new people to hire or to sell to. There is no social gathering where you won’t talk about your business. You become annoying to your friends, family, and everybody you meet. You are gaining acquaintances, but losing true friends. You become an aggressively enterprising person, a hustler.
That was and still is my personal biggest stopper from becoming an associate in an MLM company.
MLM does not equal to SCAM. Not ALL MLM businesses are scams. Some are legitimate, trustworthy, and offer great services and products at reasonable prices.
However, with every MLM, including WFG, you do need to go and hunt for your clients and partners.
This does not fit my personalities at all, and I don’t want to change my nature. I won’t do this: I treasure my friends, I prefer to discuss a wide range of topics at a party, rather than speak about my business.
But wait… What if there is another solution?
If somehow I could let people know what is my area of expertise, then people, who are interested in more information, could contact me, instead of me running after everybody and asking whether they want me to help them. But, how could I let people know what I am good at?
I’ll use Internet Marketing instead of personal network marketing. Once someone shows me his/her interest, then I’d be happy to meet with this person face-to-face, or via any of the online methods of personal communication and tell him/her everything (s)he wants to know.
What? Internet Marketing? How do I do it?
You, my friend, can learn to do it! Yes, yes and yes!
My Number 1 recommendation in Online Marketing is Wealthy Affiliate.
is a founder of LiveWealthyRetirement.com. She is a caregiver to her adult son with disabilities, and therefore a full-time work in a remote office is no longer an option for her. Julia established her own online business to help others with similar needs to work from home on their own schedule. She also teaches people how to achieve financial independence in the senior years even if they were unable to start saving for the retirement in their youth.