Pyramid Schemes and Multilevel Marketing. What’s The Difference?

If you are over the age of 21, you have probably come across an opportunity during your job hunt to work for a multilevel marketing (MLM), or network marketing organization. Many who encounter these organizations tend to confuse multilevel marketing for pyramid schemes because they don’t really know what a pyramid scheme is. They sometimes even call a pyramid scheme a Ponzi scheme. Which is similar, but not the same as pyramid scheme.

The difference between MLMs and Pyramids is actually very clearly defined. According to the Federal Trade Commission (FTC) a pyramid scheme is a fraudulent scenario whereby people are recruited with the promise that they will be compensated handsomely for recruiting other people. Every person who “joins” pays a fee. A portion of that fee goes to the recruiter and all the people up the line from him. That new recruit now turns around and recruits also and the cycle repeats.

Sooooo where is the business? What are they selling? Nothing. That’s why it’s a pyramid scheme. Sometimes they do have a product however. But the product is required to be purchased by the new recruits. And sometimes the recruits have to continue purchasing the product in order to “stay in business”, but the product/service never makes it out to a customer who is not “in the business”. It’s called “internal consumption”. This system is illegal.

How Is An MLM Different?

The quote below is directly from the FTC website (you can read the full article on the subject on their website here)

“Some people confuse pyramid and Ponzi schemes with legitimate multilevel marketing. Multilevel marketing programs are known as MLM’s,(4) and unlike pyramid or Ponzi schemes, MLM’s have a real product to sell. More importantly, MLM’s actually sell their product to members of the general public, without requiring these consumers to pay anything extra or to join the MLM system. MLM’s may pay commissions to a long string of distributors, but these commission are paid for real retail sales, not for new recruits.”

Legitimate multilevel marketing companies:

  • Herbalife (health supplements)
  • Primerica Financial Services
  • Amway (variety of products)
  • Mary Kay (skin care)
  • ACN (communications)
  • Legal Shield (prepaid legal insurance)

Thousands of people will walk through these companies’ doors, and leave thinking they are pyramid schemes simply because they heard the word “recruit” and in their minds “recruit = pyramid schemes”. The most important distinction to make, and the thing to know about MLMs is you will never get paid for recruiting. If the company does not pay you a fee for recruiting someone, it isn’t a pyramid scheme.

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