Pyramid schemes and MLMs: What’s the difference?
There are all kinds of legitimate multi-level marketing (MLM) businesses out there – and some of them, like Amway and Avon – have been around for decades.
However, MLMs and pyramid schemes can look tremendously similar, especially since they both have a hierarchical structure that involves recruiting new members, but they’re not interchangeable. For one thing, pyramid schemes are illegal, while MLMs are not.
The key characteristics of pyramid schemes
Generally speaking, a legitimate MLM is centered around actual products or services that have some value. Distributors can earn commissions either from their direct sales or through the sales of any distributors they’ve recruited to their “downline.” It’s a sustainable business model because it generates the bulk of its revenue through actual sales, not “buy-ins” from newly recruited distributors/members.
In comparison, pyramid schemes are not sustainable over the long haul. That’s because pyramid schemes rely on the “buy-ins” or “investments” from new recruits to make money. All new participants are required to put money into the business upfront, with the expectation that they’ll earn returns once they recruit new members as part of their “downline.”
Sometimes, pyramid schemes have no tangible product or service at all, but other times they mimic MLMs by offering at least some kind of product. However, participants are encouraged to keep money coming through a constant stream of new recruits, since that’s the source of any real profits.
Each recruit may be required to regularly buy products to keep their place within the organization even if they have too much inventory. Plus, they may also be asked to pay money for “training” and “consultations” that are supposed to improve their recruiting skills, though there’s little or no benefit to them.
Another major difference between MLMs and pyramid schemes is that pyramid schemes tend to promise fantastic rewards and profits with very little effort. How exactly someone can obtain those rewards or income is often obscured, but it’s always clear that the pressure is on to continuously recruit new members.
It’s important to understand that even victims of a pyramid scheme can end up in legal danger due to their own recruitment activities. If you’re accused of participating in a pyramid scheme, seeking legal guidance is wise.