MLM vs Pyramid Scheme, Whats The Difference?
If there is a business opportunity that you are interested in that resembles a pyramid scheme, it may or may not be one. There are legitimate MLM business opportunities out there but you need to know how to spot one and how to distinguish them from illegal pyramid schemes.
For this reason I am going to briefly educate you on the difference between MLM & a Pyramid Scheme.
Both illegal pyramid schemes and legal MLM’s have the same commission structure in their most basic form. They both have a hierarchical pyramid structure, where money is funneled up to the higher ranked members on the pyramid.
Both forms of business rely on recruiting people into the business a great deal. Members are encouraged to recruit new members in, and they make money off of the efforts of those recruits.
The “height” of the pyramid varies with the business. The different levels are called tiers. You could have a 3 tiered pyramid scheme or mlm or you could have a 7 or 8 tiered one, it all depends.
The image shown to the right is a 3 tiered pyramid. You have your direct referrals underneath you on the 1st tier, on the second tier you have their referrals, and on the 3rd tier you have your referrals’ referrals’ referrals (if that makes sense).
Since pyramid schemes and mlm’s rely on recruitment to grow their business, many members recruit more than one person. This makes the base of the pyramid larger than the top (which is why it looks like a pyramid) and allows for a large cash flow that trickles its way up to the higher ranking members.
Okay… So Whats The Difference?
The key difference between a legitimate MLM and an illegal pyramid scheme is the sale of products.
A legitimate MLM will have products (or services) that they sell. They may charge fees for new recruits to buy into the business, but they will sell legitimate products of value on top of that. So their members will make money from both products and from buy-in or membership fees.
On the other hand, an illegal pyramid scheme in its purest form won’t have any products at all. A pure pyramid scheme will rely solely on recruitment and buy-in fees to pay the members of the business.
Products are key to be considered a legal MLM. And when I say products, this isn’t limited to what you normally think of as a product. This includes services and doesn’t have to be physical in nature.
But… Just because a pyramid style business has products doesn’t mean that its a legitimate MLM.
Another key characteristic of a legitimate MLM is that it is DEPENDENT on the sale of products for its revenue.
Any illegal pyramid scheme could come up with some products to disguise themselves as legit MLM’s, but they can’t just have them… they have to rely on their sales.
Pyramid Schemes Disguised As MLM’s
Just about every pyramid scheme out there tries to disguise themselves as a legitimate business. And due to the very similar characteristics that pyramid schemes and MLM’s have, disguising as a MLM seems to be the go-to choice most of the time.
How do illegal pyramid schemes disguise themselves as MLM’s?
Well.. they come up with products that they use as a cover up. They may have real products, but as I stated above… their revenue needs to be dependent on those products.
Pyramid schemes often sell products just to get by the law. They don’t care about the products and that is not their main focus, they just sell them because they know they have to.
How To Spot a Pyramid Scheme from a MLM
Some pyramid schemes really get creative with how they disguise themselves, so there is no tell-tale way to spot one. But there are some common things that you can look for when you are trying to investigate the legitimacy of a business.
Pyramid schemes are all about recruiting. If there is an overwhelming emphasis put on recruitment rather than a product that the company sells then you should be suspicious.
2) Forced Buying
Often pyramid schemes will force their members to buy products in order to maintain membership. This is to make it seem as if they are getting a lot of revenue from product sales, and although true, they are doing so in an illegitimate way.
3) Ferrari’s, mansions, and palm trees
If the business opportunity you are looking into tries to lure you in with promises of riches beyond your wildest dreams, you should be suspicious. The “get rich quick” tactic is often used here. But what they should be telling you is that statistically speaking, the large majority of people involved in pyramid schemes LOSE MONEY!
Its a Dangerous Game
If you are looking into joining a MLM that you think might lean a bit too far towards the pyramid side of things, don’t take that chance. Back away and stay safe.
There is kind of a grey line between how much of a MLM’s revenue has to come from product sales to be considered legitimate. If the FTC thinks a mlm is focusing too much on recruits THEY CAN SHUT IT DOWN.
I have seen and read about plenty of MLM’s getting shut down by the FTC. Some are obvious pyramid schemes and illegal, while others I would consider more boarder-line.
So the bottom line here is don’t take the chance. You might lose a bunch of money and kick yourself later.
The FTC has an article for consumers that provides some guidance about MLM’s that you can read here for some supplemental information if you wish.
The Online World Is Plagued With Pyramid Schemes, Beware!
As many of you already know, I make a living online and I am constantly reviewing online money making programs that pop up, many of them which turn out to be scams.
Online mlm’s and pyramid schemes are something that I see all the time. They come at a dime a dozen. Some are obvious pyramid schemes, some legitimate mlm’s, and some are boarder-line.
Below I have a list of some of the more popular ones that I have reviewed…