The Difference Between MLM and Pyramid Schemes.
I have seen alot of discussions regarding the topic, and there is in truth not much of a difference between the two. The only difference is that the one is illegal and the other is not. Much Emphasis is made of the fact, by those who promote it, that MLM is legal and therefore cannot be described as a Pyramid Scheme. The opposers of MLM says that even though it is legal the basic structure comes from a Pyramid system, and it has all the inherent drawbacks of a pure Pyramid Scheme. So who is right?
Pyramid Scheme:
Pyramid scheme: An illegal multi level program wherein people pay an entrance fee for the sole opportunity to recruit others to do the same.
Members to the scheme pay a joining fee which is passed on to those above them in the scheme. Their purpose is to recruit new members below them in the scheme in order to qualify for a share of their joining fee.
- Position in this Scheme is important.
The scheme is based on a pyramid structure, hence the name, with a few people at the top, and a increasing number of people in each layer below. Money paid in by investors flows from the botoom to the top, it is therefore important to be at the top or as close to the top of the pyramid as possible. By design 90% of members will make a loss and only 1% will make a significant Profit. Your position in the pyramid dictates whether you will make money or not, not how hard you at it.
- Make money by recruiting others.
The idea behind a pyramid scheme is to encourage others to join under you in a potentially endless chain. You then get a percentage of their joining fee and also get a percentage of the members fees they in turn recruit under them, upto several layers deep. This is where the promise of great wealth comes in play and the SCAM is sold. In reality this cannot be achieved, due to the difficulty of attracting new members, 90% will always stay at the bottom or near the bottom and will ultimately lose their money. It is this feature of Pyramid Schemes that guarantees failure for the majority, and renders them illegal.
- Your profits come from other members investments.
The promise of great wealth comes from the concept of a downline. The downline consists of the members you have recruited directly, and subsequently the members they in turn introduce into the system. You will receive a percentage of the investment that each new recruit make in your downline. With a downline several layers deep the potential is there for a downline of thousands of members. In reality this downline is unachievable both practically and mathematically. This is where the FRAUD comes into play in Pyramid Schemes. They are bound to fail by design.
MLM (Multi Level Marketing):
Multi Level Marketing: A multi level program wherein people pay an entrance fee for the opportunity to sell products and to recruit others to do the same.
Members to the scheme pay a joining fee which is passed on to those above them in the scheme. The members purpose is to sell products in return for a commission payment and to recruit new members below them in the scheme in order to qualify for a share of the new members commission.
- Your position is important.
MLM was born out of pyramid schemes and as such the structure and the nature is very similar. The concept of the downline that will earn you money works in the same way, you sponsor new members and earn commission from them in a multilevel structure.
As with an illegal pyramid scheme, unless you are at or near the top of the pyramid it is likely that you will lose money. Once the scheme has passed its saturation point, no amount of hard work or enthusiasm will make a difference.
- Earn money through recruiting.
The difference between a pyramid scheme and an MLM is that MLM schemes are in the business of selling goods to consumers. This is what makes them legal.
Most MLM schemes in reality, however, promote themselves with the promise of great wealth, the appeal to greed. Selling products to consumers is not the way to make riches in MLM. Any MLM scheme will make it absolutely clear that the only way to make real money is through the recruitment of new members and the creation of a downline.
- Most profits come from your downlines investments.
The downline is the key component to making money in MLM. The concept is identical to illegal pyramid schemes, you make money from the people you introduce into the scheme.
The pitfalls are exactly the same as with pyramids, the vast majority are bound to lose money by design.
Conclusion:
Pyramids are illegal. MLM schemes are legal because of the fact that products are sold. This is the only real difference between the two systems. No amount of rhetoric, wishful thinking, self delusion or fallacious reasoning can alter that fact.
If you remove the products from an MLM, all that is left is a pyramid scheme, this is why MLMs are known as, product based pyramid schemes.
Now that you know this, and my fingers are typed numb, go and have a good look at all the programs you are involved in. You are in for a shock, i guarantee you that.
I am not even going to explain in this post what a matrix and a cycler is. If you can't figure it out after reading my post, then i have no hope for you.
I am including a link to a post Andy made about MLMs more regarding the products that they tend to sell. 3 quick ways to tell if your MLM is Illegal
To learn more about your typical SCAMS. Just some typical scams to be on the lookout for.
Comments (22)
SmartMoney Moves
6
Work At Home Services
i just would like to say, this article not only helped me understand the difference between the two but I was able to share it to some friends of mine who are also confused and mistakenly took the two program as one and the same. Thank you for sharing such an informative, well explained topic. Be safe and hoping to read more of your articles.
Andre Kalis
6
@Louise I agree wholeheartedly: A proper and reputable MLM company will have a decent product or range of products at it's core and the marketing must be centered on the product and not the network.
However, a membership site that offers some or other substantial value for its members in exchange for a fee, is also a product and the benefits of the membership would then be the product.
The above is what differentiates an MLM from a Pyramid scheme. The latter is first and foremost characte
jerseys520
1
Worth thinking
Sue Larson
7
Platinum Leader
interesting post and notes from everyone... thanks
Cheryl Baumgartner
12
Medical Billing/Coding/Insurance
I got that point Dawie, there are differences; a true MLM is a business and like all businesses the structure is a pyramid. It's a shame that Pyramid scheme was used to describe a scam because all businesses are in truth pyramids. Corporate 'pyramids' like Walmart or Coca Cola simply lock people into whatever level that they are in except in rare cases.
MLM does not follow the accepted method of feed employees into the corporate system and then lock them on a given level. MLM does not prov
Dawie Bezuidenhout
11
Systems Engineer I.T.
Look people, if you had a look at my signature link you will see i promote a MLM program as well.
I get all your points of views, but the fact of the matter is that 90% of programs that claim to be a true MLM is not.
They integrate matrixes and cyclers into their systems, and the moment they do that all legality of their MLM claims went out the window because those two components is the purest form of Pyramids you get.
I also get the fact that MLM is about relationship building and i am
Abraham Van der Lind...
8
Online Entrepreneur
Yes, in a true MLM you do not get a commission for recruiting, only from products you sell or buy and a percentage of the sales of the people you have recruited.
Thanks for a very informative post.
Louise Venison
7
TE owner, affiliate marketer
Dawie, you've started up quite a debate here. Thanks, I'm enjoying taking part in this.
A big problem with a lot of companies using the MLM structure in the past has been the system where you're supposed to make a list of all the people you know and introduce them to the company. That just led to people bothering family and friends, family and friends either getting involved but not making any money because it wasn't for them, feeling guilty because they didn't get involved, getting fed up
Cyn S.
7
Our Food As Medicine, Health and Wellness Blogger
Oh yeah, by the way the MLM (as it's called) that I'm involved with does not charge a set up fee and there is no cost for the website. We do earn commissions on our sales volume, or purchase volume. Although many can earn a substantial income in 24 months - with work, the product is good and needed in today's society. The company pays 50% of earnings back to Preferred Customers. I don't see anything wrong with that. And I don't see anything wrong with helping people who are suffering from a
Nnamdi A.
17
Internet Marketer
I wish Dawie had written this piece and I had read it some years ago before wasting the little money I had by joining MLM/Pyramid schemes.
I lost everything.
Thanks, Dawie, for this post. This is also hoping that people will read this and avoid such schemes.
There are millions of legitimate ways of making money on the internet. Discover what works for you and avoid scams and you will surely make money online.
Cyn S.
7
Our Food As Medicine, Health and Wellness Blogger
I have just posted a blog on Ponzi Schemes so I was very interested to read this post about MLM and Pyramid Schemes. I'm pretty new to all of this terminology and what it means to people, what is illegal and legal, is one thing and what is ethical and non-ethical is another issue. Some very "legal" enterprises have in my opinion really walked or crossed the line of "ethical" and vise-versa. I agree with Louise's comment above and don't truly agree in full with Dawie's post. This really again
Robert Orlandini
5
I agree with Louise. If you don't have time stick with affiliate programs.
Louise Venison
7
TE owner, affiliate marketer
What most people don't understand about MLM is what skills are needed to succeed. Affiliate marketing is about selling. MLM is about building relationships and teaching. If your focus in MLM is on selling, you're not likely to make any real money.
Cheryl Baumgartner
12
Medical Billing/Coding/Insurance
Actually in a legal MLM you can override those below you but you are not allowed to profit from the joining 'fee'. If that is happening it is illegal.
And one other point which is totally missed time and time again, ALL businesses legal or otherwise are pyramids. In any business regardless of size you have the 'Owner' under the owner are the 'upper level executives' under then comes 'management' and at the bottom is the 'employee' The higher up in the company, the larger the salary and le
Dawie Bezuidenhout
11
Systems Engineer I.T.
@Paula, that is how most international MLMs are setup as well. The problem i have with most of the MLMs is that it makes false promises to the newbie marketers and they get sucked into something that is going to waiste their time and efforts. The only people that will dilligently defend MLMs is the ones that know how to market and how to suck those newbies into these programs.
Without a downline you will never make a serious amount of money in MLMs as a newbie or a professional, if that is the
Darlene Isberg
7
Internet User
Too many people joining the Internet are not aware of the information you have just provided. It should be a "must read" before every program is presented. A Keeper!
Louise Venison
7
TE owner, affiliate marketer
Yes, joining should be free, although they can charge an administration fee (except the authorities would probably argue charging an administration fee for an affiliate website that is created automatically is just a membership fee in disguise).
Louise Venison
7
TE owner, affiliate marketer
Then it isn't legal (ie, not MLM, since MLM is legal)
This is taken from the FTC statement on pyramid schemes: "Beware of any plan that offers commissions for recruiting new distributors"
Paula van Dun
16
Retired
There are also MLM's where joining is free. You earn commission from products/services sold through your link and by referring others. So even with zero referrals you can earn. It depends on your skills. That is how must programs in the Netherlands are set up.
Dawie Bezuidenhout
11
Systems Engineer I.T.
@Louise, you earn commisions on your downlines sales in most MLMs as well.
I don't know what programs you belong too, but most MLMs have a membership fee going along with the products that you sell. You earn percentages on that membership fees as well as the products = Pyramid structure.