Are pyramid schemes and multi-level marketing the same? Which is legitimate or are they both scams? In this article, we shall explore pyramid scheme vs multi-level marketing. After reading, you can decide for yourself. However, please come with an open mind with no judgment or preconceived ideas.
What are they?
According to Investopedia, a pyramid scheme is a sketchy and sustainable business model where top-level members recruit newer members. The members pay upfront costs up the chain to those who enrolled them. New members then recruit more members below them. The majority of the pyramid schemes rely on profiting from recruitment fees and seldom involve the sale of actual goods or services with intrinsic value.
According to Investopedia, multi-level marketing (MLM) is a legitimate business strategy in direct sales and recruit new distributors who are paid a percentage of their recruits’ sales. The distributors also make money through direct sales of products to customers. However, this is controversial. Even though multi-level marketing practices are legal, the FTC found many MLM operations questionable. I can understand the hesitancy of others regarding legitimacy. I feel the same.
The Differences between Pyramid and Multi-level Marketing
The main difference between the pyramid scheme and multi-level marketing is that the pyramid scheme does not offer products or services. However, there are some multi-level marketing businesses that can be a pyramid scheme even though they offer products. The products are usually not unique and the price is expensive. You can find similar products in other places.
In addition, the pyramid scheme profit is focused primarily on recruiting new members and very little profit for tangible goods. The bottom members pay the fees where the tiers above them get a percentage. In practice, the new recruits become less over time. The pyramid scheme eventually shuts down so the top-level members walk away with cash while the lower-level recruits leave empty-handed.
Not all multi-level marketing companies are bad or with a pyramid scheme. Two examples of legitimate MLM are Amway and Avon. Multi-level marketing works well when the company has the following characteristics:
- A unique product that has very little to no competition.
- A great compensation plan which are many ways to make money including recruiting new members.
- How the company is being run? The leaders are efficient, ethical, and with integrity.
- The company and product have been around for at least four to five years.
The associates make profits from referring the products as well as recruiting new members. Here are some legitimate well-known MLM companies:
- Mary Kay
The Good and the Bad
There are no advantages to the pyramid scheme. It is illegal and unethical.
As for multi-level marketing, when working hard and efficiently, the newer members have the opportunity to make even more money than their up-line recruiter. Members can also have an opportunity to make passive income when they successfully build their team and business.
Starting a multi-level marketing business requires low overhead and a small amount of upfront money. You can work from home and has community people of upline for support. You do not need to reinvent the wheel. Repeat a successful system that was done by others before you. You can be your own boss.
The associates or members do not have to come up with their own products in MLMs. The product and the system have been developed. The associates focus primarily on the marketing, selling, or sharing aspect.
For the pyramid scheme, you can lose a lot of money and very little chance of making your money back or have any profit.
With multi-level marketing, you can also lose interest because you do not make money immediately therefore you can lose the initial investment to be a member. It does require work and not a quick get rich scheme.
You will deal with naysayers as well as people who got scammed by the pyramid scheme. Face many rejections and be able to pick yourself back up again. You learn to develop a thick skin and not allow negative vibrations to impact your actions.
Here is the status of Network Marketing:
- 70% recruit 0 people
- 20% recruit 1-2 people
- 5% recruit 3-5 people
- 3% recruit 6-9 people
- 2% recruit 10+ people
(70% of all recruits come from the 2%)
The cost to join varies. From different reports, a pyramid scheme is usually expensive to join as a member and there are usually no tangible products involved. It could cost several hundred to several thousand for their starter kits.
A legitimate MLM business to start could cost on the average $49 plus a product starter kit at different levels from a few hundred to a few thousand. Each company has its own unique product and compensation plan for each level of success.
My Final Thoughts
I learn that not all MLMs are pyramid schemes. I also learn to distinguish the difference between the two. It does get confusing when I listen to hearsay. Then I would start to doubt myself. It is best to do my own research with an open mind. It is helpful to come with a clean slate and as little as possible with preconceived ideas.
As mentioned earlier in the article, I would look in companies with the following characteristics before I join:
- A unique product that has very little to no competition,
- A great compensation plan which are many ways to make money including recruiting new members
- How the company is being run? Are leaders and members efficient, ethical, and with integrity?
- The company and product have been around for at least five years.
According to Ventaforce, the Network Marketing industry is a popular business model and especially in the last decade. More people want to work for themselves and work from home with low overhead.
It is possible to be successful in the Network Marketing business. It does require hard work, dedication, and consistency just like any other job as an entrepreneur. Also, it does help to enjoy what you do and believe in the product that you are selling. If you do not believe in it, then it is harder to succeed. However, it is not impossible. The most important thing is to believe in yourself.
Here is a great video of Robert Kiyosaki who is Best known as the author of Rich Dad Poor Dad-the #1 personal finance book of all time. He shares his opinion about MLMs.
I hope you picked up a few tips after reading this article. What are your experiences with MLM or pyramid schemes? Love to hear your thoughts. Please leave them below. I will reply within 24 hours.