I have done a lot of research about MLM companies and also created some reviews to show people whether or not this is a good business opportunity.
In most cases, a lot of MLM companies resemble Pyramid schemes and it is not easy to distinguish between these two.
Does it mean that MLM is the same as a Pyramid scheme?
Is it the same thing?
Not necessarily and in the next few minutes, I am going to explain what is the difference between these two. I will also mention some actual companies and at the end, you will also learn a bit about Ponzi Schemes.
Below you also find a short video (from a well-known show) that I have found where it is clearly explained what Ponzi Scheme is, in a rather funny way ;)…
…Sometimes I hate to be so serious all the time;
But at the beginning let’s sincerely take a look at both so-called business models to see what’s the difference between MLM and pyramid scheme.
What Is MLM?
MLM or Multi-Level Marketing is a specific structure of a company with multiple levels where each person is considered an independent business owner.
That sounds always good, especially for people looking for ways how to make money on their own.
This business owner’s task is to buy products for the company (from their upline) and sell them to the levels below him.
Those at the bottom sell the products to the end customers and at the same time, they try to recruit them.
Beginners are advised to first contact their relatives and friends since it is believed these are the easiest targets, so to speak.
But it is also very annoying to bother your friends and family.
As a rule of thumb, only a minority of people make considerably enough money and even less can afford a nice lifestyle.
Usually the earlier you get into the game, the higher chances you have to make a nice living.
A few people at the top levels are even millionaires.
And that’s the dream every MLM independent business owner tries to sell you.
The truth is though that more than 95% of members lose or do not make any money (and I am being very conservative with the number; research shows that it is even more than 99%).
A Few Examples of Well-Established MLM Companies
Here are typical MLM companies that have been around for decades:
To be precise, Avon wasn’t originally the MLM company as it is known today. It became a multi-level marketing company only in 2005.
Prior to that, it was a direct selling company.
Typical Signs of MLM
- Expensive products are being pushed down through levels
- Members promote and sell products as well as recruit new members
- All members (from the top level down to the second last) get a commission from the sale (Investopedia)
- In theory, the money is being made from selling the products.
The truth is that the real money is being made from recruiting.
With the last point, we are getting to the next section, the pyramid scheme
What Is Pyramid Scheme?
To put it simply – take any MLM company that has no products to sell and you get an outright Pyramid Scheme.
So if it is just: recruit, recruit and recruit without having anything to sell you can be sure you stumbled upon the pyramid scheme.
Now acc. to FTC, a Pyramid scheme is:
“Pyramid schemes are scams. They can look remarkably like legitimate MLM business opportunities and often sell actual products, … But if you become a distributor for a pyramid scheme, it can cost you and your recruits — often your family and friends — a lot of time and money that you won’t get back.”
Many companies started as pyramid schemes. But as authorities go after such companies, they started to introduce some products (in many cases digital products) only to trick the authorities.
And even if they officially don’t admit it, they still heavily depend on the recruiting.
My Personal Experience
Here is a little story;
I was working for one company in the financial industry where we were supposed to help people to find a better deal when it concerned, for example:
- Health insurance
- And so on
Most importantly, I was told that I can be a manager, can drive a great car, build my own team and be independent.
Well, it all was great. It was a dream that everyone wanted to live.
I did not see it in the first couple of weeks, but later I realized that the company had all characteristics of MLM.
(Despite my parents telling that fact right at the beginning).
Let’s stick a little bit with the idea and let’s assume that it might work.
How much money would one make if staying at the bottom?
He or she can work his ass off, and make only an X amount of money per week. You are on your own, I mean you organize all the meetings with your potential clients and there is only a certain number of people per day you can meet and talk to.
Hire more people and let them hire even more…
Ain’t everyone involved in any MLM somehow encouraged to recruit others?
Because truth to be told, the real money is in recruiting.
The “manager” 2 levels above me had a Volvo.
The one above him drove Mercedes.
And even our “team leader” did not force us to recruit.
He simply explained that the more people I find the more credit I get and thus the percentage from people below me.
These managers or team leaders had different personalities when it came to mentoring.
Some of them were, “aggressive”, and they forced others to make phone calls.
Others used to be more friendly.
But at the end of the day, they all have the same question:
- How many people do you have on your phone list
- How many friends do you have on your social media (Facebook, Twitter…)
And according to them, you should contact all of them and “share” the great opportunity.
I have also heard about cases where a newbie (let’s say his name was John) was lured into the seminar. Usually, it takes place on the weekends, with food and drinks … and in some cases, girls are also easy to pick up.
(I mean, girls or women that work in the same company).
Jonh somehow doesn’t feel that this is right, so he decides to leave.
He was stopped by a manager, saying something like:
“You don’t leave until you give me at least 5 contacts of yours“…
Then he left.
Well, this is not the environment where the majority of people can function.
At least it is my (and 99% of my friends) opinion.
Let me know what you think about this business model, in the comment section at the very bottom.
I am really curious.
Awkard Recruiting Practices
There is valid information that some MLMs (in a financial niche) use(d) external co-workers when recruiting new members.
Especially ladies, or young women, to recruit even more members.
They made the environment very attractive, for men, especially students.
Is There a “Clear Cut Border” between MLM and Pyramid Scheme?
Well, all MLMs have signs of a pyramid scheme.
But the main difference is that the pyramid scheme has no products whatsoever to offer.
MLMs have some products (or a lot of products) to offer.
In order to make any Pyramid Scheme “legal” the owners or managers include some kind of product, to fool the authorities.
Despite that, some of these newly established MLM won’t get away with it and at the end of the day, they are labeled as Pyramid Scheme.
But every investigation takes time and the originators of Pyramid schemes are aware of it.
They can even change the name and found a “new” company.
It is the case for example with IM Mastery Academy.
Its predecessor is called, IMarketsLive, and if you check the company and go to the iMarketsLive website you are re-directed to the IM Mastery Academy website.
There are many tricks these scammers do.
Basically, if there is a strong emphasis on recruiting, the MLM can be labeled as Pyramid Schemes.
Another example of a borderline Pyramid Scheme is Herbalife.
This company was sued for being a Pyramid, but they agreed to pay $200 million to reimburse people that lost money on their products.
As a result, Herbalife was not labeled as Pyramid Scheme and they keep selling their product in the same fashion.
Still, FTC keeps an eye on Herbalife since the practices they use are considered deceptive.
Herbalife is a great example, that there is no clear cut between pyramid schemes and MLMs.
Pyramid Schemes are illegal in most the countries
In most countries pyramid schemes are illegal.
See the image below (source Wiki), where it is illegal to run a pyramid scheme.
Let’s not forget that, in countries where MLM is legal, authorities keep checking the companies and if suspicious activity is found they are either penalized or shut down.
It may be different from case to case and from country to country.
However, even if pyramid schemes are legal in some countries, no doubt about the fact that they all are a waste of time and money.
Again, here are some signs of a pyramid scheme:
You Might be Interested in:
Is MLM Always A Pyramid Scheme?
All MLMs have roots in Pyramid schemes. In other words, the money is in recruiting. No one ever made living just from selling the products.
It is necessary to “build” a team of salesmen who work for you and you get a commission off of their sales.
The pyramid scheme disguised as multi-level marketing is quite often very difficult to identify.
For instance, Herbalife was accused of being a pyramid scheme but they paid $200 million to settle down the case.
As a result, they have changed some claims and they are not labeled as pyramid schemes.
But they operate in pretty much the same manner.
As a rule of thumb don’t get involved in any companies with multi-level marketing plans, especially when you are somehow forced to recruit others.
How About Ponzi Scheme?
This model is close to the previously mentioned pyramid schemes.
They both have in common:
- Promise huge short-term returns – This is typical for Ponzi Schemes
- No products/services to sell (many pyramid schemes add some kind of product into their portfolio to look legit)
- The originator is the one to blame and not the people below (assuming they are not aware of the illegal practices)
As I said they are close to each other but there is one difference:
The main difference between Ponzi Scheme and the Pyramid scheme is that it is very difficult to prove that a Pyramid schemes company is involved in illegal activity.
How Do Ponzi Schemes Work?
Investors are lured into the scheme on a promise of huge short-term returns. They are being paid from the source coming from newer members.
Money that flows to the founders and the earlier investors.
This game goes on and on, as long as there are new members willing to “invest”.
Here is a typical example of how such a Ponzi scheme might begin:
(Two and a Half men – S08E15)
On a more serious note, Ponzi Scheme is an outright scam.
If the cash stops flowing the entire structure collapses.
A lot of new cryptocurrency Ponzi scheme
Be careful about the new type of Ponzi Schemes.
Dealing with cryptocurrency might sound like a great plan, how to get rich quickly.
Well, it may be true. The volatility is high, so there is always someone who makes a lot.
And this is exactly what these new Ponzi Schemes founders rely on.
They promise huge returns in a very short period of time.
They create a great website, with expensive cars, jets, and mansions promising high ROI (returns on investment).
The problem is that none of these companies have any proof that they are engaged in some trading activity.
And when checking their website, there is no information about who runs the company.
For example, Hyperfund is one of these cryptocurrency scams.
Remember, do your own research first.
Double-check the information and even triple-check it.
It is your hard-earned money. Don’t let any scammer take it from you.
I personally don’t recommend joining any MLM company.
A few exceptions may be:
- Do you love the products? (Avon, Amway, Mary Kay) – not a problem, do it as your hobby. But you won’t make a living.
- Are you great at sales (face to face) and you are OK with bothering your family and friends?
Also, do you handle well rejections?
Then it is probably for you.
But other than that, I don’t recommend this business model. For most people, I wouldn’t even call it a business model.
It is a business model for the founders. But for the rest, it is a model of how to lose money.
Hope you find this article helpful.
Also, I would love to know, do you have personal experience with multi-level marketing companies?
Or a pyramid scheme?
I am sure at least you know someone involved in MLM, either your friend or relative. If you don’t mind, please share the short story below in the comment section below.
These stories are always interesting and I am sure they will help other people to see what are these MLMs all about.
Thank You For Reading
and Have a Nice Day