What is a Pyramid Scheme? Are Multi-Level Marketing Companies the same as Pyramid Schemes? What is the difference between a pyramid scheme and network marketing?
The truth, on the surface, is that they are the same. It doesn’t mean that all opportunities in the network marketing arena are bad. It’s just that they may work for some people, but not others.
The term “Multi-level Marketing, “MLM” and “Network Marketing” all refer to the same thing. The overall business structure is like a pyramid
One other point that I’ll cover again later, is that even legitimate network marketing opportunities often have slim margins on the products or services offered, such that the only way to make moony of any consequence is by recruiting others to work on your “team” (often called the “downline”).
Pyramid Schemes Broken Down
There are actually two types of pyramid schemes:
- A “naked” pyramid. This is one in which there is no product or service offered, just an exchange of cash
- A “product-based” pyramid. Just as it sounds, there is a product or service that is offered via a pyramid-style business model.
In both cases, we often use the term “Multi-Level Marketing” or “MLM” in today’s world. The terms can be used interchangeably.
The Naked Pyramid Scheme
With the Naked Pyramid Scheme, it’s just a matter of recruiting in levels. There is nothing to be had except money – maybe. Here’s an example:
- Mary recruits ten people to her “big plan”.
- They each pay Mary $100
- Now those ten people have to do the same
- If they are successful, they’ll each have a nice profit of $900
The problem is, those ten people would have to each find ten people, and the 100 people would have to find 1,000 people. Well, you can see that eventually its going to crumble and those at the bottom will lose out on their investment
The Product-Based Pyramid
With a product-based pyramid, you have the same concept. Typically, though, it is offered as a direct sales opportunity. This makes it seem enticing and adds legitimacy.
- The company hires a distributor who sells starter kits at $100 to 10 people (new sales people)
- The distributor keeps $10 for each kit sold
- The distributor also gets 10% of product sales by the 10 recruits, including more starter kits
- The recruits are trained that the fastest way to make money isn’t by selling products, but by recruiting more people to buy starter kits
- The people at the top get commissions from everyone in their downline (sometimes called a “team”).
The problem here is that some products don’t always sell very well or have small profit margins. So the best way to make money is by bringing on more recruits.
The market can quickly become saturated when you have too many people trying to sell the same products and there is no one left to recruit, as was evident in this hilarious episode of Schitt’s Creek (this is just the beginning of the episode – look online for the full episode).
In fact, mathematically, pyramid-based businesses won’t work unless someone at the bottom loses. Statistically, 88% of the members on the bottom level will lose their money. [source: Pyramid Scheme Alert]
Multi-Level Marketing vs Pyramid Schemes
Multi-level Marketing, or MLM or network marketing, has been around for well over a hundred years. One of the best known was Tupperware, which started in 1946 with legions of housewives flooding the country selling plasticware at home parties. Truth: We still have some from 50 years ago!
Legitimate MLM’s and Pyramid schemes look the same, in that they are both built using “multiple levels” of distributors and recruits. There are some who claim that even supposedly “legitimate” ones are pyramids in disguise.
The company that lead the way towards legitimacy was Amway when, in 1973, a ruling by the Federal Trade Commission claimed they were not a pyramid scheme. The differences at the time:
- Amway does not pay “distributors” for simply recruiting new salespeople (or participants in the program)
- One makes money by selling products or managing a team of sales people. Managers get a percent of the recruits’ sales
- They do not require the purchase of a starter kit or impose a minimum monthly order amount to remain a member.
Ways To identify Potential Pyramid Schemes
- Money is offered simply for bringing in new sales people. It could be in the form of a recruiting or signing bonus or commission from a starter kit
- Emphasis is put on recruiting salespeople rather than on product or service sales
- There may be a steep start-up cost for joining which could include a membership fee, starter kit or mandatory training
- This could include any MLM which allows more than 5 levels above to get commissions on a single sale.
- Are the products sold offered at a competitive price? (naming names – Pampered Chef comes to mind here with their over-priced kitchen ware)
- Do the products have real value?
- Has the company been involved in any lawsuits?
- If someone is trying to sell you on something by flaunting their fancy cars, yachts or big homes, take caution
- If they say you will receive free sales leads, etc. – it’s likely that the lists are old and out of date
- Be watchful of signing up at high-pressure events, or on websites that make it seem like the clock is ticking.
- Do your homework first.
Can it all go completely wrong? How about a cult? Read about NXIVM, an MLM that became a cult.
So, yes, it can be very bad it you don’t do your homework first.
FREE INSTANT DOWNLOAD: THE PYRAMID SCHEME CHECKLIST
The Bottom Line
I have seen some legitimate networking companies that possess some of the potential pitfalls mentioned above. I want to say that there are plenty of people working with those companies and doing well, so it’s not all bad.
A final note: Anything that sounds too good to be true, probably is. I’ve said it before, there is no way to get rich quick by marketing anything, no matter the method you are using. It takes time, honesty and dedication. Recruiting others into a dead end scheme is no way to make a living that is sustainable.
FREE INSTANT DOWNLOAD: THE PYRAMID SCHEME CHECKLIST
Related Reading:
Thank you for explaining the difference between the MLM and pyramid schemes. Many years ago I joined a company similar to Amway (MLM) and found it to be extremely difficult to depend on the downline activity. It seemed that I could control who I sold to and could get them to purchase the products, but depending on the downline to do their jobs was extremely difficult.
Thank you for explaining the difference between the MLM and pyramid schemes. Many years ago I joined a company similar to Amway (MLM) and found it to be extremely difficult to depend on the downline activity. It seemed that I could control who I sold to and could get them to purchase the products, but depending on the downline to do their jobs was extremely difficult.
I was involved with a MLM company that is product-based, but still a pyramid scheme. The products are great but highly overpriced and I could talk about the unjust system for hours, the requirements you have to meet to get paid a percentage from your downlines are ridiculous. I agree with you that there are some skilled and sometimes honest people working with MLM companies but the system is sick most times. I don’t ever want to be involved in anything like that.
I like your explanation of the pyramid systems. I hope it will an eye-opener for many people.
I’ve heard of the pyramid scheme before and in fact it was a friend of mine you introduced me to it the other day. Very reliable method and you have explained it beautifully here. I would definitely recommend this as a need to know for starting up many type of businesses. Thanks for sharing.
This is very informative. I heard about Pyramid Schemes. Thank goodness I was not involved in one because you will lose your money and might got to jail. It is hard to find an legitimate online company that you can make money online. Thank goodness we found Wealthy Affiliate. There is so many different schemes it makes you weary about doing anything online. Good job.
Thank you for the details here and I think it is really making sense to see out here. Pyramid schemes are too much and they offer bogus claims and all. So, seek g it here really mqies sense and I would value to make the very best use of all I have seen here. Thanks so much for shafi g here with us. Thumbs up to you for sharing
Pyramid schemes are one of the most popular, and most avoided, online business models as it promises a lot of pay reliant on just how many people you can get to work under you or rather you can introduce to whatever company or platform it is you’re marketing. Nevertheless, pyramid schemes are not generally accepted.
So many things have been said about pyramid schemes and MLM generally and I have seen most of them be the program used to get more people to be involved in scam business. I have a clear understanding of what and how the business is operated but with the barrier of recruitment, most people will be reluctant to get into any business in this format.
Its really good to be able to read through a very helpful article like this in a very long time, many online users don’t understand what pyramid scheme really means and they can’t differentiate between products, this makes it really hard for them to make right decisions about online businesses. This article will sensitize them about pyramid scheme and all its about.
I really like the approach you took here.
And the distinction between the pyramid scheme and MLM is paramount. Because people tend to confuse the two of them. A pyramid scheme is a money pitfall, many people have lost thousands of dollars. And I am glad that your post has underlined the main characteristics of pyramid schemes. And hopefully, people will read your post and understand why they need to stay away from such business.
Thanks
Hi,
From my online findings about pyramid schemes dissected pyramid schemes and networking schemes have many similar characteristics based around the same concept, unsuspecting individuals get fooled by unscrupulous investors who promise them extraordinary returns in exchange for their money. Ponzi and networking schemes are self sustaining so far the cash outflows can be matched by monetary inflows. The basic differences arise in the type of products that schemers offer their clients and the structure of the two ploys, but both can be devastating if broken down.
Thank you.
Aluko.
There’s a lot of talk about pyramid schemes, but I’ve never thought about the details of these systems – I’m just aware that they need to be avoided.
You described these two options of the pyramid system perfectly and how they work. Thanks also for the link The pyramid system checklist – great guideline. Avoiding schemes and scams can really be challenging. That’s why it’s always a good idea to inquire about each business and background before you join the system.
This is exactly what people everywhere need to read in order to make more sense of it all. I’ve never cared for the MLM model, but I do know there are some respectable opportunities out there that run that way. You mentioned Amway and Tupperware, which are probably the best two examples. The trouble is that you really have to look closely at them all to determine which ones are good and which ones are full of it. You have a great list of ways to identify them and I think it’s the best piece I’ve ever seen written on the subject. I’m definitely going to pass this one along. Unfortunately, you really can’t blame people for not wanting to have to look so deeply into something before getting involved, because it’s a lot to look at and a lot to scrutinize. It just seems like too much trouble for most people and that’s why it’s easier for them to just write all these opportunities off as scams and avoid them whenever possible. Such are the times we live in, I suppose.