Multilevel Marketing vs. Pyramid Scheme

What is multilevel marketing?

Multilevel marketing is defined by Investopedia as “a tactic used by certain direct sales organisations to encourage their existing distributors to recruit new distributors by paying the existing distributors a share of the sales of their recruits.” A distributor’s downline refers to the recruits. All distributors make money by selling products directly to customers. If you are in multilevel marketing (not to be confused with affiliate marketing), have a look at this company that specialises in network marketing software.

What is a pyramid scheme?

Pyramid schemes, on the other hand, are deceptive scams camouflaged as a multilevel marketing method. The difference between a pyramid scheme and a legal MLM programme is that in a pyramid scheme, no real product is marketed. Participants try to gain money exclusively by bringing in new people to the programme. The promise of sky-high profits in a short period for doing nothing more than turning over your money and convincing others to do the same is the hallmark of these schemes.

Pyramid schemes, unlike MLM, have only one goal

The main distinction between MLM and a pyramid scam is how the business is run. A pyramid scheme’s sole objective is to take your money and then utilise you to recruit more distributors. MLM’s sole objective is to move products. MLM works on the premise that the wider the network of distributors, the more merchandise the company can sell. If you’re unsure whether an opportunity is multilevel marketing or a pyramid scheme, use these questions as a test:

  • Is it necessary to “spend” a substantial sum of money upfront to become a distributor? This investment request may be camouflaged as an inventory charge. MLM enterprises that are legitimate do not require a huge initial investment.
  • Will the corporation purchase back unsold merchandise if you have to pay for inventory? Inventory buy-backs for at least 80% of what you paid are offered and followed by legitimate MLM organisations.
  • Is there any suggestion of a market for the product or service, or any attention devoted to it? The foundation of multilevel marketing is the creation of a market for the company’s products. Don’t join up if the company doesn’t seem to care about consumer demand for its products.
  • Is there a higher priority placed on recruiting than selling the product or service? Remember that the emphasis is the difference between multilevel marketing and a pyramid scheme. The pyramid scam is designed to make quick money by joining people up and taking their money. Run if the goal appears to be centred on recruitment.

The following two questions will assist you in determining the company’s focus:

  • Is the plan set up in such a way that you make more money by recruiting new members rather than making sales on your own? This is a telltale sign that you’re dealing with a pyramid scheme.
  • Are you compensated for bringing in new members? Another trademark of a pyramid scheme. In a pyramid scam, the quantity of people eager to sign up is more important than the items or services are given.