They all sound the same to me!
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A Ponzi scheme is where you invest money with a fund manager who is supposed to invest the money for you, but instead pays out clients with other clients money. Eventually they will run out.
A Pyramid scheme is conceptually similar to a Ponzi scheme, except that all of the investors are directly taking part and should know what’s going on.
MLM will have an underlying business to it besides just moving money. Usually this involves selling some product. You will pay a fee to someone to become a sales agent, and then you can start selling the company’s products. Also you can sign up additional agents and collect fees from them. With an MLM usually the actual product you’re trying to sell is garbage, and the majority of the money in the business is from joining fees. This makes it very similar to the pyramid scheme but is obscured slightly by the fact that each participant also gets a box of beauty products or similar that they generally fail to sell
Ponzi Scheme: Take money from investors promising massive returns. Instead of getting those returns pay the investors back with their own money telling them it is the massive profits you promised. Siphon off some of the invested money for personal use until the whole thing collapses (a flow of new investors can perpetuate the scheme for a time).
Pyramid Scheme: An “investment” scheme that depends on recruiting new “investors”. Profits do not come from investment but from new lower tier recruits. Each tier the number of investors increases and passes their money up the chain towards the top of the pyramid. This process of course cannot be sustained forever and the lower tiers will be left at a loss.
MLM: Multi-Level-Marketing is a business arranged in levels or “tiers”. New members are pitched the idea that they can sell a product directly to consumers instead of a retail store, paying a percentage of the profits to the company itself. But also they are given the option of recruiting new members themselves to work for them with a similar deal; sell the product and pay a percentage of those profits to whoever recruited them, who then keeps some while passing another percentage on to the company. The dream pitched is that someone can eventually not sell products themselves but live just off the profits of people they recruited and anyone *those* people recruited, etc.
An MLM can easily also be a pyramid scheme when there is no real product, or predatory practices generate money from new recruits instead of new sales. Things like charging for “training” or inspirational classes, mandatory minimum inventory purchases, and the like are all signs an MLM is a pyramid scheme.
Ponzi: I get ten people to invest $100 each. A week later, I tell them that their investment is now worth $150, and that it will be worth even more if they leave it in their account. I also tell them that they can invest up to another $200. Maybe one wants out, and I pay him $150 out of the new $200 investments. Repeat as long as I can get away with it, paying anyone who wants out with money from new investors, and living like a rich person to show how successful the “investment” scheme is.
Pyramid: I get ten people to each pay me $10 to join my organization. They are told to each recruit ten people, charge them $10, and send me $5 of it. Each of those people is told to recruit another ten, charge them $10, and send $5 to the guy who recruited them, while that person sends $2.50 to me. Repeat until nobody falls for it any more, then leave town. (They’ll stop falling for it pretty fast, because the third level needs to have 1000 people in it, and the one after that needs 10,000. Usually shortly after level 2 somebody notices that everybody they know is already in the pyramid.)
MLM: Sort of like the pyramid, but your $10 buys you a set of products that you can sell for a small profit, and you can keep buying and selling more products. You *can* make money by selling products, so that makes it legal, but it’s more profitable (and strongly encouraged) to recruit others to sell products, because part of their profits go to you, which makes it shady, but still legal.
A MLM and a Pyramid scheme are often the same. Strictly speaking the difference is the exitances of a “real” product in an MLM but not in a Pyramid scheme.
In a classic Pyramid scheme the only real revenue comes from bringing new people into the system. There’s no such thing as a pure customer (someone who just buys product). Normally the entire focus of the system is in exclusively recruiting other people to sell the product, not ever selling the product to customers. Most often the new sales person is convinced to buy a “demo kit” or starter kit that’s filled with product for them to sell to “customers”. In reality the vast majority of the companies’ sales are these starter kits, rarely or ever individual products sold to individual customers. It’s important to note, a Pyramid scheme is not a crime, it’s just a shitty product and a bad value to anyone who gets involved. But not a crime.
MLMs do A LOT of this and this is where the confusion comes from. but in a traditional MLM there’s an actual real product being sold that some people want just for the sake of it being a good product. The best money is made by recruiting other sales people, but there are also real actual customers that exist. MLM products might not always be the best value products, or the best products in their class but the products are real and have actual value. The original Tupperware is an excellent example, it really was an innovative product that people used and liked. Unlike a pyramid scheme, the product in an MLM is often acceptably good, but like a pyramid scheme, it’s not a crime.
A Ponzi Scheme is a separate thing, it’s a fraud, a crime. There’s no real products being sold here, it’s basically taking people’s investment money and keeping it for yourself rather than investing it. You tell them you are investing it though. When old investors stat to want to see returns on their investments, you just take that money from new investors and give it to old investors and say “see, you did make money, why don’t you reinvest it with me again!” then they do, and you keep it.
A ponzi scheme is never a permanent thing, it’s always going to come tumbling down eventually. It’s inherently unstable and the moment you can’t get a “new” investor there’s suddenly no cash to give the old investors as a return and the whole thing crumbles.
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