What is the difference between an MLM and a pyramid scheme?
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The legal distinction is that the MLM ties commissions/payouts to product volume the “distributor” (read, salesperson) sells and to the volume of sales an “upline” (read, sales manager) has in their managed organization. The theory is that, because commissions are from sales volume there will be enough income to cover commissions from the sales margins, instead of just through signups, thus making it sustainable. To the extent that is followed it’s just a complicated commissioned sales gig.
Legally, if the payout is tied to anything else, especially signups or memberships, it is classified as a pyramid scheme and thus illegal. The theory here is that eventually new sign ups dry out and everybody who hasn’t cashed out gets the rug pulled out from under them, not making anything.
In practice, the MLM parent company could be doing everything right but the individual salespeople could cross over into pyramid territory. And once in pyramid territory you can get fast growth (or the illusion of it) that can drive faster. So the incentives to the parent company are to be legally not a pyramid while tolerating a certain amount of pyramid behavior in the organization. Sales managers are similarly incentivized. And the fastest track from salesperson to sales manager is to go pyramid mode without looking like you’re in pyramid mode. Of course, if you get in trouble you’ll be thrown under the bus.
So, for any MLM big enough, there is a pyramid element that will emerge as shady people exploit the opportunity. For any MLM long lived enough there’s enough of a real commissioned sales model that it’s sustainable. How long is “long enough”? Well, nobody really knows the answer to that. Does the theory behind sustainable MLMs pan out? Based on how long Amway has been around on that model I suspect so. But it’s debatable.
So, ethically, I’d put them close to used car sales or payday loans. Regardless of legality, the only thing I can recommend them for is potentially experience in high-intensity sales and managing high turnover sales teams. And there are probably better ways of getting such experience with more understandable commission structures.
(Source: former job working with MLM corporate entities, plus friends who got into various MLM “distributorships”)
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