What is the difference between an MLM and a pyramid scheme?
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There isn’t much of a difference between the two. Some MLM are most definitely pyramid schemes but not all.
So let’s say you have this wonderful product and you want to have infinite growth. In order to break even you have to find just six ~~suckers~~ who are willing to sell the product. So you at the top find six people. But you realize you can turn them into salesman and you promise them if they can find six people to sell this product you’ll let them have commissions on sales… thus increasing your profit. And then those six people find 36 people who in turn find 216 people who in turn find 1296 people who in turn find 7776 people who in turn find 46656 people who in turn find 279936 people who in turn find 1679616 people who in turn find 10077696 people who in turn find 60466176 who in turn find 362797056 who in turn find two billion people…. who then sit at the ABSOLUTE BOTTOM of this pyramid because there would not be enough people on the Earth to be customers anymore.
And that’s the sort of problem with the pyramid scam. With each level you have someone who is taking their cut from someone’s cut until eventually it fizzles out and the amount of money near the bottom is little to nothing. For most pyramid schemes you will hit bottom far before you can get to that 12th level that encompasses the whole planet because ultimately no product (no matter how good it is) can have infinite growth.
**A lot of MLM can turn into a pyramid scheme pretty quickly**. But for a lot of them there’s one simple thing that makes them into a different type of scam. With a pyramid scheme everyone above gets a cut of all the earnings from everyone from below. This is because the pyramid represents the distribution path of the products. A product that will be moved by 4-10 different sellers before hitting a consumer is just not going to do well in terms of profit (except for the guy on top). The non-pyramid scheme MLM will involve the guy on the top (the company) distributing all products and simply giving a cut of the earnings from people lower on the pyramid to people higher on the pyramid…. but only for so many tiers.
In most of these MLMs the seller who is above only really cares about their people finding people. They don’t care about the people their people found finding people. Because the incentives are cut off at the levels it means your incentives are largely to sell products rather than get others to sell them.
Neither of these business models are particularly good for the person doing the business. You’d much rather be at the bottom of an MLM scheme than a pyramid scheme… but it still doesn’t look great.
MLM stands for Multi-Level Marketing, which is a legitimate business model in which a company sells its products or services through a network of independent distributors. Distributors are compensated based on their own sales and the sales of their downline (the distributors they recruit). A pyramid scheme is an illegal business model in which participants pay money to join the scheme and are promised a return on their investment. The money paid by new participants is used to pay off earlier participants, and no real products or services are exchanged. Pyramid schemes are illegal because they are unsustainable and eventually collapse, leaving most participants with nothing.
MLM stands for Multi-Level Marketing, which is a legitimate business model in which a company sells its products or services through a network of independent distributors. Distributors are compensated based on their own sales and the sales of their downline (the distributors they recruit). A pyramid scheme is an illegal business model in which participants pay money to join the scheme and are promised a return on their investment. The money paid by new participants is used to pay off earlier participants, and no real products or services are exchanged. Pyramid schemes are illegal because they are unsustainable and eventually collapse, leaving most participants with nothing.
The presence of a product. That’s it.
In a pyramid scheme people on the bottom pass money up and that’s it. In a MLM the people at the top are selling samples, products, and kits to those below them. Since a product is involved it is not illegal like a pyramid scheme. The money is still being shifted to those at the top.
Those at the bottom can try and sell the products for horribly small profits, or they can try and recruit people to sell their products for them and get a cut, just like a pyramid scheme.
The presence of a product. That’s it.
In a pyramid scheme people on the bottom pass money up and that’s it. In a MLM the people at the top are selling samples, products, and kits to those below them. Since a product is involved it is not illegal like a pyramid scheme. The money is still being shifted to those at the top.
Those at the bottom can try and sell the products for horribly small profits, or they can try and recruit people to sell their products for them and get a cut, just like a pyramid scheme.
A “pyramid scheme” is technically another name for a Ponzi scheme. This is where no goods or services are actually traded. Rather, you take money directly from people, with the promise you’ll give them more money back in the future. Those people in turn recruit others to give them money, and kick some of that money back up the chain. As long as everyone keeps recruiting more people than the layer before them, everyone makes money. But as soon as that stops, the people at the bottom are left having paid a bunch of money and get nothing back.
MLMs are effectively the same thing, but they include goods or services as part of the transaction. Rather than simply asking for money from people directly, you sell them something. Then they try to sell that thing onto more people, and so on. As long as everyone keeps recruiting more people to buy stuff from them, then everyone makes money. But if someone buys a bunch of merchandize to re-sell and then can’t, they’re screwed. This of course can’t continue forever, and in fact it doesn’t for about 98% of participants, who lose everything and are told it’s just because they didn’t work hard enough.
While MLM participants insist the exchange of goods makes it “not a pyramid scheme,” and the law does make it a pretty grey area apart from an actual Ponzi scheme, they are effectively the same thing. But with another whole layer of hustle culture / lifestyle / cult stuff on top of it, so that when the pyramid inevitably fails, people are left thinking it’s their fault and not the fault of the ones at the top of the pyramid.
A “pyramid scheme” is technically another name for a Ponzi scheme. This is where no goods or services are actually traded. Rather, you take money directly from people, with the promise you’ll give them more money back in the future. Those people in turn recruit others to give them money, and kick some of that money back up the chain. As long as everyone keeps recruiting more people than the layer before them, everyone makes money. But as soon as that stops, the people at the bottom are left having paid a bunch of money and get nothing back.
MLMs are effectively the same thing, but they include goods or services as part of the transaction. Rather than simply asking for money from people directly, you sell them something. Then they try to sell that thing onto more people, and so on. As long as everyone keeps recruiting more people to buy stuff from them, then everyone makes money. But if someone buys a bunch of merchandize to re-sell and then can’t, they’re screwed. This of course can’t continue forever, and in fact it doesn’t for about 98% of participants, who lose everything and are told it’s just because they didn’t work hard enough.
While MLM participants insist the exchange of goods makes it “not a pyramid scheme,” and the law does make it a pretty grey area apart from an actual Ponzi scheme, they are effectively the same thing. But with another whole layer of hustle culture / lifestyle / cult stuff on top of it, so that when the pyramid inevitably fails, people are left thinking it’s their fault and not the fault of the ones at the top of the pyramid.
MLM stands for Multi-Level Marketing and is a legitimate business structure where people can earn money by selling products or services. With MLM, the focus is on selling products and services, not recruiting people. MLM companies usually have a solid product or service to offer and they pay their members a commission when they make a sale. A pyramid scheme is an illegal business structure where people are recruited to join the scheme and are promised money or rewards for recruiting other people. The money made by the scheme comes from the money invested by the people recruited, not from selling products or services. Pyramid schemes are illegal because they focus on recruiting people, not on selling products or services.
MLM stands for Multi-Level Marketing and is a legitimate business structure where people can earn money by selling products or services. With MLM, the focus is on selling products and services, not recruiting people. MLM companies usually have a solid product or service to offer and they pay their members a commission when they make a sale. A pyramid scheme is an illegal business structure where people are recruited to join the scheme and are promised money or rewards for recruiting other people. The money made by the scheme comes from the money invested by the people recruited, not from selling products or services. Pyramid schemes are illegal because they focus on recruiting people, not on selling products or services.
It’s a fine line, sometimes,
a pyramid scheme is where ALL or almost all the money a person can earn is by recruiting other people (other sellers), those people recruit others and so on. It’s bad because there is a limit in which no more people will join, it will eventually crash, making everyone loose their money, except those who started in the very beginning.
An MLM, at least in theory, you can make $$ by selling products or services, you may also get money by recruiting other people too, but a person can at least make a profit selling products (e.g: Mary Kay makeup, Avon Cosmetics, etc). A
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