Pyramid Scheme and Multi-Level Marketing: Where is the Success?

Pyramid Scheme and Multi-Level Marketing: Where is the Success?
Pyramid Scheme and Multi-Level Marketing: Where is the Success?

With every passing year, having multiple income streams becomes more and more important. Starting and investing in a business that gives a return on investment is difficult. So, you can understand the allure of an MLM business that requires little to no money and training to start. Depending on the industry, you can work from home part-time. 

According to Statista, Amway, a popular network marketing company, raked in $8.5 billion in 2020. 

Over the past decade, how we sell, market, and manage businesses has evolved courtesy of the internet. Initially, direct selling companies recruited a salesforce that operated more like the Jehovah’s Witnesses – knocking on every door in the street. 

Today, digital solutions exist that help MLM companies run and manage their businesses more efficiently and smoothly. There are software tools designed to meet the needs of a multi-level marketing company in any niche. 

You can use these software to operate your business better and improve your bottom line. Different MLM software have different functionalities that allow your team to pick the best strategy for the best results. 

As you plan on starting an MLM business, do you really know the difference between MLM and pyramid schemes? Here’s a breakdown of the differences between MLM and pyramid schemes.

What is Multilevel Marketing?

What is Multilevel Marketing?

It is a strategy used to sell services and products through a non-salaried workforce within a pyramid-based commission system. Multi-level marketing has layers of non-salaried salespersons (called distributors) that operate independently. Distributors make money in two ways:

  • Commissions from direct product sales
  • Recruiting new distributors to the system

Distributors aren’t paid when a new participant joins the system. However, they receive a percentage from the sales made by their downline distributors. When a distributor forms a large downline team, they no longer have to sell products. Instead, the commissions from the downline team can be sufficient. 

The commission system is designed to motivate existing distributors to build a downline team. Consequently, the company has a large salesforce with access to a large customer base. 

What is a Pyramid Scheme?

A pyramid scheme is an investment opportunity built on a hierarchical design. The new recruits form the bottom of the pyramid and provide funding or returns that are handed over to older recruits higher in the hierarchy.  

The scheme is started by a company or an individual who recruits investors with the promise of big and guaranteed returns. At the start, initial investors receive a big ROI, but these gains are paid for by new people joining the scheme. 

If the investors stop bringing in new people, the returns stop, and the business dies. When this happens, those at the top of the pyramid make money, and the others register losses. 

What is common?

Multi-level marketing and pyramid schemes are similar in their setup. Initial investors/distributors are at the top of the pyramid, while new distributors are at the bottom. Distributors higher in the hierarchy benefit from the earnings of their downline. In both, recruiting new investors and forming a large downline helps you earn more profits.   

What is the difference?

The differences between MLM strategy and pyramid schemes are in their definition. But just in case you missed it, here are the differences split into three categories. 

Structure

Structure

The main idea behind MLM strategy is to promote as many distributors as possible for a product or service and increase the workforce. The distributors get commissions on every product sale, and compensation for sales distributors in their downline make. With this structure, distributors at different levels get commissions from a single sale, and the amount they get depends on the sales volume generated.  

However, for pyramid schemes, new recruits pay money to enroll, and there’s no real product sold. Only a handful of people, usually the old recruits, benefit from the scheme. When the scheme fails, those at the bottom lose their money. 

Legitimacy

The FTC (Federal Trade Commission) has guidelines that help customers discern legitimate schemes from fraudulent ones. According to the FTC, the difference between MLM and pyramid schemes is in these guidelines:

  • Sales of services and products to consumers – MLM sell product and services while pyramid schemes don’t. 
  • Commissions are paid on product sales, not from new recruits. Pyramid schemes are based only on new enrollments, while MLM earns you commissions on product sales and new enrolment.  
  • MLM companies buy back inventory from their members during termination, while pyramid schemes don’t have inventory. 

When MLM is transforming into a pyramid scheme

Some signs the MLM is transforming into a pyramid scheme include:

  • The promoters make big promises on the earning potential
  • Promoters overemphasize that recruiting new investors to your network is the main method of making money. In a legitimate MLM company, you should also make money via direct sales.  
  • Promoters pressure you to seize the opportunity now, or you risk losing it. This tactic is often designed to discourage you from researching the company.  

For pyramid schemes that sell products, distributors purchase more products than they can resell to qualify for rewards and bonuses.

The 70% rule

The FTC examines several factors to help determine if an MLM is a legal business. One factor they consider is the 70% rule. The genesis of the 70% rule (which isn’t a regulation or rule) is an FTC decision made in 1979 when evaluating Amway’s business structure. Eventually, the FTC decided Amway wasn’t an illegal pyramid scheme because of several policies Amway instituted. 

One of the policies was that every distributor had to sell at retail/wholesale 70% of the products bought in the month to get a performance bonus on the products sold. 

The goal of this requirement was to encourage product sales and keep distributors from inventory loading. Although it’s not a rule or regulation by the FTC or the federal government, courts consider it when evaluating MLMs’ structure. 

Conclusion

Before starting an MLM company, find the best software to use. Once you have the best, double down on your online presence using an experienced SEO company like the Lasting Trend Agency.

Read Also: 5 Actionable Tips For Affiliate Marketers

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