MLM vs Pyramid Schemes – What’s the difference between the two? And can you make money on multilevel marketing?
This review tries to answer these (and other related) questions. Also, I try to make your choosing easier. Please read through the review to see whether joining an MLM company is worth your time and money.
Let’s start with MLM.
What Is MLM Definition?
Multi-level Marketing (MLM) is a controversial marketing strategy where goods and services are sold through a network of distributors. Typically, members of a MLM company can make money from two (theoretical) revenue streams:
- You can earn commissions by selling the company’s products and services
- You can earn commissions by recruiting new members and leveraging the MLM company’s pyramid-style commission system (more on that later)
Why is Multilevel Marketing controversial? Please keep reading and you will see.
But first, the Terms:
- Multi-level Marketing is also called “MLM,” “network marketing“, “referral marketing“, “direct selling,” and “pyramid selling,” “relationship marketing,” etc.
- Distributors are sometimes called “consultants,” “promoters,” “independent business owners,” “salespeople,” etc.
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How Does MLM Work
Probably you already have that experience. Because they are everywhere.
They are in Facebook, in your workplace, even in your local church… They come to you with a well-crafted sales pitch, attempting to persuade you into buying some all-natural shampoo, cosmetics or an awesome new food supplement.
If you did not know, they are distributors of some MLM companies like Avon, Amway, or Herbalife.
How do these Multi-level Marketing companies work and why are their distributors so annoying?
Here’s how (and why):
MLM companies sell their products and services through distributors. Mostly, these distributors are private people who are trying to make some extra income.
To illustrate it, let’s assume that you decide to join some MLM company as a distributor. Then there are two options for you to make income:
First, you can start selling its products and earning a commission from each sale.
Second, you can earn commissions by recruiting new distributors and receiving small portions from their income.
Not only that. If these distributors (recruited by you) in turn recruit new distributors, you will receive a small portion of their income as well. And so on and on.
All these members who sign up under you in the recruitment chain are called your downlines. And whoever is above you in that chain (including the one who originally recruited you) are called your uplines.
As you can see from the image, all downlines are beneficial to you. The harder they work (the more products they sell and the more new distributors they recruit) the more money you will make.
Also, the harder you work, the more money will make your uplines.
That’s why this type of companies are called MLMs – all their distributors stand in different levels. It’s not hard to see that there are way more lower level members than those on the upper levels. In the same way, it’s not hard to see where the real money moves…
Money rolls from lower levels to the upper ones, right?
And this is the reason why all these distributors of shampoos, essential oils, and food supplements are so annoying. It’s not only about selling you a shampoo. It’s about growing their downline tribe – recruiting you to join their “club.” Then getting a cut of money you make.
What Is a Pyramid Scheme Definition
Pyramid schemes are similar to Multi-level Marketing systems. But while MLM is considered legal, pyramid schemes are illegal.
The big trouble with pyramid schemes is that they don’t offer any meaningful products or services. Their business model is built on making money through recruiting new members.
When you join a pyramid scheme, the way you can make money with them is to lure unaware people into joining the system, then pressure them to do the same for others.
To be honest, pyramid schemes use the same recruiting system as MLMs – You earn commissions from your downlines while your uplines take portions from your income.
What about the products and services?
Some pyramid schemes don’t have them at all. Others have but, remember this: The main focus of pyramid schemes is NOT on selling products (it is on recruiting). Plus, even if they have those products, these are mostly low value products, which they pressure you to buy (the more you lose, the more they win).
A good example here is Empower Network. They have some extremely expensive information products but when you look closer, you will discover, there are no products at all. They are selling you nothing but hope and thin air. Look yourself (here, here, and here).
Often MLMs even have high startup costs. You are required to pay them (or buy some crap information product) in order to start making money with them.
I’ve Seen A Lot Of Work-from-Home Opportunities And NOTHING Comes Close To This One.
As Soon As You Look Closer, You’ll See Why.
MLM vs Pyramid Schemes
So what’s the difference between the two?
Read the following and see if you notice the difference:
…MLM companies prioritize selling products and services over recruiting new distributors. Pyramid schemes, however, prioritize recruiting new members over selling products and services.
Did you notice the difference between the two? If not, please read again.
See! That’s the very reason why MLM is such a controversial business model. The truth is MLM and pyramid schemes overlap each other a lot and it is very difficult to draw a red line and say – this legal and this is illegal… This is legit MLM business and this is illegal pyramid scheme:
And that’s the reason why it is so confusing and why these two names (MLM and pyramid schemes) are often used interchangeably.
That’s also the reason why some of the biggest MLM companies in the world (USANA Health Sciences, Amway, Herbalife, Nu Skin Enterprises, and Mary Kay) have been accused of being pyramid schemes. And yes, often convicted as well. Herbalife, for example had to pay $15 million to settle a lawsuit against it.
The truth is, the polices of most MLM companies are highly questionable and way too similar to illegal pyramid schemes.
Therefore, don’t be fooled by the happy talk of Multi-level Marketing companies and their distributors.
Can You Make Money With MLM?
When you see all these glossy magazines of different MLM companies, featuring their top earners, luxury vacations, conferences, etc., you might be tempted into thinking that this is your opportunity of lifetime.
After all, when all these ordinary men and women could do that (and are swimming in money now), perhaps you could as well.
If that seems like you, beware this:
The chances of becoming rich (or, in fact, making any money) through MLM companies are remote.
Because, according the official statistics, something like 99.92% of all MLM distributors lose money. It means, out of 1000 people only 8 will succeed. Everybody else, the staggering 992 poor souls end in red. How sad!
This is because, as I mentioned above, all these systems are designed the way to roll money from lower levels to the upper ones. Therefore, the whole system is rigged against you.
MLM and Pyramid Schemes cause rapid market saturation.There is another huge problem with all MLM and pyramid schemes. There are simply not enough people to make every distributor happy.
Because the growth of the army of distributors is exponential.
Let me illustrate it.
Let’s assume a new MLM company comes to your home town (say it is a big city with a 1 million population).
The representative of the MLM company hires 2 distributors in that city. These 2 distributors hire another 2 new distributors each. And so on and on. As you can see in the image on the right, after only 19 levels you have run out of people in the city. There simply are no people left in the city.
Even worse! Out of these 1,000,000 members, over 500,000 are sitting on the lowest level. It means, they have absolutely nobody to recruit or sell the products. And thus they are left with no chance to make any money within the system.
Next, on the level 18 there are 262,144 people where each member has only 2 recruits. And on the level 17 there 131,072 people where each member have 4 recruits each.
Consider this: Just these last 3 levels (level 17, 18, and 19) make a whopping 917,504 people out of 1 million members!!!
Yet these 917,504 people cannot make any money.
As a result, the business stops and big majority of its members are left frustrated.
So how do MLM companies tackle it? After all, they cannot print more people, can they?
To solve the problem, MLM businesses rebrand themselves into new companies (just the same way how typical scams do). For example, Amway alone has used over 20 different brand names. Nu Skin has used brand names like Pharmanex, Photomax, Big Planet, etc.
How does this rebranding help them?
Simple. It allows them target the same people they had already screwed over (did you remember, 99% of all MLM distributors lose money in the multi-level marketing business?) When these failed distributors see a new brand, they think that this is a new opportunity to get rich quick.
Why Are MLM Companies Called Cults
Finally, this is another serious problem connected to Multilevel Marketing companies.
As you understand, multilevel marketing involves direct selling – one person approaches another and delivers his/her sales pitch. It’s obvious that the more friendly and supportive you are, the more you can sell.
That’s why Multilevel marketing is sometimes called relationship marketing. You build strong relationships. First, to sell the prospect a shampoo or a food supplement. Second, to recruit him. Third, to train and motivate him to sell products and recruit others.
So you see, relationships in pyramid shaped companies mean everything. Everybody is creating and building relationships. Upliners build relationships with you. You build relationships with your downliners.
Eventually it becomes something like a huge family or ant colony. All your friends are there, your business partners are there, your income stream is there…
When you one day choose to leave the system, you will discover two things:
First, it will be very difficult to cut off all these relationships. And that’s probably the reason why people often choose rather lose money (in MLM vast majority lose money) than leave the system.
[Sidebar: In fact, I have been in one such system. I have first-hand experience on what that means. I can tell – a lot of tears and hurted/broken relationships. I can tell you, I don’t want to go through all this again. However, I am happy I decided to break out from that evil system and I have never regretted it.]
Second, they don’t want you to leave. They will begin to harass you and make your life hell to say the least. It’s exactly like in typical cults.
After doing my research (and having a personal experience with one of them) I state my conviction: MLM is not worth your time and money.
First, because Multi-level Marketing is too similar to illegal pyramid schemes.
Second, because your main income will come from recruiting others and teaching to do the same to others.
Third, if the company sells products, most probably you will end up spending tons of money buying these products and being unable to sell them. And remember, the company won’t buy them back.
Fourth, the chance to make money with MLM companies are nanoscopic – Beware: over 99% of all MLM distributors lose money in the business.
Better Alternative to MLM Business, Which Is Uniquely Yours
Whatever the reason might be why you want to make money online…
…Be it your financial freedom.. or more quality time with your kids and spouse.. or security in old age.. desire to travel the world.. more time for your hobbies or sports.. Or just to help you pay your bills, bless your grandchildren (if you have them), etc.
You know the “why.” I can only confirm and encourage you – YES! It is absolutely possible to make side money (or even a second income) online. AND it is possible to do it WITHOUT getting involved in high-risk MLM/pyramid schemes and other scams that deceive you into a major disaster.
Here is, in my humble opinion, by far the most complete and newbie friendly program for creating a thriving internet business from home.
What About You?
First, thank you for taking time and reading my review. I hope you found the information that you were searching for.
Now, what are your thoughts on MLM vs Pyramid schemes? Can you make money with Multilevel Marketing and would you recommend it to others? Please drop me a comment below and I will respond.