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 choice easier. Please read through the review to see whether joining an MLM company is worth your time and money.
Let’s start with MLM.
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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 an 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.
How Does MLM Work
Probably you already have the MLM experience because these companies lure you everywhere.
They are on Facebook, in your workplace, even in your local church. They come to you with well-crafted sales pitches, attempting to persuade you into buying some all-natural shampoo, cosmetics, or an excellent 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 those members above you in that chain (including the one who initially recruited you) are called your uplines.
As you can see from the image, all downlines are beneficial to you. The harder they work (i.e., 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 company is called an MLM – all their distributors stand at different levels. It’s not hard to see that there are way lower-level members than those on the upper levels. In the same way, it’s not hard to know where the real money moves.
Yes, you are right. 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 the money you make.
What if I could show you a real system you can use to put $1,200+ per month into your account, working from the comfort of your home…
…Would you be interested?
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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.
Why so?
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 by 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 the 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) to start making money with them.
Finding out more costs nothing. And you’re not committing to anything else.
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 challenging to draw a red line and say, “This legal and this is illegal… This is a legit MLM business, and this is an illegal pyramid scheme.” In a chart, it would be like this:
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 policies 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 a lifetime.
After all, if all these tens of thousands of ordinary people can do that, perhaps you could do it as well.
If that seems like you, beware this:
The chances of becoming wealthy (or frankly, making any money) through MLM companies are exceptionally remote.
Why?
Because, according to the official statistics, something like 99.92% of all MLM distributors loses money. It means, out of 1000 people, only eight will succeed! Can you imagine! Everybody else, the staggering 992 poor souls end in red. How sad!
This situation happens because, as I mentioned above, all these systems are designed so that money rolls from lower levels to the upper ones. Therefore, the whole system is rigged against you.
Market Saturation
MLM and Pyramid Schemes cause rapid market saturation. There is another huge problem with all MLM and pyramid schemes. There are not enough people to make every distributor happy.
Why so?
Because the growth of the army of distributors is exponential.
Let me illustrate it.
Let’s assume a specific MLM company starts a business in your home town (say it is a city with a population of about 1 million people).
The very first member of that MLM company recruits two new distributors in that city. And these two new distributors recruit another two 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 that city. There simply are no people left in the town.
Even worse! Out of these 1,000,000 members, over 500,000 are sitting at the lowest level. It means they have nobody to recruit or sell the products. Every single citizen is already a member of that MLM company. And thus, these 500,000 people on the lowest level have zero chance to make any money within the system. And they constitute half of the population of that city.
Not only that. On level 18, there are 262,144 people – this is over a quarter of the city population. So a quarter of the population has only two recruits each.
On level 17, there are 131,072 people. Each and every one of them has only four recruits.
Now consider this: Just these last three levels (levels 17, 18, and 19) make a whopping 917,504 people out of 1 million members (91.7%)!!!
Yet these 917,504 people cannot make any money.
As a result, the MLM business stops, and a huge majority of its members are left frustrated.
So how do MLM companies tackle it? After all, they cannot print more people, can they?
So MLM companies solve this crucial problem? Well, they rebrand themselves into new companies (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 the companies to target the same people they had already screwed over. Did you remember, over 99% of all MLM distributors lose money in the multi-level marketing business? When these thousands of failed distributors see a new brand, they think that this is another unique 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 evident 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. How? First, you find a prospect and sell him a shampoo or a food supplement. Second, you recruit him. Third, you train and motivate him to do the same to others (i.e., sell, recruit, train).
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. And the money keeps flowing from the bottom to the top.
Eventually, it becomes something like a vast family or ant colony. All your friends are there; your business partners are there, and your income stream is there as well.
What happens when one day you choose to leave the system?
If that day comes, you will discover two things:
First, it will be extremely complicated 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. So I have the first-hand experience of what that means. I can tell – a lot of tears, hurt, and broken relationships. I can say to you; I don’t want to go through all this again. However, I am happy I decided to break out from that corrupt 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.
Final Verdict
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.
Why?
First, it is because Multi-level Marketing is too close to illegal pyramid schemes.
Second, it is because your primary 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 repurchase them.
Fourth, the chance to make money with MLM companies are nanoscopic – Beware: over 99% of all MLM distributors lose money in the business.
Imagine for looking for legit work-from-home opportunities and finding THIS when you go inside… WOW
Yes, the raw, sizzling beauty of passive income stream online… Look closer now. Because sometimes ‘later’ becomes ‘never .‘
What About You?
First, thank you for taking the 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.
Stay safe!
Egon
ARE YOU looking for ways to create a legit passive income online?
Excellent Article.
I too have had my share with non success with some MLM companies (I will say much had to do with life situations at the time that made it difficult to concentrate on building) One particular one I did not have success with and was so broad that I did see a lot more struggling than I did successful. One other one I did (which was selling jewelry) I actually did quite well with. They actually are very much about the product, and yes there is incentives for recruiting other jewelers, however the biggest incentive is by the value of the customer (hostesses).
It is similar to having a Tupperware party; though I believe the women have a lot more fun with the jewelry than with the food ware items (may just be my opinion). It is very client-based and that is why you do see jewelers actually making more money than their up-line because it’s the effort they put into pulling a great party together and the amount of bonuses offered to the hostesses and free prizes you give during the party.
You get 50% of sales from the get go; that is why I have personally at times made $3000 one month and my sponsor made under $1000 (and that’s including the 10% the company pays her from my sales (she didn’t take from me) and vice versa (I had not such a good month and she had a great month).
Unfortunately that is why (for me) I didn’t continue because it was too inconsistent (however that is on me as well because I just didn’t want to keep looking for new hostesses and trying to always come up with new ideas and so forth).
So You may be wondering why than did I go on about this; it is because I want to point out that there are MLM companies that you can actually make a good passive income from or part-time to full-time income from and MLM companies that are very difficult to see profits from.
For myself personally, that is why I prefer affiliate marketing. I create a website and promote products and receive a commission on it, yet with any affiliate program you do also receive commission for recruiting other affiliates to that program as well – buts whats nice is that even if you don’t, the commissions you receive from recommending products can bring a nice passive income, especially if they are high-end products.
For me the best type of programs are ones that let you see their system and try out free first (whether a free trial, etc.). I will say the opportunity you mention here is a very attractive one, and for the reason I mentioned, is because they actually let you have a free membership with some training, and I noticed they didn’t have constant up sells (something I can’t stand).
With that being said, I do like the sound of the opportunity you mention, but I did want to put in a fair opinion about my experience with MLMs as well. I honestly think that if someone is part of an MLM and they are promoting products, they would be more successful in presenting it, almost in an affiliate way, They should create their OWN website, separate from the MLM website they may receive, and work on branding themselves, make some YouTube videos and get a following.
That way I believe they honestly will see more profits and success.
Thank you for your article,
Robert
Hey, Robert, and thank you for the detailed and insightful comment. I appreciate it a lot. Also, thank you for your encouraging words. I am glad to hear you found my post helpful.
As for MLM then yes, there those businesses that have higher ethical and business standards… And there are those which are, in fact, just pyramid schemes. And I emphasized in the article, the distinctive line between MLM and pyramids is not clear at all.
In both cases it also true that money flows from lower levels to the upper ones. That’s why people on the top levels make killings while a huge majority of their members sit on the two lowest levels and are destined to lose money. That’s how MLM and pyramids are designed in the first place.
But yes, you are right. In both cases (MLM and pyramids) if one diligent and determined to succeed, he or she can succeed. And I personally know many people who have joined an MLM and they mostly earn some side money by selling its products (shampoo, perfume, etc.)
As for my #1 recommendation, then yes… It is free to get started. It means, everybody can try it out and see if it can help him.
What I liked about it (when I started) was:
1. I could choose whatever niche I wanted (in other words, I could follow my passion). I was not forced into a niche that I did not like.
2. It has a free starter membership so there were no obligations for me. If I did not like it… Well, just drop it and that’s it (Hey, I am still a member).
3. When I started I was a complete dummy in that make-money-online thing. I knew nothing about it. So I liked very much how their training was systematized – very simple steps, easy to understand and easy to follow.
4. Plus, very practical. Tasks after every lesson. Simply brilliant. You learn, you practice. You learn, you practice.
5. Their support system is excellent and crucial. Because if you happen to be a complete novice like I was… Well, you get stuck and you have so many questions. And that’s why an excellent support system is a must. And they have it.
All these things (and many more) combined is the reason why I enjoy being there. If anybody is interested, here’s how you can get started.
Cheers,
Egon
1) Where is Koscot or “Amway protection”–the infamous FTC vs Amway (1979) decision and three Rules, which serve the grounds to deemed MLM legality–(1) at least 70% of goods should be retailed to end clients (non-participants); (2) every participant should have at least 10 customers; and (3) the company, I wonder?
2) Nowadays these Rules are neither supervised, nor enforced; rendering MLMs as mere motivation pyramids in pyramid schemes for doing biz on its participants–the ‘independent’ wannabe businessmen.
3) In the real life (let alone MLM), there’s no ‘infinity’ of people or resources; yet MLM is but a funny lottery with preplanned ‘winners’ and puny ‘losers’.
4) While even overpriced (with 5+ level overrides built into the prices) quality goods have nothing to do with the legality, but the MOTIVE for buying goods is the cornerstone making the difference.
5) Lack of retailing makes MLM a closed market fraud:
In a closed room (no external/retail income) ten participants sequentially (after a ‘marketing plan’) pay $100, totaling 10X$100=$1000. Now in the same order they try to take MORE than invested… Do the math.
No wonder in every MLM some TOP 5% participants get over 80% gross.
MLM ≠ Direct Sales (no ultimate clients!)
MLM = Pyramid Scheme + Fake Goods/Services
Hey Jack, and thank you for your thorough, detailed feedback.
It explains so well. I agree with you. MLM is essentially a Pyramid scheme + some fake goods or services. Agree.
Recently I bumped into a (otherwise a nice) person who tried to sell me some MLM. I had time and so decided to listen her and see where she was heading. She quickly took her pencil and a piece of paper and I was amazed how “trained” she was in explaining all these “levels” and “earning opportunities” and how “after a couple of months I can bag thousands of dollars…”
I know – these new innocent and inexperienced people pay the entrance fee and become members of whatever MLM they were told to join. The Next step – a training where they are told that they have just joined the best money-opportunity on Earth. And after that… they are sent out to recruit new members. And only then the reality hits hard – the whole thing does not work. Nobody wants their “best money opportunity.”
Why? Because it is a pyramid.
There are much better, and safer, ways to create one’s own passive income stream online. One of those is here. In my humble opinion, a way better opportunity. And it want cost you a cent to see if it works for you or not.
Hi, I find that this article starts off ok, and that you provide some accurate descriptions of the business models used by MLMs vs PS. I am with you up until the graphic of the overlapping circles. You are spot on. Then things go badly from that point. We Learn of your personal bias resulting from your disappointing experience , and your tone becomes understandable. Your Market Saturation theory is flawed in that there is no finite number of potential customers. Your point that the majority of people do not succeed as they expect to is also accurate, however it is not due to limited customer opportunities, it is due to lack of effort, misdirected efforts (doing lots of non-income producing activities), lack of training, lack of personal development, and/or misunderstanding the work requirements either due to being misled by your upline, or just not having a basic understanding of business concepts. I also had a disappointing experience with MLM, but it was because I gave up, and it wasn’t a good fit for me. Doesn’t mean all MLMs are “evil”. Oh, and a note about credibility- yours- I don’t know your educational or experiential background. Here’s mine- BA Economics, MBA, 20 year operator of a small business income tax preparation business, and I have two years of experience developing business plans for financing. I owned and operated a restaurant for 5 years. My point is- I know what I am talking about. The information that you did not provide is that MLMs give you the opportunity to make real income if you are smart, seek and complete training and personal development, and don’t give up when it gets tough- and it will get tough- for relatively low start-up (compared to say a restaurant). You have to do due diligence, your investment is at risk, you may lose money- but the opportunity is there for you if you can succeed.
Hey, Christine, and thank you very much for your detailed comment and feedback. I appreciate it.
I also want to apologize for my late response. I did not expect to get that long vacation this year but I got it. That’s why the delay.
Now, coming to the topic… Well, I completely agree with you, Christine, “the opportunity is there for you if you can succeed.” I rechecked my review and – I never told in my review that it’s not possible to make money with MLM. Of course it is. I even showed that it’s possible to make even moolah… If you are diligent, of course, and have proper training, personal development and/or understanding the work requirements (like you wrote).
If you have all that then yes, you can succeed.
But (as much as I know) those MLM people who have become wealthy, have not become wealthy by selling shampoo (or whatever products their mother companies make). They get wealthy by recruiting others. Because the trick is to make other people to work for you.
And here it is mathematically impossible that out of let say 1,000,000 members (even if all of them are diligent, etc.) that all 1,000,000 members get wealthy. No. mathematically, out of 1,000,000 members 917,000 only lose money (and I showed why).
Because of those 917,000 money losing members a handful of diligent, smart… members can enjoy extreme wealth. And that’s one of the reasons I did not recommend MLM for the Average Joe/Jane.
But thank you again for your comment ma’am. It definitely adds some extra flavor to the review and helps my readers get a better picture.
God bless you,
Egon
Hey Egon!
I’ve seen many of these MLM’s you talk about online. They promise you the big bucks but you always have to put money upfront, and that has always pulled me back.
Some MLM’s I’ve checked make sense, and they have nice products, but in the end people are going to be more focused on recruiting since that’s more lucrative.
Thanks for the thorough information on these type of online business.
Cheers!
Hi, Israel,
Thank you for the feedback. I appreciate it a lot.
I’ve personally involved in one of the MLMs and, to tell the truth, failed to make any money with it. And yes, I too had to put money upfront to begin with. Needless to say, I lost it.
My family still uses some of the products from these companies. These products are fine – no bad word against them. Saying that though, it does not mean that when one joins MLM, he/she will start making Big Bucks (or any money at all). As I showed in the article above, the numbers are heavily against such outcome.
It would be much better (and more beneficial) to learn how to build up a personal passive income online. Here’s my #1 preference. I personally use it since 2013 and am very satisfied. Look closer and you’ll see why.
Thank you again, Israel.
God bless you :)
Egon
Anybody can use an income supplement and most people don’t know that they can build most companies without buying the product themselves. What most people don’t get is that, if you simply use patience and don’t go too hard on the spending, you will end up supplementing your income with sometimes hundreds of dollars in a month. People you call suckers are the one making money and yes they are in the green. So before you listen to this article bashing mlm, visit my website.
Thank you for the comment, Frank. I appreciate your thoughts. As I wrote, it’s possible to make money within MLM systems. However, the chances for doing that are remote. It’s mathematically proven that big majority of MLM members will lose money.
Also, the truth is that nobody can draw a clear line between MLM and pyramid schemes. That’s why even the biggest (and most respected) MLM companies get accused of being pyramid schemes. For Example, Nu Skin Entreprises paid $85,000 when it was sued by the attorney general Pennsylvania.
In 2010, Amway had a class-action lawsuit against it. As a result, they paid $34 million in cash and change its business model.
There are more examples like these. What I want to emphasize, though, is that MLM and pyramid schemes are way too similar to draw a clear line between these two. And while MLM is a legit business opportunity, the truth is (as shown in the article above), the big majority of its members earn nothing. That’s the fact.
That’s why this opportunity here is much better (and safer) option.
God bless you, sir,
Egon