File picture: Pixabay
File picture: Pixabay

How to spot the difference between a pyramid scheme and MLM

By Yasmine Jacobs Time of article published Oct 17, 2021

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Hands up if you have gotten a DM promising you an opportunity to have your “own business” because they are looking for “like-minded individuals that are looking for additional income”? Oh and you also get to try the latest products?

You are not alone. Times are tough and while it is tempting to hit the reply button and jump at the chance to be your own boss, it is better to err on the side of caution.

While some of these companies are legitimate, there are people out there that will do whatever it takes to take advantage of those who need to put food on the table.

What is the difference between pyramid scheme and multi-level marketing?

At first, it may be difficult to tell a pyramid scheme from an multi-level marketing (MLM). After all, both have business models that rely on multiple levels of distributors and recruits.

However, there are ways to tell them apart.

A pyramid scheme is a fraudulent system of making money by recruiting an ever-increasing number of so-called ’investors’. The initial promoters recruit investors, who in turn recruit more investors – and so it goes on.

You and your Facebook feed might be familiar with NuSkin, Herbalife and Avon. These are examples of MLMs and they sell products directly to consumers without using intermediary retail stores.

MLMs often sell genuine products (LumiSpa, anyone?), whereas a pyramid scheme usually does not have a product in place.

MLM recruits can make a profit from selling the company’s products as well as recruiting sales people below them.

Another way to spot the difference is the money you are asked to give at the start. If you are required to “invest” a large amount of money up front to become a distributor, it is most likely a pyramid scheme. Legitimate MLM businesses do not require large start up costs.

On this note, be cautious if you have to buy-in to participate. It can be anything from expensive courses, training packs to marketing material.

Don’t sign up if the company doesn't seem to have any interest in consumer demand for its products. Multilevel marketing depends on establishing a market for the company’s products.

It is worth taking note of what the focus is. Is there more emphasis on recruitment or is the focus on actually selling the product or service? Pyramid schemes focus on fast profits from recruiting people and getting their money so if the company concentrates more on the recruitment than selling the product, it might be time to reconsider.

The business model should also be easy to understand. It is a huge red flag if the model is made up of complex commission structures, bonus points and complicated sales targets.

How do MLM and pyramid schemes work?

It is all in the numbers. The success of the business, whether it is a MLM or pyramid scheme depends on the number of people that can be recruited into the network.

Both pyramid schemes and MLMs promise prospective recruits easy money and passive income in exchange for very little work – sounds like the dream life, right? Not exactly.

According to research, 95% of network marketers or multi-level marketing recruits fail and the people that do succeed are in the minority.

Those people that they show in the MLM meetings that were on the verge of losing their house but now own several cars and go on vacation every month? They are the top 2% sales people.

What to check if you want to sign up

If you are still thinking about signing up, here are a few things to investigate or question.

– What is the company’s history and reputation?

– Does the company meet ethical requirements?

– Is there a big demand for the product?

– How much competition is there?

– How much must you invest upfront?

– What happens to unsold inventory? How are you going to exit?

And remember, if it is too good to be true to be true, it probably is.

IOL

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