The Difference Between MLM and Pyramid Schemes

Multilevel Marketing (MLM) and Pyramid Schemes Can Be Very Similar

Image shows a woman examining a large pyramid with money on the bottom, people in the middle, and fliers at the top. Text reads: "how to recognize a pyramid scheme: no inventory buy-backs, large start-up costs, an emphasis on recruitment rather than sales, no interest in consumer demand or market research"

Image by Ashley Nicole DeLeon Â© The Balance 2019

Considering a multilevel marketing opportunity (MLM)? Be careful. It may well be a legitimate multilevel marketing business. Or it may be a pyramid scheme - an illegal scam designed to steal your money. This article explains the difference between MLM and pyramid schemes so you can distinguish between them.

Multilevel Marketing Can Be a Good Thing

Multilevel marketing (MLM) is an attractive business proposition to many people. It offers the opportunity to become involved in a system for distributing products to consumers. Unlike the person starting a business from scratch, the MLM participant has the support of a direct selling company that supplies the products and sometimes offers training as well.

How MLM Works

As a MLM consultant or contractor or distributor (different companies call them different things) you make your money by selling the products to other multilevel marketing participants. If they're not already a member of your MLM company, you sign them up.

Besides earning money off your own sales, you also earn a percentage of the income generated by the distributors that you've brought into the program (these are known as your downline). Often there are bonuses for selling particular amounts of product or signing up a certain number of new members; you can earn cars and trips as well as cash. Sounds good, doesn't it? And being part of a well-run MLM business can be a lot like being a member of a large extended family.

Pyramid Schemes

Unfortunately, not every multilevel marketing opportunity is a legitimate business opportunity. Many pyramid schemes, frauds designed to part the unwary from their money, are disguised.

Like multilevel marketing, pyramid schemes depend on recruiting people to become distributors of a product or service. Like MLM, the pyramid scheme offers the opportunity to make money by signing up more recruits and by accomplishing certain levels of achievement.

The big difference between multilevel marketing and pyramid schemes is that MLM is legal in Canada (and most of the US) and pyramid schemes aren't. Participating in a pyramid scheme is an offense under the Criminal Code of Canada, punishable by up to five years imprisonment.

But it can be very difficult for the person looking for a business opportunity to tell the difference between a legitimate MLM opportunity and a pyramid scheme at a glance. How do you tell whether it's a legitimate business opportunity or a scam?

Unlike MLM, Pyramid Schemes Have Only One Purpose

The big difference between MLM and a pyramid scheme is in the way the business operates. The entire purpose of a pyramid scheme is to get your money and then use you to recruit other suckers (ahem - distributors).

The entire purpose of MLM is to move product. The theory behind MLM is that the larger the network of distributors, the more product the business will be able to sell.

Use these questions as an acid test if you're in the least doubt as to whether the opportunity you're considering is multilevel marketing or a pyramid scheme:

Checklist for Recognizing a Pyramid Scheme

  • Are you required to "invest" a large amount of money up front to become a distributor? This investment request may be disguised as an inventory charge. Legitimate MLM businesses do not require large start up costs.
  • If you do have to pay for inventory, will the company buy back unsold inventory? Legitimate MLM companies will offer and stick to inventory buy-backs for at least 80% of what you paid.
  • Is there any mention of or attention paid to a market for the product or service? Multilevel marketing depends on establishing a market for the company's products. If the company doesn't seem to have any interest in consumer demand for its products, don't sign up.
  • Is there more emphasis on recruitment than on selling the product or service? Remember, the difference between multilevel marketing and a pyramid scheme is in the focus. The pyramid scheme focuses on fast profits from signing people up and getting their money. If recruitment seems to be the focus of the plan, run.

These next two questions will help you determine what the focus of the company is:

  • Is the plan designed so that you make more money by recruiting new members rather than through sales that you make yourself? This is the signature of a pyramid scheme operation.
  • Are you offered commissions for recruiting new members? Another pyramid scheme trademark. It's the number of people who are willing to sign up that matters in a pyramid scheme, not the products or services being offered.

Pyramid Scheme vs. MLM: How to Protect Yourself

As always, when you're investigating a potential business opportunity, you'll want to gather all the information you can about the MLM company's products and operations.

Get (and read) written copies of the company's sales literature, business plan and/or marketing plan.

Talk to other people who have experience with the multilevel marketing company and the products to determine whether the products are actually being sold and if they are of high quality.

Check with the Better Business Bureau to see if there have been any complaints about the company.

And listen carefully when you're at that MLM recruitment meeting. Inflated claims for the amazing amounts of money you're going to make should set your alarm bells ringing.

Being part of a successful multilevel marketing company can be both profitable and fun, but unfortunately, some purported MLM opportunities are actually just cons designed to flatten both your wallet and your dream of running a business.

Better Alternatives to MLMs

If you are looking to start a full or part-time business, there are many other proven business ideas that are alternatives to MLMs:

Article Sources

  1. Government of Canada. "Multi-Level Marketing and Pyramid Selling." Accessed Oct. 13, 2020.

  2. Government of Canada. "Multi-Level Marketing and Pyramid Selling." Accessed Oct. 13, 2020.