MLM v Pyramid Schemes

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To the untrained eye, MLM or Multilevel Marketing companies and pyramid schemes look very similar. A close look however reveals significant differences.

The first difference between MLM companies and pyramid schemes is whether the company is in the business of selling products. Think soap, vitamins, food etc. Something that real people would buy on a regular basis. All legitimate MLM companies have a catalog of products. In a pyramid scheme, generally speaking, the “product” is distributorships. No one buys any soap or shampoo, just positions on a matrix.

The second difference between MLM companies and pyramids schemes is how distributors get paid. In a legitimate MLM company distributors get paid a commission on product sold. When a distributor sells his company’s product to someone at the retail price, he keeps as profit, the difference between wholesale and retail. Also when someone joins an MLM organization at the invitation of a distributor, and purchases product at wholesale pricing, the distributor receives a commission often called an override on those purchases. All income earned is based on product volume.

Conversely, in a pyramid scheme, profits are generated from sign up fees or purchased distributorships. Your income is based solely on people signing up and paying large fees of which you are promised a portion. Eventually these plans fall apart because at some point people realize that there are not enough new people willing to buy distributorships.

The final and most important difference is legality. MLM is legal and pyramid schemes are not. I cannot say it more clearly than that. As I close I will leave you with a quote from http://www.consumerfraudreporting.org/MLM_listofnames.php

Plans that promise profits mainly for recruiting new members are illegal pyramid schemes. In legitimate multilevel marketing plans, profits come primarily from selling goods and services to consumers.

What are your thoughts about MLM?