How to Distinguish Between a Pyramid Scheme and Multi Level Marketing

Many people automatically associate a negative connotation with buzz words like “multi-level marketing” and “downline.” These people assume that those words denote a “pyramid scheme” and that the opportunity attached to those words is a scam. However, this is simply not true. If you know what to look for and what to avoid, you will be able to detect a true “pyramid scheme” from a potential money making opportunity.

Method 1 of 2: Pyramid Scheme

1. Understand the definition: A pyramid scheme is a non-sustainable business that involves the exchange of money, usually in the form of a sign-up fee, and usually has no product or service.

2. Know that pyramid schemes are ILLEGAL! The only people that are able to make money on a pyramid scheme are the people at the top of the pyramid.

The above picture proves that pyramid schemes are unsustainable. As stated above, because pyramid schemes offer no product or service, no possible way exists for the people at the bottom of the pyramid to make any money. The only way to make money in a pyramid scheme is to sign-up new members for a fee. However, as the above picture shows, this becomes impossible when the scheme reaches a certain level. The end result is that people can spend upwards of several thousand dollars to enroll in one of these scams and will end up losing everything. 

Common Elements

1. Learn the common elements. As the United State Securities and Exchange Commission states, “The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same. The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors.” 

2. Look for other identifying characteristics to look for are: (1) Vague descriptions about the company from which your questions can only be answered by signing up and paying the fee; (2) No product or service being offered or a product that sells at a highly inflated price; (3) A majority or all of the possible income to be made comes from the sign-up fee from new enrollees; and (4) Repeated assurances that the company is completely legal.  

Method 2 of 2: Multi-Level Marketing

1. Understand the difference. Multi-level marketing companies follow a similar concept to a pyramid scheme, which is a reason for most of the confusion, except that two significant differences exist.
  •     One difference is that members at any level of a multi-level marketing model can make income through the company’s products and/or services without signing up any new members.
  •     The second difference is that members of any level in a multi-level can advance past the people who signed them up.
  •     Finally,multi-level marketing companies are LEGAL!

2. Understand why. You may be asking, “if all the confusion, why then do these companies initiate this business model?” The main reason for this type of model is to reduce the cost of advertising. We can all agree that effective advertising in this day and age can cost a bundle. Many new companies do not have this much capital in the beginning. Therefore, one solution is to reward the company’s members for “spreading the word.” Instead of the company spending hundreds of thousands or even millions of dollars on advertising, the company gives the members an incentive, usually in the form of money, for signing up new members to sell/use the company’s product and/or service.
  •     Unlike a pyramid scheme, any member on any level can make money without ever having to sign-up a new member. However, once some of these proper multi-level marketing companies reach a certain population level, it becomes either impossible for any new people to sign-up or impossible for them to make big money. Therefore, the people at the bottom cannot make bonuses for sign-ups, but they will still be able to make money based on the company’s product and/or services.
Common Elements

1. Little or no enrollment fee;

2. The company completely explains itself, its products, and its services BEFORE you sign-up;  

3. A member’s main source of income will come from selling or offering the company’s products and/or services; and  

4. A member can make money at ANY level of the model WITHOUT signing up new members

5. These elements assure that the member will have a fair chance to make money from the company. However, as is true with any venture, your income depends on your ability to sell products or offer services. Any company that promises you money for doing nothing is not being honest with you.

  • If you discover a multi-level marketing company that you may want to sign-up for, always do a cost/benefit analysis. Weigh all possible costs associated with signing up against all the potential benefits. If the benefits outweigh the costs, you may want to sign-up and try to make some money from the company. The same is true vice versa. In the end, the decision is up to you. 
  • If you follow these guidelines, you should be able to tell the difference between the two types of companies. Some pyramid schemes are very cleverly hidden. If you should encounter a company like this during your entrepreneurial journey, and you discover that you cannot make a conclusive decision as to whether or not the company is a pyramid scheme, it is best to err on the side of caution and avoid the situation.