How to Spot the Difference Between a Pyramid Scheme vs MLM
MLM and pyramid schemes are often confused for one another. MLM stands for multi-level marketing, which is a type of business strategy that allows people to share in the profits from their own sales efforts as well as those made by others they recruit into the company. MLMs offer potential recruits an opportunity to build up a team of distributors that work together to achieve individual goals.
Pyramid schemes on the other hand, use money from new investors to pay off early backers with larger returns than they invested. In this article we will compare MLMs vs pyramid schemes so you can learn how these two business models differ and know what steps you should take before launching your online company.
How does multi-level marketing work?
MLMs are a form of direct selling and the main idea is promoting products or services through distributors. MLM marketing allows people to build networks in order to share ideas, collaborate on projects, promote their business and make it more visible for potential customers. MLM companies offer an opportunity to sell various kinds of products that include different categories such as MLM training, MLM software, MLM tools and so on.
How do pyramid schemes work?
Pyramid schemes are a form of MLM marketing and the main idea is to entice people into joining by paying them for recruiting new members. Pyramid schemes usually require you to invest something, be it time or money, in order to make more profit as the pyramid expands. This can lead to many problems such as constantly chasing recruits who never actually join, which in turn can lead to an extreme depletion of time and money.
Pyramid schemes are illegal because they’re based on the sale of a product without any real work or value added to it by MLM members. In MLMs people actually have to do some type of marketing for the company products in order make profit from them with MLMs. MLM members are not required to recruit in MLMS, and so you do not need to keep buying into the company just for the sake of recruitment; your profit is based on what product sales you generate as an individual.
How do you identify a MLM company?
The following could help you identify MLMs:
- MLM companies offer many different types of products.
- MLMs have higher prices, often starting at $300-$400 for a basic starter kit and charging more as you buy into the company’s system.
- MLMs are usually expensive to maintain with monthly or quarterly fees that can go up over time; in contrast, MLM companies are also more expensive to purchase into when just starting out.
- MLMs often have a very complicated system of sales, with levels and points which can be confusing.
- MLMs may not offer detailed information on what products they sell or how much the company earns from any given sale; many MLMSs do not disclose their financial information.
- MLMs can be hard to sell as the MLM company often requires a certain number of sales, which is difficult for new members who may have not yet built up an established customer base.
- MLMs are usually based on buying in bulk and selling at a higher price point than what was originally paid for. MLMs may also sell products for an inflated price point, which can be a problem because these prices do not reflect what the product is worth in the open market.
- MLM companies often have very few competitors and so they are able to control pricing on their products.
- MLMs frequently target areas of society that traditionally don’t have access to or are not educated about business opportunities. MLMs often offer a product that is expensive and out of reach for these communities, which can be problematic because it alienates them from the MLM opportunity.
- MLM companies require an investment of time in order to build up a customer base. This means they may only recruit people who are willing to put in a lot of time, which limits MLM’s success.
- MLMs often have high start up costs or membership fees. This is problematic because not everyone can afford the fee and it may give MLM an unfair advantage against other companies that are looking for investment capital.
- MLMs are known to have their own credit cards, which MLM members buy from.
How do you identify a pyramid scheme?
Some of the ways you can identify a pyramid scheme are if the MLM company are:
- Only focused on recruiting, not selling products or services.
- Making promises of a tremendous amount of money with little to no effort required on your end.
- Using aggressive sales tactics like pressuring you into an MLM meeting or convincing you that MLMs are “the best business opportunity in town.”
- Targeting a group that is vulnerable to MLM offers, like recent college grads or stay at home mothers.
What are MLM compensation models?
Compensation models for MLM companies can vary, but typically MLM companies use a system called “direct marketing.” MLMs give commissions to people who recruit new members.
Commission rates on MLM are usually set at 50% of the purchase price for that product or service. The commission rate will increase as you go up in rank and/or move further along in the MLM company you’re promoting.
MLMs also give commissions to people who recruit new members and are known as “recruiters.” MLMs may have different commission rates based on where in their organization a person is positioned, such as at the top (top earner), middle of pyramid (mid-level earner) or bottom of pyramid (low-level earner).
What is a pyramid scheme compensation model?
A pyramid scheme compensation model is a system where members are compensated for recruiting other people into the company. The recruitment of new members is not based on any skills or business acumen, but rather it’s just the number game and there are no profits generated in MLM at all with this type of compensation model. MLM companies, on the other hand, compensate their members for selling products and services in a MLM business model.
What is the difference between pyramid schemes and MLM companies?
MLM in its simplest form is not a scam because MLMs have tangible goods or service that can be bought and sold. Pyramid schemes are scams because they offer no real product to buy, only the right to get paid in commissions from new members you recruit into your scheme.
Can pyramid schemes be disguised as MLM?
Yes. MLM companies must be able to show that they have a real product or service. MLMs can be disguised as pyramid schemes by putting no money into the sale of products, but just relying on commissions from recruiting new people in the MLM business model.
How do you become a successful MLM distributor?
You can become a successful MLM distributor by:
- Being a great product or service provider. MLMs should be able to provide tangible, quality products and services that will make people want to buy from them repeatedly.
- Understanding the MLM business model and how it works. MLMs rely on recruiting new members in order for their company to grow so you’ll need to spend lots of time and energy developing MLM skills.
- Investing in the MLM business through your own hard work, instead of relying on recruiting new members to do all the work for you. The more effort you put into it, the greater chance that MLMs will be successful.
The MLM company should also have a strong online presence. MLM companies should have a website with dynamic content to show prospective members what they can gain from joining the MLM company and what it takes to build an MLM business.
Do your research
There are some good MLMs out there, but you will need to do your research before investing in one of them. If you're looking to start your own MLM business, make sure you do all of the research necessary to avoid getting ripped off by a pyramid scheme.
One way to research MLM companies is to check out reviews on I Buy I Review. MLM reviews can offer a lot of insight into MLMs. MLM reviews also provide information about the legitimacy and legality of MLMs, which is important to know before joining an MLM company or launching your own MLM business
One of the companies recently reviewed by I Buy I Review is iMarketsLive, which claims its online training program will make you a professional at Foreign Exchange. Check out I Buy I Review’s comprehensive iMarketsLive review here.
I buy and review courses so you don’t have to. Sometimes, I even find courses that are legitimate and worthwhile; and that’s how I accidentally came across one that led me to building a 6-figure business in a little under 5 years. Now, I still review courses because it’s my favorite hobby. 🙂 Learn more about me here.