Have you ever wondered What Is the Difference Between a Pyramid Scheme and MLM? I have been thinking that question recently and I have come to a conclusion that in many cases there is not such a big difference at all. Or is there? That is our topic today. Fasten your seat belts, keep your hat and let’s go!
Note: I want to keep as simple as possible so everyone will understand. However, if you have any questions, on what I share and teach, don’t hesitate to leave them below in the comments.
What Is the Definition of a Pyramid Scheme?
A pyramid scheme is a business model that concentrates more on recruiting new people rather than selling products or services. New members bring more money into the system while recruiters and those who have already joined, get some benefit.
A pyramid scheme is slightly different than a Ponzi scheme because if the system is Ponzi, you don’t need to do anything else than hand the money to the founder. Then he gives you (or at least promises to give you) high return on your investment. A typical example of a Ponzi scheme is MMM Global and MMM Returns by Sergey Mavrodi.
In a pyramid scheme, you need to do something which is usually recruiting new people and selling products? The system is called a pyramid because those who joined earlier are in a better position. They are earning from their downlines while those who have just joined, earn from their own sales.
What Is the Difference Between a Pyramid Scheme and Multi Level Marketing?
Pyramid schemes are officially illegal while Multi Level Marketing is legal. Why is it so and what are their differences?
Basically in pyramid schemes the main focus in on recruiting and not selling the products. Those who joined the system first benefit the most because they make money from each member they have recruited and from their downlines. But isn’t it exactly the same with MLMs?
The CEO of Herbalife talked in a recent event that their focus has been and will always be on recruiting new people. That’s how it goes with every MLM if you really want to make good money, you must recruit other people. Of course, you can earn good money if you are a magnificent salesperson. But that raises a question, why are you selling an MLM-product if you are not recruiting new people?
In my eyes, pyramid schemes and MLMs are working in the same way.
Sometimes pyramid schemes are defined in a way which says that they are not selling any products. Well, you don’t need to sell a single product either in MLM in order to make money. If you just recruit enough people, you will earn lots of money.
Complicated Commission Structures. What Is the Purpose?
Have you ever wondered what is the purpose of complicated commission structures? There can be many reasons to have it but one is to keep workers motivated. Many people like to calculate numbers and see how much they could possibly earn. It may also help them to reach them to reach a certain goal.
However, one reason to have complicated commission systems can be to bluff people. When you see how it’s possible to earn $200,000/month by rising in the system, it makes your blood flowing faster. But when you realize that more than 99% of people are earning much less than an average income from MLMs, you realize that the reality is much different. Founders and a few “early-joiners” are making the big money while others are being scammed.
Have you ever compare network marketing/MLM to affiliate marketing? If you are an affiliate marketer, you earn the commission for the each product that you have sold. The commission varies usually between 4-80%. In Amazon, the smallest commission level is 4% while some digital products are offering up to 80% commissions. I have even once seen a product that offers 100% commission.
Why Are Pyramid Schemes (=MLMs) Being Made?
In my opinion, those systems are many times designed to make the founders rich. If they really would care about the good price/quality ratio, why wouldn’t they just create a real business? Yes, you know the reason. Because it wouldn’t be so profitable for them.
One legitimate reason is that MLM can spread faster than a “real business”. If you have an MLM-company, members are willing to recruit new people because it gives them some rewards. In a normal business recruiting new people doesn’t pay off. If I would recruit new people to a company where I am working right now, for example, it wouldn’t bring me any monetary benefits.
If I would earn, for example, 100-1,000 for recruiting a new person, I would be much willing to persuade my friends to join us. At least, in theory. That’s how it goes with MLMs. People are driven by rewards.
One great benefit of an MLM for the founder is that he doesn’t need to pay the salary. In most 9-5 jobs boss needs to pay the salary for all employees whether they make good results or not. In an MLM-company you get paid only if you bring results and sales. You don’t get paid for going to the toilet or while being sick at your home. In most jobs you get paid even when you are sitting at the toilet or staying at home in fever. What do you think about it?
Why Are MLM-Products Overpriced?
I use to say that all MLM-products are overpriced. Why is it so? Because a customer doesn’t need only pay for the seller and producer but also every downline, upline and all the other guys in the system.
Have you ever seen MLM-candles that cost $20 while you can get exactly same candles in a retail store for $1. Only differences about those candles is their price and a brand. I have never seen a situation where an MLM-product would be cheaper than its counterpart in the supermarket. Have you?
One reason that MLM-products are so expensive is that they look more valuable with a high price tag. Let’s say that I have two candles at my home. The other one cost $1 and the other one $20. Which one do you think has a higher quality?
If something costs 10-20 times more, it gives a feeling that you are owning something very valuable. It tells that you belong to the inner circle that has these specific products. And it also brings more money to the company. That’s why they are overpriced. Do you have also other explanations?
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A Better Way to Make Money Online
I will stay away from pyramid schemes because of the reasons that I have told in this post. However, I will concentrate my time and energy on building an honest online business. I explain you the process in 3 simple steps.
1.I create a website. (Nowadays it’s possible in 30 seconds without former knowledge)
2.I write helpful content on my website to help visitors to have a better life.
3.I promote some beneficial products on my website
4.When visitors buy something, I earn a commission.
5.I repeat the process.
I can create a website regarding to almost any subject that makes people’s life better. 5-6 months ago I created, for example, a website that helps people to learn languages faster. The process is very simple but it, of course, requires work to create content. That’s why I am outsourcing some of my content writing for freelance writers.
If you would like to learn how you can make money online by using the same simple process, I recommend heading to Wealthy Affiliate. You will get 20 interactive video lessons and 2 websites for free that will help you to get started. I will also give you my 1-on-1 support to help you over every obstacle that you can face.
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Have you ever joined MLM-systems / pyramid schemes? Have you tried the process that I explained in the end?
This was interesting reading. I have seen it before but it was good to see someone point out how the systems work and why.
In my eyes, you should provide people with a service or product that serves them or solve a problem. The fact that the Herbalife CEO points out that their focus is on recruiting people rather than selling their products is to me great example of a situation where the money is considered far more important than helping the customers and solving their problems.
you have very good points. Businesses provide solutions to “problems” and challenges. For example, people have an idea that they want to make money online. I am here solving that problem by offering my helping hand. Somebody wants to be healthy and gym offers him/her a space to exercise.
There are thousands of examples. But if the main focus in on recruiting new people, I think then we are not in the right track.
I now see what’s the difference between a pyramid scheme and mlm. I did not know there was a difference between the two. Actually I thought mlm was another name for pyramid scheme. Either way both are scams that takes people money through the process of recruiting more people.
Thanks for the post.
I think that all MLMs are not scams. Many of them are honest businesses. However, I don’t like the idea behind MLMs. They provide overpriced products to make the founders rich.
I decide to stick on affiliate marketing.
Thank you very good article. I have found a blog where the topic is discussed. However, I dare to disagree in two cases.
First of all, the difference between a pyramid scheme and MLM or network marketing is great. The pyramid scheme is illegal but MLM is not.
I think everyone should find out what is MLM before comparing these two with each other. As for the price of products will become so does also not directly parable worthy.
Products are sold through MLM are of a quality often many times better than the so-called traditional products. Pyramid scheme, respectively, focuses on everything other than the sale of the goods.
I will return to this issue in my blog (if and when I get to finish it) in more detail.
Thank you again for your blog.
I know what is MLM because I have made a little research about tens of different MLM-programs. However, I haven’t found any of them to be very exciting. All MLMs focus greatly on recruiting like pyramid schemes as well. Of course, they may be some valuable products but after researching 20-30 different programs, I haven’t found a one where the price/quality-ratio would be better than in the normal products.
However, I am always open to learn more and hear experiences from people who like MLMs and have succeeded with them.
What is your favorite MLM-system and why? I would love to hear more.
My experience is not about a comprehensive, I have been only three MLM company dealing with. The first was GnLd- cleansing and nutritional supplements, top products, and old traditional company.
The second, focusing on the anhydrous car washing company, DWG Enviro-Tech Finland Oy, top products.
At present, cooperation partner is Zinzino from Sweden. a pioneer in Omega oils, unique product.
With regard to the recruitment, so I have not come across a company whose head-businesslike purpose is to get more people in their circle, I also do not deny that they should not be.
When making inquiries to find out, company backgrounds, experiment with products, marketing system and what it is based.
It raises the reliability of the company is to present a certificate of Direct Selling Association, if you can not find it, and anyway, so it seems strange not to waste time.
On this day, in 2017, it’s time we get rid of these pyramid scenarios that disrupt the operation of honest companies.
Thank you for sharing your experiences about MLMs. It’s always very interesting to hear how different people see these things. I have talked with many people who were involved in MLMs but most of them got frustrated when they realized that only the founders are getting rich and a few more.
Of course, there are better systems as well. Some of my friends were very excited about their MLM-systems but they haven’t been done it for very long.
I just don’t like that business model for the reasons that I have mentioned above. However, there are also some positive sides on MLM-systems. I wish success for you, Jarmo!
This is a great article. I’ve been involved with MLMS in the past. It’s amazing how fine the line is between pyramid and MLM. If the difference is only based on recruiting vs. product sales, I’d say many companies are toeing the line. The majority of MLM business models are only profitable for people when they become relentless recruiters. Product sales are just not that profitable.
it’s true that the line between a pyramid scheme and MLM is very small (if there is any). Many MLMs have been officially labeled as pyramid schemes and in my opinion most of them are.
I know some honest and great people who do money with MLM-programs but I don’t want to do it. In my opinion, the products are just too expensive and the focus is to make the owners rich instead of providing the best price/value-ratio for the client.