Understanding the Difference between Multi-Level Marketing Programs and Pyramid Schemes

This is a guest post from Ryan who is the author of the Obsessed Analytic blog, a guide for young adults regarding life, money, and technology.

Occasionally you may run across an old friend or acquaintance who has a deal too good to be true. You hear “Just buy a few of these and sell some of those and you’ll retire at thirty.” These pyramid/multi-level marketing/sales pitches are enticing, but it’s important to understand what’s worth it and even what’s legal. Understanding the difference between the scam known as a pyramid scheme and a legal multi-level marketing design is important to anyone wanting to try out one of these sales businesses.

What are Pyramid Schemes and Multi-level Marketing Companies?

Straight up, a pyramid scheme involves a lot of people passing a small amount of money up a “pyramid” so that the person at the top comes out with big bucks. Although profitable for some, the downfall of a pyramid scheme is that it is unsustainable. For any one person to make money, another dozen or so must lose money. Or for a hundred people to make money, a thousand must lose. No matter what, there are always more losers than winners.

Multi-level marketing (MLM) companies have a similar top down design as pyramid schemes, but when designed correctly, they function like a legal sales company (i.e. Primerica, JWS). When following the right frame set, a MLM company can provide sellers with a great entrepreneurial experience and a great source of income, but under the wrong rules, a MLM can ruin someone and make them waste their time.

How to Tell If a Deal is Legitimate

There is one key difference between the legitimate and illegitimate companies and this has to do with the product being created and the source of income. In any real economy, products are traded for currency which signifies the value being traded. A legitimate company has workers and sellers creating and selling a product and then outside buyers purchase the product in exchange for money. A good with value is being passed to someone outside of the company and the money is then distributed among the workers and sellers.

Multi-level marketing companies often require sellers to pay a fee to sell the good and this fee is passed up the ranks. If no goods are ever sold then this set up emulates a pyramid scheme. As more and more goods are sold, the design begins to look more and more like a traditional company where the sellers pay no fee and receive a commission for goods sold. A company is legitimate when it has more money coming in from goods being sold than from sellers paying fees to sell.

When a Multi-Level Marketing Company is Worth It

Even legitimate MLMs may not be worth it to the seller. It may take an unnecessary amount of time and effort to make the smallest amount of money. Here are some questions to ask before committing.

  • Is there an entrance fee to become a seller?
  • Do I have to buy x units of the product (that’s a fee) to make a commission?
  • Will I only make money if I refer others to the company?

When evaluating a company, the more times you answer YES to the questions above then the more likely the MLM is operating like an unsustainable pyramid scheme. Be sure to be cautious of how hard it is to make money in MLMs. Remember that traditional sales companies don’t require sellers to pay fees to get started, don’t require sellers to buy the company product to make money, and don’t require sellers to have other sellers under them to make a living. Although these may increase your pay, you should be able to make a living without them.

What are your thoughts on MLM programs? Have you benefited from a well-designed one or been hurt from a deceitful one? Let us know in the comments…

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24 Comments
  1. Jason Topp

    Interesting post – my defenses always go up whenever I hear of a “great opportunity” like an MLM – I guess I always view them as a pyramid scheme, but I’m sure there are some legit companies out there.

  2. Michelle

    Love this explanation of MLMs versus pyramid schemes. Personally, I have been a Mary Kay consultant in the past. They claim not to be an MLM, but essentially, they are in many ways. Very legit but can be scheming if the recruiter “requires” inventory to join (which it is not). Currently, I am with an MLM company ONEgroup, who markets the miessence brand. I was very skeptical and took quite a bit of time learning how the income works. Like with most MLMs I’ve looked into…sell the product to decide how much you make and take recruiting as a bonus, not as a goal to survival. Thanks for a great post, once again!

  3. Joe Plemon

    My wife tried working for an MLM cosmetic company years ago. The BIG push was to recruit, recruit and then recruit more. The more recruits you get, the more money you make through THEIR sales. Those at the top were easily 6 figure income earners, but it was very difficult to make a living by simply selling cosmetics. This company (dare I say Mary Kay?) is still around and evidently doing well. But people should realize going in that the real business is recruiting and training…not selling cosmetics.

    Thanks for the thought provoking post, Ryan. Your statement “A company is legitimate when it has more money coming in from goods being sold than from sellers paying fees to sell” makes sense, but would one have a tough time learning that information?

  4. Kick debt off

    Good piece here when you say ” A company is legitimate when it has more money coming in from goods being sold than from sellers paying fees to sell.”
    I have friends who have lost a lot of time and money on both MLMs and Pyramids. I therefore easily dismiss anything related to the pyramids and MLMs – especially with the mindset of getting out of debt.. it is easy to fall victim of scams.

  5. Lakita

    This is a great article. I have an interview scheduled in late March for a lady who has putting her son through college with the extra money she is making from an MLM.

    I have also done a few myself in the past, there are some legit companies out there as well as some scams. I beleive one of the keys is not to get caught up in the “hype”. If you beleive you will make 6 figures in the first 3 months you will fail and be disappointed.

    Just like anything else, MLM’s (the euphemism is relational marketing) is hard work! I will be discussing my own experiences with MLMs in the future as well….I would leave this advice for anyone interested in MLMs:

    – Look at the compensation package to make sure that is is legit and potential.
    – Sell something you are interested in!

    Kita

  6. FrugalMaman

    Good points, but something not mentioned is that if you sell a product you really enjoy and would be buying anyway, you are getting it at a discount. Even if you do not sell enough to make a ‘living’, you are receiving other benefits that make it worth your time and effort.

  7. Ryan

    Thanks for all the great comments so far. Your support is much appreciated.

    Jason, glad I could provide some contrast between pyramid schemes and MLMs.

    FinancialBondage, thanks for the honesty about your experience so far. Hopefully it will help others from making a similar mistake.

    Michelle, glad you found a good company to do business with. Your analysis ahead of time is what I hope everyone does before joining an MLM.

    Joe, it’s definitely annoying when all people do is recruit. To answer your question I’d say to ask someone you know in the company how it’s going so far and dig deep for all the numbers regarding fees paid and goods sold. Also, ask yourself if you would buy the product before any similar product that’s not part of an MLM. If not then it would be hard for the company to make money outside of its members.

    Lakita and Kick debt off, good points on the time it takes to be successful.

    Frugal maman, I did leave out that if this is a hobby then money is not your main concern. If you enjoy the networking and the product you’re selling then an MLM can be a blast.

    Looking forward to more thoughts. Check out my blog for similar articles.

  8. bondChristian

    Nice breakdown. I’m working on a guest post for Church Marketing Sucks that goes over the same issues. In a sense, Christians discipling other Christians who in turn disciple other Christians is a form of Multi-level Marketing. It’s important to understand why it works (and how it can be very effective) and the ways it doesn’t work and can end up ripping people off.

    I enjoyed this. Thank you for posting.

    -Marshall Jones Jr.

  9. 4jacks

    The only good pyramid scheme is the one where you are sitting on the top, the middle and the bottom. I don’t know why these people are all anxious to get involved with pre-existing pyramid schemes. The format is simple. Just copy and paste all their junk and insert your name and the names of all your relatives in the receivable column. Then mass market your new scam.

  10. Suzy

    My husband and I have been involved in a wonderful MLM for over three years. We have done very well with it. I disagree with the assumption that if you answer “yes” to the questions, you should not get involved. Here are the facts:
    * Is there an entrance fee to become a seller? There is a start up cost in any business venture. Typically, MLM fees are much less than it would be start a business or even to start work as a real estate agent! So that is unfair to lay at the feet of MLM companies.
    * Do I have to buy x units of the product (that’s a fee) to make a commission? Why in the world would you want to represent products you are not using yourself? And again, this is part of the investment into your business.
    * Will I only make money if I refer others to the company? Well, doesn’t all businesses work this way? All businesses make money by having customers. How in the world come MLMs be any different?
    I believe the reason people despise MLMs is because they tried something and wanted some other people to make them rich. When that did not happen after sponsoring one or two people, they quit. They did not fail; they quit. Just like they quit at violin or golf. They decide if it does not come easy, it isn’t worth the effort. But no one blames the makers of violins or golf clubs for the failure. That would be absurd! It is also absurd to blame MLMs. The truth is most people are not going to amass wealth with a traditional job. They will live month to month, but probably won’t drastically change their future or their children’s futures financially. There are many wonderful MLM companies, but it takes hard work to be a success. The one I am involved with is certainly not a “get rich quick” or “lottery win” venture. The friends we have met in this industry who have been successful (some of them wildly successful) all worked very hard and had to put cotton in their ears against people who went around yelling “SCAM.” They did what everyone said could not be done because they trusted that the Lord brought them the opportunity. They were faithful and God rewards faithfulness. The people out there yelling, “SCAM” are the greedy and unfaithful and they are bringing an evil report. I would not be so quick to criticize the opportunities God is bringing to his people. We know people who have been able to feed their families and stay out of foreclosure through MLMs when traditional companies have failed.

  11. Ryan

    bondChristian, thanks for your comments and I’m looking forward to your post. It’s true that networking and marketing in any business relates to MLM’s. It’s just important to find the system that works best.

    4jacks, I agree, pyramid schemes are definitely not sustainable. That’s why understanding the difference between MLMs and pyramids is important. Thanks for your input.

    Cork Hutson, glad you found a MLM that works for you. It’s that ability you have to discern that well designed ones from the disguised pyramid schemes that has helped you out and can help others too.

  12. Ryan

    Suzy, great comments. I’ll try to address them all.

    True that business ventures have some sort of cost, but most sales people don’t pay the company they are joining – they get paid instead. Also, in a pyramid scheme you pay people above you for nothing and most people would agree that a pyramid scheme is not worthwhile. An MLM can fall somewhere in between. If you’re paying for access to a quality product like the one you probably sell then it’s definitely worth it. But if the money is just rising up a pyramid and you’re not getting anything in return it can be a waste. Glad you found a legit one.

    Second, most sales people don’t have to buy their company’s product to be successful. For example, a car salesperson doesn’t have to buy one car a month in order to get a commission on the rest of the cars he sells. Some MLMs require you to buy products that you never use just to make a commission. This doesn’t make since to me. But if it’s a product you like then I agree. The key is if you really stand behind the product and in your case it sounds like you do.

    Third, as far as referring people I am talking about getting other sales people below you. Just like a regular company has sales people at the bottom that are still making ok money with managers on top making good money, an MLM should have people making money at all levels. If the people at the top are the only ones making money to justify their time but the ones at the bottom are losing then it may not be the right use of time for everyone.

    Finally, the point here wasn’t to criticize MLMs. The point is to help people discern between the legit ones and the ones that are really disguised pyramid schemes. I think you nailed it when you said your company is not a “get rich quick” scheme. Just like any entrepreneurial venture, the best MLMs require a lot of hard work from people like you who are willing to stick with it.

    Let me know if you have more questions. It’s great to hear from people who have found the right MLMs to work with.

  13. Gary

    My wife and I are also involved with an MLM that we are enjoying very much. It is challenging us to learn, grow, and put others first. We find it a great way to share our faith and send love and good wishes to others. Our pruducts (greeting cards) are priced at 75% less than retail, and there really is no competition. We have only been working the business for a few months, and are really just learning how to run our business. We see this as a long term opportunity, and not a get rich quick scheme. I also believe that in the long term our income potential is much greater than if we just were to hope that our jobs would last us the until we are able to retire. How often does that happen these days anyway. We would rather invest our time and energy into our own business opportunity, and what better way to start than with a small investment and a whole lot of sweat equity? Besides, we liked the products and service so much that we would still use it even if there was no business opportunity available with it! It’s a win – win situation for us!!!

  14. Gulnur Erdem

    Hi.Thanks for this great article.It helped a lot, still I have some questions.
    I am working with an MLM.But I’ve just doubted that!
    My company is called Questnet.It differs from scams because at any level the “follower” can earn more money than his/her refrence person if s/he extend his ‘organization’ equally for right and left branches when the reference person fails in this.
    However Questnet pays you when somebody new buys a product with your reference id(or your followers’ ids).Generally the way of making money is finding new customers who are willing to be new sellers to earn money in the same way.A customer can just buy the qualified,certificated and fairly priced product and just walk away,too.S/he doesn’t have to be a seller in any way.Yet, an ‘independent representative’ can sell products and make profit by adding himself or the customer to the chain.To be honest this is not the main opportunity to earn big amount of money.
    Although I doubted the legality,I wonder how so many countries (220) allowed Questnet to work on their lands?If it were a scam it couldn’t have that much representative/custemers (6 million for 2009).Also pyramids are forbidden in many countries.There must be an explanation, but I can not figure it out.
    If you answer my question or if you just learn something wrong with Questnet company I really want to know.
    Regards.
    Gulnur Erdem

  15. Wise Finish

    They are both good ways to lose all of your friends.

  16. Gary

    They are also GREAT ways to make a nice income (getting harder to do each day in this country) with very little investment, and I good residual income at that.

    You only lose your friends if you don’t know what you are doing and abuse them. In which case you just wasted your money.

    I hope my friends will think enough of me to share something with me that may or may not be a good fit for me. Something that could really help me and my family. That is what friends do. But if the friend says NO, then move on.

    That is what MLM’s teach… If your friend didn’t… Jesus would like you to forgive them!

    BTW… I haven’t approached ALL my friends and family. Many of them are not a good fit. I don’t abuse my friends either. But even if I did, the company I represent would still be a GREAT company!!!!

  17. Cameron

    I would like to know if anyone had any information on WorldVentures. It is rapidly sweeping across my small town with fans and critics. To me it is a MLM where you sell vacations. I too called scam at first but I cant seem to find a legit criticism anywhere on the internet about it. I would really love any info that anyone had, pros and cons, because there is a huge meeting tomorrow night that I have been invited to by a relative of mine. Thanks for the help.

  18. Eric

    I am very happy to hear that Primerica was mentioned in this article. I have been in talks with my friend (and all the people he knows through Primerica) about signing a contract to sell their financial services.
    So far, I have been upset with the way I feel hasseled to sign up with all their services since I really don’t know what exactly I am writing a check for (though in doing research I have been learning way more than I half knew before). I agree that the way I should be going about talking to people I already know, is that I should think about whether my family members or friends fit the needs (because obviously they all don’t).
    It just seems to me that I need to figure out how to market myself as a Financial Services Representative in order to generate business for myself. I am not very concerned in having a lot of people follow in my steps, unless they seem to fit it and believe in it.
    Does this sound right to you? If I can just ignore all the pep talk about recruiting recruiting recruiting recruiting, should I be able to achieve in this set? Because ultimately if I could just write a $124 check to have them look at my background and send me to classes, then in the same process be able to save money for people I know while getting paid… I should make up that $124 and help my family right?

  19. Eric

    Also (I just thought of this), it wouldn’t be too far of a stretch to just take my commission and divide it by the hours I worked to make it into a monies per hours job (at least in my mind). What should I care if somebody above me is making money off of what I do? Because honestly that already happens where I work at Kwik Trip. I get paid $8.85 an hour to deal with people for 10 hours a day. I feel no satisfaction what so ever.
    How hard do the people that own Kwik Trip work anyway? They make well more than my under 20k a year (I am also in school which is why it isn’t just barely higher, trying for humor also).
    Any opinions? I am thinking you will probably be passive toward what I’ve said but I’ll take anything.

  20. garyatk

    Eric,
    The problem with Primerica is not how their sales network is set up. Although it does attract people who do NOT belong in the financial sales business. It is the fact that the products are sub par at best, and anyone who desires to help people with their finances should be at least a little concerned with the quality of products that they are selling people. I believe that if you research the quality of the products you will choose to look for something else to sell.

  21. Jessica

    I just recently paid the $99 for the backgroung check with Primerica and signed up to take the test which cost another $57. My field trainer who is also the RVP pu me on the spot to buy life insurance for another $30/month and in order to have access to the online site where the study material is well that is another $25/month. I don’t want to lose my money and get nothing but I also dont want to get any further into this if its not gonna be anything more than a scam. The trainer insisted that I call people that I know to set up training appointment while he listened. I know that this particular office is all about recruiting. What should I do?????? Help! I thought that Primerica’s overview sounded good enough to atleast give a shot, but I dont want to give them anymore money or be pressured to give them names. Are they on the up and up?

    How do I cancel the life insurance and get my money back if I choose?

  22. garyatk

    Jessica, RUN… don’t walk… RUN out the door! As with any product you may represent, if you aren’t proud enough of it to show it to your mother (in an appropriate way) don’t sell it to anyone. The Primerica products are those products you should stay away from! Your upline is after your money, and your contact list. They do not care about you! If they did, they would steer you to a better product.

    Look at the fine print on the insurance contract you signed. You have I believe at least 3 days to cancel the contract. Do it now!

    Good Luck!

  23. Kristi Willis

    I have NEVER been assoc. w/any type of MLM company because no one ever sold anything different and it was always so saturated, you had to sell so much product w/parties, inventory, limited to your 3 ft circle, I had absolutely NO interest. That was until I heard that the Doctors who created ProActiv had started a new skincare company 2 years ago Rodan and Fields Dermatologists. Orginially sold in Dept. Stores under Estee Lauder, pulled to go direct sales. It offered something that NO ONE has, Dermatology to the Masses w/the ONLY skin care to offer OTC medication in it. No competition, no parties, no inventory and only 5k reps in the whole U.S. then go global. Yes, I’m in. I highly respect this company and the industry people who work there. Have been accused like other of a Pyramid Scheme, but not so at all. Winner of the DSA award, the Doctors still practice and have a incredbily well respected reputation. Just as you can’t give a blanket judgement about people, you can’t do it w/MLM companies either due to lack of investigation. So in this case “Ignorance is Bliss” because I would have missed out on the opportunity of a life time and I haven’t looked back since.

  24. Kristi Willis

    Moderator, I am new to blogs like this, so I hope I did not overstep my boundries in my earlier post. I guess the point I was trying to make and back up was the fact you can not judge all MLM companies the same. Rodan and Fields Dermatologists are a very well respected company and I was trying to show why.