Is MLM pyramid selling?

A comparison between a pyramid scheme and an MLM scheme

by John Jackson © 2004

Much emphasis is made of the fact, by those who promote it, that MLM is legal and therefore not a pyramid scheme. Opponents of MLM object that even though it is legal, it is still based on the pyramid system, and it has all the inherent dangers and drawbacks of a pure pyramid scheme.

Pyramid scheme: An illegal multi-level program wherein people pay an entrance fee for the sole opportunity to recruit others to do the same.

Members to the scheme pay a joining fee which is passed on to those above them in the scheme. Their purpose is to recruit new members below them in the scheme in order to qualify for a share of their joining fee.

Characteristics of a pyramid scheme

  • Position in the scheme is important

    The scheme is based on a pyramid structure, hence the name, with a few people at the top and an increasing number of members in each layer below. Money paid in by new investors flows from the bottom to the top. It is therefore important to be at, or close to, the top of the pyramid.

    By design around 90% of members will make a loss and only 1% will make a significant profit. It is the position within the scheme which dictates whether or not you'll make money; not how hard you work at it.

  • Earn money by recruiting

    The idea of a pyramid scheme is to encourage other people to join it below you in a potentially endless chain. You then take a percentage of their joining fee and you also get a percentage of the joining fee of any new members signed up by your new recruit, and so on, up to several layers deep. This is where the promise of great wealth comes in and is how the scam is sold.

    In reality this cannot be achieved. Due the the difficulty of attracting new recruits, 90% of members are always at, or near, the bottom of the pyramid and will lose their money. It is this built-in feature of pyramids, which guarantees failure for the vast majority, that renders them illegal.

  • Profits come from others' investments

    The promise of great wealth comes from the concept of a "downline". This downline consists of the members that you yourself introduce to the scheme, and subsequently the new recruits that your members also introduce.

    You will receive a percentage of the investment that each member introduces to the scheme. With a downline several layers deep the potential is there for a downline consisting of many thousands of people.

    In reality this downline is unachievable both practically and mathematically. This is the inherent fraud in pyramid schemes. They are bound to fail by design.

Multi-Level Marketing: A multilevel program wherein people pay an entrance fee for the opportunity to sell products and to recruit others to do the same.

Members to the scheme pay a joining fee which is passed on to those above them in the scheme. The members' purpose is to sell products in return for a commission payment and to recruit new members below them in the scheme in order to qualify for a share of the new members' commission.

Characteristics of an MLM

  • Position in the scheme is important.

    MLM was born out of pyramid schemes and as such the structure and the nature is very similar. The concept of the downline that will earn you money works in the same way; you sponsor new members and earn commission from them in a multilevel structure.

    As with an illegal pyramid scheme, unless you are at or near the top of the pyramid it is likely that you will lose money. Once the scheme has passed its saturation point, no amount of hard work or enthusiasm will make a difference.

  • Earn money by recruiting

    The difference between a pyramid scheme and an MLM is that MLM schemes are in the business of selling goods to consumers. This is what makes them legal.

    Most MLM schemes in reality, however, promote themselves with the promise of great wealth: the appeal to greed. Selling products to consumers is not the way to make riches in MLM. Any MLM scheme will make it absolutely clear that the only way to make real money is through the recruitment of new members and the creation of a downline.

  • Profits come from others' investments

    The downline is the key component to making money in MLM. The concept is identical to illegal pyramid schemes: you make money from the people you introduce into the scheme.

    The pitfalls are exactly the same as with pyramids; the vast majority are bound to lose money by design.

Pyramids are illegal. MLM schemes are legal because of the fact that products are sold. This is the only real difference between the two systems. No amount of rhetoric; wishful thinking; self delusion or fallacious reasoning can alter that fact.

If you remove the products from an MLM, all that is left is a pyramid scheme: this is why MLMs are known as: product based pyramid schemes.