MLM vs Pyramid Scheme Businesses: The Differences & How Do They Work?

 

Updated on Jun 4th, 2022
9 Mins Read

As people grow wary of scams and legally compromised businesses, pyramid schemes are getting harder to pull off. As a result, many are branding themselves as network marketing companies. It decreases the credibility of legitimate network marketers, as people stay away from any business venture that counts on distributor recruitment alongside sales.

Despite the common notion, there is much difference between an MLM company and a pyramid scheme pretending to be one. This article will help you gain a clear perspective of how network marketing businesses operate within legal bounds, why pyramid schemes don't, and how to spot the difference between the two.

What are Pyramid Schemes?

A pyramid scheme only gains profits through the recruitment of more people. For example, there may be a recruit who joined up for an upfront cost. The people above encourage them to recruit more members, the part of whose joining fee goes to the recruit. The cycle then repeats further.

The model can include a product or service, which often doesn't justify its price tag. As such, the only way to earn considerable income. Right away, there is a problem with the system that you can figure out with basic maths.

Consider a pyramid scheme that pays you for recruiting six people. If you place yourself at the first level, those six people will have to recruit 36 others to make the business viable for level two. By the time you get to the 13th level, you've exceeded Earth's human population. And you can be pretty sure dogs won't join pyramid schemes.

MLMs vs Pyramid Schemes

While most governments essentially outlaw pyramid schemes, they allow MLMs to operate under strict business obligations. Just like most other businesses, income by MLMs is both traceable and taxable. MLMs work on the principle that direct selling of products and services is the way forward. Other firms tend to use the term "affiliate marketing."

Multi-level marketing involves the direct selling of tangible products and services that justify their price tag while allowing prospective leads to join the business should they provide enough value. It moves away from the conventional supply chain model that needs thousands of stores and million-dollar marketing campaigns to sell every batch.

Therefore, you can observe clear distinctions between MLMS vs pyramid schemes on several grounds:

Sustainability of Business Model

Legitimate network marketing companies have a business model that doesn't rely on recruiting new members but on repeat customers. If a chain of distributors is selling its stock at an appreciable pace, it is a good indicator of a sustainable business model.

On the other hand, a pyramid scheme only has a few large-scale recruitment cycles. Even if they have a product or service on offer, it usually has terrible reviews and distributors struggle with selling their stock. Moreover, most people in a pyramid scheme never see a single cent in earnings, let alone break even on investments.

Liability of Losses

Unlike a pyramid scheme, an MLM has a safety net for all its associates. If they can't sell a batch of products, they can requisition replacements or return them for fair compensation. Additionally, MLMs don't penalise any of their distributors if they fail to meet their sales quota.

On the flip side, pyramid schemes solely blame a failure on the associates. They don't usually have a recuperation plan and pass over the quality issues to their members, favouring the company.

Transparency of Business

While legitimate multi-level marketing companies make their presence known through online portals and participation events, few pyramid schemes ever come out in the open. Most meetings are invite-only, and they take great care staying away from the prying eyes, especially those of law enforcement and revenue services.

Focus on Recruitment

Although MLMs offer incentives to bring new associates into the organisation, all members have an alternative source of earnings. In a pyramid scheme, there is more focus on bringing in associates instead of directly selling products. Such enterprises want to squeeze the maximum funds within a limited timeframe before the majority of members realise their mistakes.

Protecting Yourself Against Pyramid Schemes

Now that you know the differences, you understand how hard it is to distinguish a pyramid scheme from an MLM at first glance. Still, there are a few tests that you can try on a new business proposal that comes your way.

Clear Your Doubts During Recruitment

Remain sceptical during the recruitment process. During a recruitment drive, don't be afraid to ask questions like "How is the business model sustainable?", "Can we see some independent reviews?" or "Can I see the registered ID on the FTC website?"

Read the Fine Print

Go through the entirety of the contract before joining an MLM. Sure, there would be several pages, but a legitimate network marketing agency can wait a day or two before you decide.

Pay close attention to the earnings disclaimer and how the firm handles below-par performance. A pyramid scheme would try to rush you through the paperwork, painting an unrealistic image in the process.

Submit a Legal Query

Once you gain the required details, you can run it through your local law enforcement or internal revenue channels. It can help you locate any infringements or fines imposed on the firm. Alternatively, you can provide the information to a lawyer to research whether there is any legal action currently underway against the company.

Discuss on Online Forums

A great way to assess a business opportunity is to research it through online forums. Yes, there can be a few members with a biassed opinion, but most groups can provide a clearer picture of the MLM in question. Former and current members can also convey their experiences. It can help you understand what to expect with the company going forward.

How MLM Software Grant Transparency to Network Marketing Companies

The key to creating a genuine, successful business is transparency. Today, the digital frontier is the best way to go about it. A website is rarely enough. It is best to have your prospective recruits understand how your business operates. The appropriate MLM software can help you do just that.

Some of the most helpful MLM programs to increase your firm's transparency include the following:

Matrix MLM Software

A matrix MLM plan has a fixed width for each level of a network marketing company. It forces the associates to focus on the products by limiting the incentives they can earn from recruiting new individuals. The business operating with this plan generally possesses higher stability when compared to other MLM ventures.

Board Plan MLM Software

Nothing beats laying out the broad strokes of your organisation in front of your prospects. It is what a board plan MLM software allows you to do. The program creates a virtual board with the respective position of each member alongside the relevant stats such as the average earnings, total revenue in sales, and the flow of commissions.

eCommerce MLM Software

To assist in the affiliate marketing initiative of your e-commerce website, you can utilise an e-commerce MLM software. It can integrate a networking model into your business and help you manage all contacts effectively. You can track conversions in real-time and assign the appropriate rewards per specific milestones.

Final Thoughts

Changing the public perception of MLMs takes time. You can take the next step by being as upfront with your MLM as possible. In doing so, you're not only helping other network marketing companies gain their fair share of recognition but also removing the illusion that numerous pyramid schemes hide behind.

To do that, Global MLM can help develop the perfect software for your needs. No matter the kind of organisation or product you're adopting, we can deliver an application that makes the management of associates, resources, and time smoother than ever.



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