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Difference Between MLM and Pyramid Scheme

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Multi Level Marketing and Pyramid Scheme

  • What is MLM or Multi-Level Marketing
  • What is pyramid scheme
  • Basic of difference between pyramid and MLM scheme
  • Market set up of these schemes
  • Compensation plans of the schemes
  • Legitimacy structure
  • Important features of the pyramid and MLM schemes


Difference Between MLM and Pyramid Scheme

Are you someone who is looking for quick and easy money?

If yes, then you must have come across the terminologies like Pyramid Scheme and MLM or Multi-Level Marketing.

Most of the people tend to mix both of them and see them as a scam. Practically, both these marketing terminologies have a vast difference. Let us see what are MLM and Pyramid Schemes firstly.


What is MLM or Multi-Level Marketing



It is a direct marketing system that involves real customers to whom products are sold through a proper channel.

People use the products of a particular company and sell it to the people who can be benefited from them.

Related: What is MLM business?

If you are someone, who wants to associate with this business as an entrepreneur, then you can become their product distributor.

Here, the company handles the packaging and other marketing strategies and you just have to distribute the products and services to the right people.

Moreover, the company’s experts also provide training to budding distributors or entrepreneurs who want to start their own business from scratch with little investment.

Related: MLM software for network marketing



What is Pyramid Scheme



The Pyramid or Ponzi Schemes are the fraudulent schemes that disguise themselves as the MLM business most of the times.

The Pyramid Scheme does not have a real product that is sold and their commission is based only on the individuals who become the part of this scheme.

Therefore, there is a huge difference between these two money-making schemes because MLM involves real product and hard-working people.


Basic of Difference between Pyramid and MLM Scheme

Below pointers shows the basic difference between the Pyramid and MLM schemes:

1. Market Set Up of these Schemes

Under the MLM or Multi-Level marketing scheme, the idea is to increase the sales of the company manifold. For this, the encouragement is to sell products to the customers and increase the number of distributors in a chain too.

Here, the distributors make a commission when they make the sale and when their recruiters make the sale.

Therefore, the compensation plan in the MLM business provides commission at multiple levels. The commission depends upon the total volume of sales made during a particular period.

On the other hand, under the Pyramid Scheme, there is no real product sold and money is charged for enrolling others into this scheme.

The distributors who have joined on the starting of this scheme earn money with new recruitment. However, if there is no new distributor recruited then the scheme fails miserable and people lose their money except the top ones.


2. Compensation Plans of the Schemes

There are different levels of compensation plans under the MLM industry that includes:

  • The Unilevel model includes recruiting unlimited front-line distributors and they are encouraged to include more distributors in their chain. Here, the commission is paid upto 7 levels deep.
  • The Matrix model is also like a Unilevel model but it includes a limited number of distributors at a certain level. After you reach that level, you can start building another matrix.
  • The Binary model allows only two front-line distributors and if there are other distributors, they are split to the next level. The compensation is also balanced among the two distributors and volume of sales.

The Pyramid Scheme compensation level includes:

  • It follows the 8-ball model where two people who are recruited in this scheme have to pay the gift sum. Here, the person on the top receives the gift sum from the 8 distributors before quitting this scheme. After this, the remaining distributors move up into the scheme and cycle goes on.
  • In the matrix model people have to make advance payment for the product and wait in a queue to enter the scheme. The person recruits other distributors in this scheme and gets a camcorder or a television set and other such products that are low cost than the amount paid. He/She can visit the scheme after getting more money and this model collapse when no more people are willing to join and pay.

Related: Know more about MLM plans


3. Legitimacy Structure

The governments of many countries globally have setup legal structures for MLM and Pyramid Schemes. Most of the pointers included under these guidelines are:

  • Product Sales: MLM marketing follows this structure whereas the Pyramid scheme does not.
  • Buying Back of Inventory:  While terminating someone, the MLM business buys back the inventory but it is not the case with Pyramid Scheme.
  • Paying of Commissions:  MLM follows a hierarchical commission structure on the sale of the products whereas the Pyramid scheme only involves new enrollments.

It is important to know about the legal status of some of the MLM companies too as they are also involved in recruiting people only. It is good to have a conversation with previous distributors to know about their experiences.


4. Important Features of the Pyramid and MLM Schemes

People who are looking for quick money sometimes fall into the clutch of the companies that do not follow ethical rules and regulations.

They exit the market in less than 5 years landing the people in the lurch. Here are some of the features you need to see for Pyramid and MLM schemes:


Features of MLM (Multi-Level Marketing)

  • The assembling of the team involves hard work and dedication
  • It is not an easy money making scheme
  • They have a product to sell
  • They are operating in the market from decades
  • Provision of commission
  • Clear compensation plan is exhibited to the distributors
  • They have a global presence

Features of Pyramid Scheme

  • No real product or service is involved while you pay the full amount
  • These schemes gamble with your financial security
  • They demand a large sum of money as initial investments
  • This scheme just wants enrollment with no work. It seems to be easy and quick money- making opportunity.


Final Remarks About MLM and Pyramid Scheme

Finally, if you are likely to get into some quick money making schemes it is necessary to carry our full research of the company. You must ask questions, talk to their potential and top distributors, search for the customer reviews, ask about the authentication and certificates of the company, and much more. All these things if searched properly will save you from getting into some money extracting Ponzi scheme.

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