The difference between a pyramid scheme vs MLM is a matter of continuous debate.
Many times, you see both these concepts used simultaneously.
While an MLM is primarily a direct sales initiative, a pyramid scheme is traditionally seen as a fake venture.
If you track down historical information, most times people associate a pyramid scheme with quick money making schemes.
Claims about illegitimacy taint both MLM and a pyramid scheme.
So whenever you get into any venture that is either an MLM or a pyramid scheme, it is better to tread with caution.
As you may have seen in one of the best-known pyramid schemes, the Madoff fraud.
The pyramid schemes by Madoff promised huge returns but delivered nothing.
This may be the case sometimes for multi-level marketing firms too.
But there are exceptions too.
An MLM is typically always a pyramid scheme, but the vice versa may not be true.
It ultimately boils down to the business model and how effective it is.
The revenue generation structure is one of the biggest factors to watch out for.
It is also linked closely to the business model.
This is ultimately the key factor that decides how the profitability pans out.
The core product offering is also a function of the business model.
Moreover, the extent of gains and losses and recruitment drive is also dependent on the model.
But the biggest factor is perhaps the end product.
Irrespective of claims and tall promises, the end product is the most defining element.
That goes on to prove how reliable and sustainable this business is after all.
In many ways, that helps you distinguish between a pyramid scheme vs MLM.
Definition of MLM
So what do you understand by a multi-level marketing firm?
An MLM or a Multi-level Marketing strategy is a unique selling strategy.
The product promotion, advertisement and selling are all via direct sellers and distributors.
They approach the customers on a one on one basis and sell the product.
But the revenue flow is never through this single channel.
Normally an MLM draws revenue from two major sources.
The commission on selling a product and also by recruiting new members in this distribution network.
In this context, the distribution network has similarities with a pyramid scheme.
Often that is the reason that an MLM has courted controversy.
This direct selling strategy depends on referrals quite heavily.
The whole idea of promotion is based on referrals.
The relationship that you share with other distributors takes the business forward.
You approach recruits too on the basis of this relationship.
So there is a huge personal angle in this professional set-up.
The distributors or the members further their network only on the basis of this personal relations.
The entire business cashes upon the personal repertoire of individual members.
The money that you earn in return is the incentive to put these relations at stake.
In many ways, that defines the social and professional dynamics of this set-up.
Stay-at-home professionals operate most MLMs.
From using social networking platforms to networking parties, individual relationships hold center-stage.
Most multi-level marketing firms formulate the growth avenues in a way that it is linked to this factor.
It directly envisages growing through an inclusive route.
But you have to remember that the product is the central force of the business.
It is what defines what the business comprises of.
Therefore, we can define an MLM as a direct selling strategy.
Definition Of Pyramid Scheme
Now the product is the most defining element and distinguishing factor.
A pyramid scheme is structured like an MLM.
But that is where the similarity ends.
The multi-level marketing scheme is often a legitimate pyramid scheme.
But then you can argue what is missing in a tiered pyramid scheme?
Why is it not considered legitimate?
Why is it an illegal set-up?
Well, the crux of the matter is the product.
If you closely study the structure of a pyramid scheme, you will see there is no product at all.
All they are selling at the most is a hope of a product.
There is no product in reality.
This is one of the biggest concern areas about this business format.
All that this business aims at is generating money for the founders.
New members are recruited only because they will help bring in more money.
Your innocence and ignorance is often the biggest weapon for the founders.
They cash-in on this to catch you unaware and rope you in.
The lure of quick money is used to attract people.
Who does not want to make a lot of money?
But the problem is most people forget that there is no short-cut to making money.
So, a pyramid scheme is only focused on making money.
The payouts to the lower rung of the pyramid are often controversial too.
The sale or manufacturing a product is not the focus at all.
Perhaps that is why selling is never an important aspect.
All a pyramid scheme is bothered about is attracting more members.
The money that comes in through recruits is the only moving force.
That is also the fundamental idea that drives pyramid schemes.
Making money on the sly is the only motive for a pyramid scheme.
Product Offering: Pyramid Scheme vs MLM
When comparing an MLM and pyramid scheme, let us start from the end.
Most times an MLM offers a product or a service.
At least a part of the revenue is generated through this way.
Multi-level marketing businesses are structured mostly around this core product.
It can be anything from a service to a consumer durable good.
It can even be a concept or a financial arrangement.
The idea is whatever this end product may be; it helps the company in furthering business.
That is the key factor to take into consideration.
The core business model is structured around the product.
From product development to product promotion, the business centers on this core product.
The business in case of MLM is all about the product.
The product is a source of a significant chunk of the revenue.
But when you see a pyramid scheme, it is not the case always.
Almost every pyramid scheme operates with the motive of making money.
There is very little clarity about the product that they are offering and how it will help in generating revenue.
These are not listed entities either, so there is no surety about the numbers they quote.
So there is no way of knowing the actual revenue that they are earning either.
As you saw in the Madoff case, they kept making false profit claims.
Most times, people who join these pyramid schemes are blinded by their greed.
They are just not able to see the loopholes and accept the profit numbers blindly.
However, in terms of actual product offering, the details are most times very vague.
Almost always, the end product is more like a concept in a pyramid scheme.
Everyone hears a lot about it, but no one has ever seen it in real.
Legitimacy of Business: Pyramid Scheme vs MLM
When you are comparing a pyramid scheme vs MLM, legitimacy is a key factor.
Like I mentioned, the lack of a product is the biggest pocket of concern for a pyramid scheme.
This is what creates the concerns and prerogatives that determine legitimacy.
Imagine going to a shop and buying a product.
Will you ever pay the shopkeeper money just for telling he has X, Y, Z products?
You will analyze the various products and then choose one.
Check the various parameters and then pay for the one you choose.
But this is not the same in case of a pyramid scheme.
You simply pay for a promise.
It is primarily about making quick money.
There are no details and strategy.
You only know that if you can recruit more people, you can make money.
This is exactly why this is an illegitimate business right from the word go.
So how is an MLM any different?
The focus of an MLM is the product that they are selling.
The MLM then becomes a simple vehicle to take the business forward.
You incentivize new recruits in an MLM surely.
But in many ways, that is also the way they promote their business.
You can further a business only when you have enough hands taking it forward.
In case of an MLM, the network of new recruits help extend the reach of the business and the product.
At the end of the day, the focus of the MLM continues to be the product they are selling.
That becomes very important for the company.
In many ways, it also lends legitimacy to the MLM.
The recruits, users and the customers are all aligned in the same plane.
That also becomes the key factor that differentiates both.
Saturation Of The Warm Circles: Pyramid Scheme vs MLM
Both the pyramid scheme and an MLM rely very heavily on the circle of close acquaintances.
They invariably become the first few rungs of the pyramid.
After all, how do you approach complete strangers?
It is much simpler to request your aunt or close friend to try the cream you are selling.
Gradually then you try and coax them to become members.
In this way, you then convince them to become members.
They then approach their friends and relatives.
So the circle continues to grow in this format at a steady pace bit by bit.
But when you are dealing with a genuine and legitimate MLM, it does not stop there.
The circle keeps expanding, and soon you are dealing with a host of complete strangers too.
What binds you together is the product.
So as long as the product is good, you will keep attracting new candidates.
You have the likes of Avon and Amway continuing for 100 years now.
But that again makes us think how a pyramid scheme is different?
The pyramid scheme does not have any product to boast upon.
Even if there are claims, there isn’t any to see for real.
The result, most people are stuck there to recover their money.
The truth of it is revealed pretty early into the pyramid.
The problem is you have already made a significant amount of investment.
You then start nurturing the hope of at least getting back some amount of money.
But as the lie starts getting exposed, recruits too start dwindling.
Slowly but surely, this flow dries up completely.
As a result of that, the fund flow stops completely.
Soon the pyramid scheme collapses.
The only people who may have made money are the founders of the pyramid.
MLM Companies Nurture Cults
Sustainability is a cardinal element for MLM.
Unlike pyramid schemes, these are never fly by night wonders.
They continue operations for years, generations and centuries for a few.
But the question is how an MLM can remain relevant for that long.
You have to create the need for the product.
That will then help generate demand for this product.
That is where the need to create cults comes into consideration.
In many ways, multi-level marketing is also relationship marketing.
They involve direct one on one selling of the product in consideration.
Creating a cult makes you part of an exclusive circle.
That also gives you the impetus to grow the circle in a steady fashion.
It slowly grows like a huge ant hill.
All your immediate family and friends are part of it.
They have even gone ahead and involves their own friends and extended family.
This has meant that a lot of time, people are also okay with losing money than breaking off relationships.
This is how a lot of MLM continue to grow despite not making money for the members.
Each one is busy trying to average out cost and keep the relationships intact.
Everyone in an MLM is going forward with the hope of recovering the cost.
There is also a feeling of bonhomie between the members who are in this struggle together.
In order to recover cost, they often try to start using the product themselves.
That then becomes their habit.
So when you are used to a certain product, you also grow comfortable with it.
That is all part of a typical cult system.
Compared to this, a pyramid scheme normally collapses a lot earlier.
There is never enough time for people to nurture the cult feeling.
It collapses long before that.
Caution Important: Pyramid scheme vs MLM
However, despite all of these differences between pyramid scheme vs MLM, caution is important.
An MLM is a legitimate pyramid scheme after all.
Even in the most successful MLM, the bulk of profit is hardly from the product.
The major chunk of the profit is derived from those who sell the product and the recruitment by them.
The amount of commission is minuscule, so the real motivation is almost always about getting more people.
The more the people join the MLM, the better the chances of individual gains from incentives.
This is why the incentive for getting new people is always higher.
Only what works in favor of an MLM is there is a real product in the offing.
This means that the interest for it can be sustained for a longer duration.
Additionally most MLM deal with consumer necessities.
That means the overall interest will last if the product in consideration is good.
The compensation plan is however never based on the product offering.
It is primarily about how effectively you can rope more people in.
In that way, the objective of a pyramid scheme and an MLM converge beautifully.
Only number of recruits will help members earn more money.
Either you join an MLM or a pyramid scheme, the scope of profit remains very low.
Most times, the only people who are making money are the founders.
The main source of income is all about recruiting new members.
At the end of the day, the product promotion may matter to an MLM.
But buying the product will erode all your profits.
The chances of making money in an MLM are almost as low as that of a pyramid scheme.
Before you join either an MLM or a pyramid scheme, thorough research is necessary.
You must be very clear about what to expect.
In that context, meeting former distributors or members can help.
But legitimacy is the only difference between pyramid schemes vs MLM.
The profitability remains questionable and there is no comparison between pyramid schemes vs MLM in this context.