Is Multilevel Marketing a Pyramid Scheme?

Personal Finance

The pyramid scheme business has been booming since the ‘80s. Multilevel marketing is a form of sales that looks a lot like a pyramid scheme—and sometimes it is. Here’s a look at what pyramid schemes and multilevel marketing are, what makes the distinction between pyramid schemes and legal multilevel marketing, and red flags for trouble in both.

What is a Pyramid Scheme?

A pyramid scheme is getting people to buy into a fake product or pay to join a group, support someone else, or invest in a company (which is only a shell). Pyramid schemes are named for their structure and the way the money flows: a few people make a lot of money with a large base doing the grunt work. They’re also wildly illegal.

One person can start a pyramid scheme. She gets 10 people to join her and pay their dues. Each of those 10 people must get 10 more people; they get to keep a percentage of the buy-in fee but the rest goes up the pyramid. Even if there is a tangible product, each person brought into the group is made to understand that the money isn’t in selling the product, it’s in getting other people to join in selling the product.

Pyramid schemes tend to collapse pretty quickly. A 10-base pyramid requires a million people buying into the venture by the seventh level; even if you include everyone in the world, you’re going to run out pretty quickly. If you try to get out of the scheme by not paying the fee, the other people in your pyramid tend to impress upon you that you’re abandoning a family. A pyramid scheme isn’t selling what the group’s selling; they’re selling themselves and a sense of belonging.

What is Multilevel Marketing?

Multilevel Marketing (MLM) can be legal or it can wind up being a pyramid scheme. MLM, or network marketing, is a form of marketing in which each member of the crew is encouraged to sell a product, as well as pulling other people into the group, growing the number of members and selling more and more product. You might offer training to these new members, and be in charge of getting the product they need from the distributor, ultimately making a percentage off of what they sell. Sound familiar?

When is MLM a Scheme?

Legal MLM has one very, very important difference from pyramid schemes and MLM scams: the product being sold is real, worth its price, and possible to unload. Think Rainbow Vacuums or Avon. If someone is trying to get you to join in some multilevel marketing, a few key things to consider are:

  • Does it promise you’ll make money fast with practically no effort?
  • Are you asked to purchase a large amount of the product with no guarantee you’ll get your  money back when the product doesn’t sell?
  • Does the product require large startup fees paid for via cash or other irreversible means?
  • Is there even really a product?
  • Are you encouraged to get new sellers or sell the product?

If red flags start flying, you may be looking at a product-based pyramid scheme. Unfortunately, even the legitimate companies have a level of swindling. The people up top are always going to profit from your work, and you’re always going to be encouraged to get other people to become enthusiastic sellers of the product. Multilevel marketing isn’t always illegal and it isn’t always a scheme, but it does always work like a pyramid scheme.

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