Pyramid Scheme vs. MLM: What’s the Difference?

It's more than just the structure.

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Image shows a woman examining a large pyramid with money on the bottom, people in the middle, and fliers at the top. Text reads: "how to recognize a pyramid scheme: no inventory buy-backs, large start-up costs, an emphasis on recruitment rather than sales, no interest in consumer demand or market research"
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The Balance / Ashley Nicole DeLeon

There is a difference between a multilevel marketing (MLM) company and a pyramid scheme. MLMs are legal, legitimate network marketing companies, but pyramid schemes are illegal scams designed to steal your money. Learn the difference between MLM and pyramid schemes so you can distinguish between them.

Key Takeaways

  • Multilevel marketing is legal, but pyramid schemes are not.
  • With multilevel marketing, the focus is on selling products, but with a pyramid scheme, the focus is on recruiting new people.
  • To avoid being scammed by a fraudulent company, research it and its products ahead of time.
  • If someone promises huge returns or pressures you to act quickly, that's a red flag they may be part of a pyramid scheme and not a legitimate MLM.

What’s the Difference Between MLM and Pyramid Schemes?

 Multi-level marketing  Pyramid scheme
 Legal Illegal
 Focused on sales Focused on recruitment
Ensures there is a market for their products Promises big returns on your money
May buy back inventory Won't buy back inventory

Multilevel marketing (MLM) is an attractive business proposition to many people. It offers the opportunity to become involved in a system for distributing products to consumers. Unlike the person starting a business from scratch, the MLM participant has the support of a direct selling company that supplies the products and sometimes offers training as well.

Unfortunately, not every business opportunity is a legitimate one. Some are pyramid schemes—frauds designed to part the unwary from their money.

Legality

The big difference between multilevel marketing and pyramid schemes is that MLM is legal in Canada and most of the U.S. and pyramid schemes aren't. Participating in a pyramid scheme is an offense under the Criminal Code of Canada, punishable by up to five years imprisonment.

Focus

Another big difference between MLM and a pyramid scheme is in the way the business operates.

MLM is a marketing strategy. As an MLM consultant, contractor, or distributor (different companies call them different things), you make your money by selling the products to other multilevel marketing participants. If they're not already a member of your MLM company, you sign them up.

The entire purpose of MLM is to move product. The theory behind MLM is that the larger the network of distributors, the more product the business will be able to sell.

Besides earning money off your own sales, you also earn a percentage of the income generated by the distributors that you've brought into the program. These are known as your downline. Often there are bonuses for selling particular amounts of product or signing up a certain number of new members; you can earn cars and trips as well as cash.

The entire purpose of a pyramid scheme, on the other hand, is to get your money and then use you to recruit others. Like MLM, the pyramid scheme offers the opportunity to make money by signing up more recruits and by accomplishing certain levels of achievement. But unlike MLM, the focus of a pyramid scheme is solely on recruitment, not on sales. In fact, there may not be any product to sell at all with a pyramid scheme, or it may be low-value items.

Note

A warning sign that you're dealing with a pyramid scheme is if there's a lot of pressure to act quickly and buy more product than you can resell.

How To Identify and Protect Yourself From a Pyramid Scheme

It can be very difficult to tell the difference between an MLM and a pyramid scheme at a glance. How do you tell whether it's a legitimate business opportunity or a scam?

Read written copies of the company's sales literature, business plan, and/or marketing plan.

Talk to other people who have experience with the multilevel marketing company and the products to determine whether the products are actually being sold and if they are of high quality.

Check with the Better Business Bureau to see if there have been any complaints about the company.

And listen carefully when you're at that MLM recruitment meeting. Inflated claims for the amazing amounts of money you're going to make should be a big red flag.

Note

As always, when you're investigating a potential business opportunity, you'll want to gather all the information you can about the company's products and operations.

Questions To Ask

Use these questions as an acid test if you're in doubt as to whether the opportunity you're considering is multilevel marketing or a pyramid scheme.

  • Are you required to "invest" a large amount of money upfront to become a distributor? This investment request may be disguised as an inventory charge. Legitimate MLM businesses do not require large start-up costs.
  • If you do have to pay for inventory, will the company buy back unsold inventory? Legitimate MLM companies will offer and stick to inventory buy-backs for at least 80% of what you paid.
  • Is there any mention of or attention paid to a market for the product or service? Multilevel marketing depends on establishing a market for the company's products. If the company doesn't seem to have any interest in consumer demand for its products, don't sign up.
  • Is there more emphasis on recruitment than on selling the product or service? Remember, the difference between multilevel marketing and a pyramid scheme is in the focus. The pyramid scheme focuses on fast profits from signing people up and getting their money. If recruitment seems to be the focus of the plan, run.

These next two questions will help you determine what the focus of the company is:

  • Is the plan designed so that you make more money by recruiting new members rather than through sales that you make yourself? This is the signature of a pyramid scheme operation.
  • Are you offered commissions for recruiting new members? Another pyramid scheme trademark. It's the number of people who are willing to sign up that matters in a pyramid scheme, not the products or services being offered.

Alternatives to MLMs

If you're still having trouble deciding and you are looking to start a full or part-time business, there are many other proven business ideas that are alternatives to MLMs:

  • 5 Low-Cost, Work-at-Home Business Opportunities for Women
  • 16 Inexpensive Business Ideas
  • The Best Business Ideas for Working for or with Seniors
  • 11 Unique Business Ideas
  • Best Business Opportunities for Retirees
  • 16 Part-Time Businesses You Can Start Today
  • Should You Buy a Franchise?

Frequently Asked Questions (FAQs)

Are pyramid schemes illegal?

Yes, pyramid schemes are illegal. They are fraudulent, unsustainable practices that promise big returns but don't deliver. The Federal Trade Commission warns people to look out for companies with unfair compensation structures where there is pressure to buy and sell product with no regard for consumer demand. Legal MLM companies base the compensation on sales to real customers.

What is the difference between pyramid selling and network marketing?

In pyramid selling, the primary goal, focus, and purpose is to collect your money and convince you (with the promise of big returns) to recruit others who pay money, too. Network marketing is different. It is a marketing strategy that aims to sell products by leveraging a wide network of distributors. The goal of network marketing is sales, not recruitment.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Trade Commission. "Multi-Level Marketing Businesses and Pyramid Schemes."

  2. Government of Canada. "Multi-Level Marketing and Pyramid Selling."

  3. New York State Attorney General. "Don't Get Caught in a Pyramid Scheme."

  4. Investor.gov. "Pyramid Schemes."

  5. Federal Trade Commission. "Business Guidance Concerning Multi-Level Marketing."

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