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Pyramid Schemes and MLMs

Pyramid Schemes and MLMs

If you’ve seen a baby pink Cadillac on the road or a smoothie place with no prices on the menu, you’re familiar with MLMs and pyramid schemes. However, the line between the two is often blurred especially tied together by the media and the public. So, what are pyramid schemes and MLMs and how are they different?

MLMs Defined

Multi-level marketing (MLM) is a business model that requires participants to use a person-to-personal sales approach. This means that employees are selling directly to consumers either in a gathering or directly to a customer’s home.

When a person joins an MLM company, they become independent distributors or contractors. Distributors can make money in one of two ways:

  • Selling the product personally as retail to customers outside of the company
  • Recruiting distributors and earning commission based on what their new distributors sell to customers.

The people recruited by the distributor become part of their sales network – also known as the downline. MLMs can lean into pyramid schemes if they pay people based on the number of people who join rather than the amount of goods sold. MLMs that focus on recruitment and sales equally or have less pressure to recruit are generally not pyramid schemes.

MLMs can be another revenue stream, but in general participation in multi-level marketing does not turn a significant profit. In many cases, members of the downline don’t make a profit at all and may lose money. These companies can be deceiving and may be masquerading as MLMs when in reality they are pyramid schemes.

Examples of MLMs

It is important to remember that true MLMs are legitimate businesses as defined by the federal government. Over time, some MLMs have been accused of being a pyramid scheme.

Below is a list of legitimate MLMs that you may recognize:

  • Mary Kay
  • Primerica
  • Tupperware
  • Avon
  • Young Living

A classic indicator for illegal activity is if an MLM funnels profits to the top 1% or focuses almost exclusively on recruitment. If one or both of these things are true, the company could be a pyramid scheme.

What Is a Pyramid Scheme?

Pyramid schemes are scams that look like MLMs on the outside but actually have very little to do with sales. Often, pyramid schemes manipulate distributors into purchasing large volumes of the product to start which forces the distributor to sell to friends and family members without a profit. Money lost in a pyramid scheme is more often than not lost forever.

Most pyramid scheme recruiters use promises of earning potienial and encourage people to leave their job to “get rich quick.” However, the reality is income in a pyramid scheme is almost entirely based on the number of recruits not product sales. These schemes encourage people to recruit massive networks of people who can feed back into the system.

Many schemes encourage or require distributors to purchase unreasonable amounts of product to stay in the system. Regardless of existing intervals or inventory, distributors could be asked to buy thousands of additional units to satisfy the membership requirements.

One of the selling points is the reward and bonus system. For example, top earners (recruiters) may receive lavish gifts or prizes like vacations, houses, or luxury vehicles. Most of the requirements for bonuses are out of reach and only go to those with a vast network of people who also have vast networks of their own.

Warning signs of a pyramid scheme include:

  • Recruiters make promises about high earning potential
  • Promoters pressure new recruits to recruit their own distributors for the downline in order to make a profit
  • Recruiters prey on people looking for extra income and use high pressure sales tactics to force people to join. Emergency bias is also used as a recruiting tool
  • Distributors are required to buy more products can sell in a reasonable period of time

Pyramid schemes like eAdGear and Herbalife rely on recruitment and downlines to turn a profit and as a result are illegal.


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