Difference between MLM & Pyramid Scheme

Know the Difference Between MLM & Pyramid Scheme

In the direct sales industry, why choose MLM, does it work and how can your business profit from it? When it comes to how MLM works, example after example shows that it is profitable. But while the multi-level marketing business is indeed lucrative, being snared by scammers in a pyramid scheme is not. So, let’s see where the differences lie and how you can work towards gaining profits, rather than being duped of your earnings:

What is MLM & How Does It Work?

Multi-level marketing is also known as MLM, network marketing, direct selling, relationship marketing, and referral marketing. Within it, distributors play the key role as consultants, independent business owners, promoters and salespeople.

MLM or multi-level marketing is the lifeline of industries and businesses. Leading companies that rely on MLM or direct selling include Amway, Herbalife, Tupperware, Avon, The Pampered Chef, and Mary Kay. Additionally, there is a huge network of distributors and recruits selling every kind of product.

Pyramid Schemes Explained

A pyramid scheme is a hierarchical step-up based investment. It’s also illegal and fraudulent. Here’s how the pyramid scheme works. New recruits form the base of the pyramid and provide the so-called funding or returns. This, in turn, is shared with early investors or recruits in the hierarchy above them. The scheme is run by scammers seeking to recruit investors with offers of guaranteed huge returns.

How to Differentiate Between MLM & Pyramid Scheme


#1 Researching the Company

Finding out when a company is founded can pave the way for deeper insights. Legitimate MLM companies are those with an impeccable track record. Since pyramid schemes are illegal, the scheme stops the minute top executives turn a decent profit.


#2 Study the Compensation

Check the compensation. MLM companies make massive money off sales rather than the contributions of new members. Their focus is always on recruiting and keeping better salespersons so one is compensated well. Pyramid schemes can advertise about compensation details in the future sense, telling you how much money you can actually make after a promotion. Pushing them to concrete profit margins is another story altogether.

#3 Find the Refund Policy

Pyramid schemes have claimed to real products. But they actually don’t sell quality products. In fact, the focus is not on the product at all. One way of checking this is to find if a full refund is available for unused products.

#4 Understand The System of Promotions

Another way to distinguish oneself from others is to find out how the promotions are offered. People move up pyramid schemes on the basis of recruits that can be signed up. MLM companies promote people on the basis of sales volume or solid performance criteria, on the other hand. If the company lacks an official appointment policy, it is probably a pyramid scheme.

Factors to compare:

MLM plans are marketing strategies through which network marketing companies are designed to promote products through distributors, offering multiple compensation levels. Pyramid schemes are fraudulent and masquerading as an MLM strategy. The difference between pyramid schemes and lawful MLM programs is that pyramid schemes lack real products and commissions are sold on the basis of new individuals one introduces.

Mode of Business Operations

A major difference between the schemes is the business operation and process. MLM strategies focus on tapping premier MLM software and focusing on moving products out into the market. Pyramid schemes, on the other hand, focus on getting money and recruiting others in the chain process. MLM is based on selling more products and boosting the performance of the distributor network.

MLM structures are efficient to sell products and build a market niche. Pyramid schemes do not focus on the market. For this reason, pyramid schemes are an illegal form of marketing in countries like the US, Poland, UK, South Africa, Australia, and Japan.

Focus on the Setup

The key idea behind MLM strategies is promoting a maximal number of distributors for products and exponentially increase the sales force. Promoters get a commission on product sales and compensation for sales recruits make.

In the event of pyramid schemes, money is charged for including other individuals into the scheme and no real product is actually sold. Only some people make money and when no more new individuals can be recruited, the scheme fails and most promoters lose their cash.

The legitimacy of the Company

The FTC in the US has clearly defined pyramid schemes as illegal. Sales of actual products or services to consumers mark an MLM business, while pyramid schemes offer no such value.


So, this is how one can differentiate between legit MLM companies with reputed MLM software and fraudulent pyramid schemes with no infrastructure. If you want to establish yourself as a respected multi-level marketing business, multi-level marketing software and infrastructure are a must. Choose premier multi-level marketing software development company Sankalp’s innovative MLM software, Ventaforce and you’ll be delighted with the results.

8 thoughts on “Know the Difference Between MLM & Pyramid Scheme

  1. I have read somewhere similar point of view and I totally agree with what you said. However, there are also some other things that could be mentioned on this topic, but overall I like what you described.
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