Multi-Level Marketing Vs. Pyramid Scheme

To the uninitiated, it is almost impossible to distinguish the differences between a genuine, legitimate multi-level marketing program and a pyramid scheme, sometimes referred to as a Ponzi scheme. This comes about due to the fact that both presents a pyramid like structure in terms of organization.

Multi-level marketing is a term that describes a distribution tool used by some companies to create a marketing and sales force by compensating distributors of company products for sales they personally generated and also of other distributors they introduced to the company; creating a chain of distributors and a hierarchy of multiple levels with different compensation rates depending on the plan. The main feature of such plans is the direct selling of products from manufacturers to consumers, cutting out the middle man entirely. It is argued that such a structure would make products more affordable due to greater savings and the possibility exponential returns on infinite recruitment to such plans. In addition to that, the wide base of downlines presents a dedicated consumer base from which a promoter can rely on for recurring sales.

On the other hand, a pyramid scheme primarily depends on the exchange of money from enrolling other people into the plan without the actual delivery of product or service. These schemes are a form of fraud and illegal in many countries around the world. Some hold that multi-level marketing regardless of legality is nothing more than a variation of a pyramid scheme.

Despite the exchange of a product or service for money, not every multi-level marketing program can be considered to be legitimate. There are several signs a multi-level marketing program can be a disguised pyramid scheme (as discussed on the Federal Trade Commission’s website, USA):

• Paid commissions for recruiting new distributors
• Uncompetitive prices for product
• Compensation plan focuses more on the recruitment of new distributors rather than the sale of company products
• Promises of commissions and rewards

Always be cautious of (also discussed on aforementioned site):

• Product(s) sold or bought
  Are claims of merits provable and product is safe for use?
  What do health professionals, official reports and others say about the product(s)?
  Is the product likely to appeal to a large customer base?
• Supposed business opportunities
  What other products are marketed?
  Is the company primarily relying on the plan to be marketable?
  Are distributors urged to spend or invest money in order to make it?
• Company compensation plan
  What is the company’s track record?
  What up-front investment do you have to make to join the plan?
  Are you committed to making a minimum level of sales each month?
  Will you be required to recruit new distributors to be successful in the plan?
• Your responsibilities
  A distributor is legally responsible for the claims made about the company, its product and the business opportunities it offers. That applies even if distributors are simply repeating the claims they read in a company brochure, advertising flyer or from other distributors.