Multilevel marketing vs. pyramid schemes for business partners: which one is legit and why?
Both MLM and pyramid schemes involve multiple levels of participants, but there is a key difference between the two. MLM is a legitimate business model that can be a great way to grow your business and increase your revenue, while pyramid schemes are illegal and often scams.
In this post, we’ll go over the key differences between these two types of marketing and why it’s important to know the difference if you are looking to start a multi-tiered partner program.
What is multi-level marketing?
Multi-level partner marketing (MLM) is a business model that uses a network of individuals to promote and sell products or services for a certain company. This process of hiring salespeople creates a network with a hierarchy. The person who hired the new salespeople is at the top, and the salespeople he hired are below him.
The salespeople at the top of the network typically earn a larger percentage of the profit from the sales made by the people below them in the network.
Case study: Which companies are using multi-level marketing successfully?
Several companies have successfully used multi-level partner marketing as a business model.
Some examples include:
- Avon is a company that specializes in selling beauty products, including skincare, makeup, and fragrances. Avon is one of the oldest and most successful MLM companies in the world. It has been around since 1886.
- Amway is a company, which was founded in 1959, sells a wide range of products, including health supplements, personal care products, and home cleaning supplies. Amway is considered one of the pioneers of the MLM industry and is still in operation today, with a global presence.
- Herbalife is a company that sells health and wellness products, including weight loss supplements and protein shakes. Founded in 1980, Herbalife has a global presence and is considered one of the most successful MLM companies in the industry.
- Mary Kay was founded in 1963, Mary Kay is one of the world’s oldest and most successful MLM companies. This company specializes in selling beauty products, including skincare, makeup, and fragrances.
- Tupperware is a company that sells food storage containers and other kitchen products. Founded in 1946, Tupperware is considered one of the pioneers of the MLM industry and is still in operation today.
Even though these companies have done well, not all MLM companies are successful or legit.
Now, let’s talk about a model that is very similar to multi-tier partner marketing and is often confused with it…
What is a pyramid scheme?
A pyramid scheme is a form of investment in which individuals invest money in a business and then recruit others to do the same. The main goal of the business is to find new investors, not to sell a product or service.
The individuals at the top of the pyramid make money from the investments of those below them rather than from any actual profits generated by the business.
Most countries have laws against these schemes, and they are seen as a form of financial fraud because they always fail when there are no more new people who are willing to invest.
It is similar to multi-level marketing, but in a pyramid scheme, the main focus is to recruit new members rather than actually sell something.
The people at the top of the pyramid scheme, the creators and early investors, are the ones who make the most money, and they do so by taking advantage of the later investors.
Which companies are using pyramid schemes?
Pyramid schemes are illegal in most countries, and many governments actively work to shut down companies that engage in this type of activity.
Here are a few examples of companies that government authorities have shut down for operating as pyramid schemes:
- Enron was an American energy company that collapsed in 2001. The company was found to be operating a pyramid scheme and had used fraudulent accounting practices to inflate its profits and hide its debt.
- WorldCom was an American telecommunications company that filed for bankruptcy in 2002. The company was found to have engaged in accounting fraud to hide its financial condition.
- Zeek Rewards was a North Carolina-based company that operated a pyramid scheme that promised investors returns of up to 1.5% per day. The SEC shut down the company in 2012, and its operator was sentenced to 25 years in prison.
- TelexFree was a Massachusetts-based company that operated a pyramid scheme that promised investors returns of up to 200% per year. The SEC shut down the company in 2014, and its operator was sentenced to six years in prison.
- BurnLounge was a California-based company that operated a pyramid scheme that promised investors the ability to make money by selling music and merchandise online. The FTC shut the company down in 2007, and its operator was sentenced to seven years in prison.
These are just a few examples, and the list goes on.
Pyramid schemes can also take many forms, but they mostly rely on “second-tier” referrals.
Pyramid schemes can be found in various industries, such as:
- Digital currencies are losing value.
- Real Estate
- Investment Opportunities
The main distinguishing factor of a pyramid scheme is that they often use high-pressure sales tactics and make unrealistic income claims to lure in new investors. They may also use various names and change them frequently to avoid detection.
As a partner, always be cautious when presented with an opportunity that promises high returns with little or no risk or that requires you to recruit other people to make money. These are red flags that indicate the opportunity may be a pyramid scheme.
If it’s too good to be true, it probably is.
What’s the difference between multi-level marketing and a pyramid scheme?
The main difference between multi-level partner marketing and a pyramid scheme is that in an MLM, the focus is on selling a legitimate product or service, whereas in a pyramid scheme, the focus is on recruiting new members and basically selling a “promise” of a huge ROI.
In MLM, members make real money by selling the company’s products and services, getting a % off a sale, as well as recruiting new members and earning a percentage of their sales (2nd-tier referrals). While both MLM and pyramid schemes have a hierarchical structure, in an MLM, the emphasis is on making money through sales, not just recruitment.
What are the dangers of creating a partner pyramid scheme?
There are several dangers associated with creating a pyramid scheme.
- Pyramid schemes, in general, are against the law in many countries, and people who take part in them can get penalties or even go to jail.
- Partner pyramid schemes are inherently unstable and will eventually collapse. This happens because the pool of potential new investors is eventually exhausted, and not enough money is coming in from new investors to pay returns to earlier investors. When the pyramid collapses, most participants lose the money they invested.
- Pyramid schemes can damage the reputations of the individuals and companies involved and harm the broader economy by diverting money from legitimate businesses.
- Ponzi schemes (which are a form of a pyramid scheme) prey on vulnerable individuals, particularly those who are financially struggling or looking for a quick and easy way to make money. They often make unrealistic income claims, and many people lose their savings.
MLM partner marketing best practices
The foundation of any successful MLM business is a product or service that people want to buy. Make sure that the products or services you offer are of high quality and in demand in the market. Here are some best practices to create an MLM partner business and stay on the safe side:
- Disclose the terms and conditions of the opportunity: Be transparent and upfront with potential partners about the terms and conditions of the opportunity, including the compensation plan and any requirements for participation.
- Avoid making false or misleading income claims to partners about potential earnings they can make. This is illegal and can lead to legal action.
- Don’t rely solely on recruitment for income. A sustainable MLM business should not rely solely on enrolling new members for income. The majority of income should come from the sale of products or services.
- Comply with laws and regulations. Make sure your business complies with all relevant laws and regulations, including those related to advertising, consumer protection, and pyramid schemes.
- Be honest and ethical in all aspects of your business. This will help you create a positive reputation for your business and attract loyal customers and partners.
The MLM business model can be successful if done right; however, it’s important to be aware of the legal and ethical considerations that come with this type of business and to do your research and due diligence before getting involved in any MLM opportunity.
As a business owner, you may want to leverage the efforts of others to grow your business, and that’s exactly what the MLM structure allows you to do. MLM is a business model in which a company’s salespeople are compensated for the sales they make and the sales of other salespeople they recruit. As your team of affiliates grows, so does your customer base, and so do your sales and income.
Using the power of MLM affiliate structures can be cost-effective because the affiliates themselves are responsible for promoting and selling products, which can be cheaper than traditional forms of advertising.
Pyramid schemes, on the other hand, look similar but, as explained in this article, are focused on investment and deposits rather than sales, which (among other factors) makes them illegal in the vast majority of countries. If you want to harness the power of a multi-level sales team, MLM, or multi-level marketing is a good choice.
Do you want to start an MLM Partner Program?
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You can try Scaleo for free for 14 days; no credit card is required. Give it a try and see how it can help you take your MLM partner marketing to the next level!
Last Updated on July 11, 2023