MLM or Pyramid Scheme – What’s the Difference?
MLM vs Pyramid scheme, how do I know when I am choosing right? With so many pyramid schemes going around it may difficult to decide the right networking marketing company to partner with. To some people all MLM companies are pyramid schemes. This is not true. There are legitimate MLM businesses selling actual products that allow partners to earn income from them.
On the surface, it may be difficult to differentiate between an MLM and a pyramid scheme. Here are some few tips to help you pick out the difference. These tips will also help you identify scammers posing as MLM.
What is MLM?
Multilevel marketing (MLM) is a business model that involves distributing products to consumers through partners identified as independent business owners (IBOs). Instead of conventional sales people, IBOs make money by selling the product directly to consumer or managing a team of sales people. Then they get a percentage of all the sales done by their recruits.
The idea behind MLM is to remove intermediaries in the distribution chain to reduce costs that go to selling. These selling costs are then converted to revenue for partners (IBOs) in terms of profits. Some of the recognized MLMs include Amway, The Pampered Chef, Herbalife, Avon, and Mary Kay.
MLM is an attractive business idea because it gives people an opportunity to become distributors to consumers. With this partnership, you do not have to start a business from the scratch. You have the support of a direct selling company that supplies you with the products and offers you training on how to go about selling and marketing.
How does MLM Work?
As a consultant or IBO or Distributor or contractor – different companies have different names for their partners—you make money by selling products to other network or multilevel marketing participants. If they are not a member of your company, you sign them up.
Apart from revenue earned from your sales, you also get a percentage of the income generated by distributors that are in your network (that you admitted to the program). They are referred to as your downline. Occasionally, you can also benefit from bonuses that come with bringing in many members and selling more products above targets.
What is a Pyramid Scheme?
Pyramid schemes just like MLM depend on recruiting people to become distributors of a good or a service. A pyramid scheme also offers an opportunity to make money by signing up more distributors and attaining a certain level of targets. The money offered for recruiting people is either in form of a commission from sale of a starter kit or “bonus” from recruitment.
A common red flag for a pyramid scheme is that it insists more on recruiting people more than selling. Another characteristic of a pyramid scheme is that the startup costs are high compared to MLM. The cost for joining such as a starter kit, non-refundable membership fee and mandatory training should warn you that you are about to join a pyramid scheme.
MLM vs Pyramid Scheme – The Purpose
The purpose of MLM is direct selling of actual products to consumers used distributors that are part of the company. The only idea for MLM is to move the product (s). For a pyramid scheme, the purpose is to simply pass up money in a chain of investors. There is no actual product where the money is invested. For a pyramid scheme, the idea is to get your money and use you to recruit other members that will also bring money.
MLM can become a pyramid scheme when it is involved in an unlawful or deceptive compensation structure.
How do I Recognize a Pyramid Scheme?
These are some of the red flags you should look out for;-
· Huge start-up cost
Pyramid schemes require you to invest large amount of start-up capital to join
· MLM companies with no buy-back policy
Most legitimate MLMs agree to buy back 80% of unsold stock from their distributors.
· Are they actually marketing a product?
MLMs have a main purpose of moving a product. The idea is to sell as much products as possible. Follow and see if the company has more emphasis on the product and that more efforts are directed to that end. If the interest is not on the product, stay away.
· More emphasis on recruitment
This is the biggest pointer to a pyramid scheme. Pyramid schemes focus on more people so that they can get money as soon as possible. The idea is to sign up more people and get their money. If the main strategy of the MLM is recruitment, you need to run.
· Commission for signing up new members
If an MLM company offers to pay commission for more members signed up, it could be a pyramid scheme. You will also notice that promotions or advancement in hierarchy is based on recruiting more distributors instead of appointment.
MLM vs Pyramid Scheme – How to Protect Yourself
There are a couple of legitimate MLMs. There are also good MLMs that start out well, but then head up taking the direction of a pyramid scheme. You need to be careful when signing up to a network marketing company.
These tips will help you stay safe when comparing MLM vs pyramid scheme
1. Study the compensation plan in details. It should be realistic and with emphasis on earnings from selling.
2. Examine the company’s sales position, business plan, and marketing plan.
3. Check up the MLM in a reputable business bureau.
4. Avoid MLM that entice distributors to join by flaunting wealth such as car and houses.
5. If you feel pressured to join through intense motivational talks that want you to join immediately, stay away.
When confronted with a business opportunity, sometimes it may not be easy to know the qualities of MLM vs pyramid scheme. Visit our website to get a listing of reputable network marketing companies. We will also give you tips on how to identify a good MLM with a complete list of the most profitable and reliable companies.