People in the direct selling industry make a big effort to differentiate the pyramid schemes and the Multi-Level or Network Marketing companies.
There is a lack of clarity in the legal framework and in the modus operandi that lead people to draw wrong conclusions about these two different models.
According to Debra A. Valentine, all the pyramid schemes share one characteristic: they pledge to consumers that they will have great benefits mainly based on sponsoring new people to the program. It is not based on benefits generated by real product sales, but in the sponsoring/requirement of new affiliates. In the pyramid schemes the income is based on the number of recruited people and the on money that the new recruits pay to join the company and not on the sales of products to consumers.
In many cases, a bad business management is defined by the marketing strategy. Participants are forced to buy large quantities of products for sale and sponsors receive commissions for this sales. In this model the affiliates are also the final consumers. It is necessary to draw a line between what is a normal quantity for personal consumption and what is excess inventory.
Differences between Multi-Level Marketing (MLM) and Pyramid Schemes:
- MLM: Accessible enrollment fee or enrollment kit for everyone.
- Pyramid: High enrollment fee. (The main goal is to recruit)
- MLM: High quality product portfolio with return guarantee.
- Pyramid: There is no product or if there is one it has a dubious quality. There is no return guarantee from the products or the enrollment fee.
- MLM: Long term business based on residual income from the consumption of the customers.
- Pyramid: Short term business. Get rich quick without effort.
- MLM: Income is directly proportional to the effort, sacrifice and persistence.
- Pyramid: People can escalate positions without effort.
- MLM: Income is derived from the sales volume.
- Pyramid: Income is derived from the number of recruited people.
- MLM: The money is declared (invoiced and taxed)
- Pyramid: The money is not declared and is classify as a donation.
- MLM: You can earn more money than your upline.
- Pyramid: It is not possible to earn more money that your upline.
- MLM: Legal scheme.
- Pyramid: Illegal scheme.