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Distinguishing Between a Pyramid Scheme and Multi-Level Marketing (MLM)


A pyramid scheme might pass themselves off as multi-level marketing opportunity. You might think you've come across a great MLM opportunity, and actually end up being prosecuted, depending on your level of involvement. So how does one distinguish between a pyramid scheme and multi-level marketing?

Identifying Pyramid Schemes

Pyramid schemes generally start with one person at the top of the "pyramid". That person recruits five or more people, and convinces them to invest in whatever idea he's selling. Each recruit is given the task of recruiting five more people. When those people invest in the idea, a percentage goes to the recruiter, and a percentage goes to the "pharoah" at the top of the pyramid. The people who invest in the early stages of a pyramid scheme generally make the most money. As each recruit goes out and finds five more investors (or whatever number they're tasked with finding), they receive a cut of the money. However, the majority of the funds go straight to the con artist at the top. It may appear like a good investment, because the more people you recruit, the more money you make.

The problem is that pyramid schemes don't sell an actual physical product. Recruits are simply putting money into the pharoah's pocket, and they'll have very little to show for it. The further down the pyramid a person is, the less money they'll make. Pyramid schemes usually end when the pharoah takes the money and disappears (or when the whole thing collapses). These scams grow exponentially in the early stages, but because of that growth, they run out of investors at some point.

Pyramid schemes have also happened in the U.S. in the form of chain letters, email campaigns, and lotteries. If you're presented with an investment opportunity that asks you to recruit other investors, it's probably a pyramid scheme. Talk to a reputable stock broker or the Better Business Bureau about the deal if you're unsure.

Identifying Multi-Level Marketing

Multi-level marketing differs from pyramid schemes in that it is legal, and there has to be an actual product being sold. These programs function similar to a pyramid scheme, in that the original company gets a percentage of all the sales you make. MLM companies create what's called a "downline of distributors". If you sell products and promote the company, and recruit other sales people, you get a percentage of their sales. Once again, the company at the top of the distribution line makes most of the money. You don't earn a commission on recruiting new members, which is another distinction from the pyramid scheme. Commissions for signing up other members to a MLM plan are illegal in the U.S. Although the concept is very similar to a pyramid scheme, MLM companies such as Amway and Avon are legal, because they're selling real products to customers.

In the age of information products, it can sometimes be difficult to distinguish between a pyramid scheme and multi-level marketing. Pyramid schemes often present themselves as a multi-level marketing opportunity. If you're uncertain about a potential offer, make sure you conduct research before joining.


Daphne Mallory, Esq. is the co-owner of Mallory Writing Services and has written more than 100 articles helping home based business owners and entrepreneurs start and market their business. You can learn more about her here.

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