MLM vs Pyramid Scheme: What You Need to Know

The other day, I got a DM from an old high school friend. I hadn’t heard from her in a while, and I was excited to catch up and find out what she was up to. As we talked about post-college life and all the books we’d been devouring, she started telling me about her job. She raved about how she got to “choose her own hours” and “make six figures from her living room.” 

Yep, you guessed it—she worked with an MLM.

Multi-level marketing companies, often referred to as MLMs, are companies that recruit everyday people to sell products to their network of friends and relatives. Typically, these companies let their sales representatives choose their own hours and work from the comfort of their own home. This flexibility is pretty attractive—especially to the 18% of parents who stay at home, looking to fill their days with something productive while the kids are at school.

However, working with an MLM can be a pretty risky business venture. Most people who do business with MLMs make little to no money, despite putting in hours of quality work. In some worst case scenarios, people join what they think is an MLM, only to discover that the company is actually an illegal pyramid scheme in disguise. 

To ensure that you don’t get coerced into joining a pyramid scheme and wade waist-deep into debt, here are a few things you need to know about MLMs vs pyramid schemes. 

What Is an MLM?

MLM stands for multi-level marketing. Also known as network marketing, direct selling, or social selling, multi-level marketing is a business strategy used by companies to sell products through people rather than retail stores. MLM companies recruit everyday people to sell products or services directly to their parents and pals. Often referred to as “distributors” or “market partners,” these salespeople sell online via social media or directly from their home—so don’t be surprised if you get an Instagram DM from an old high school friend inviting you to a spontaneous Monat meeting, Beachbody Challenge Group, or Amway associate get-together. 

While selling products is one way that MLM distributors earn money, it isn’t the most profitable method. Salespeople primarily focus on recruiting new distributors to work under them—on their team or downline—ultimately earning commission based on what their new recruits sell. This is where the multi-level in multi-level marketing comes from, and why most sellers enthusiastically encourage their customers to join the business opportunity. 

What’s a Pyramid Scheme?

What’s the deal with pyramid schemes? Are MLMs the same as pyramid schemes?

Not exactly. While an MLM is a legal (albeit high-risk) marketing strategy, a pyramid scheme is an illegal scam based on fraudulent investment. MLM distributors are able to make money by selling products in addition to recruiting others, but people duped by pyramid schemes earn wages solely by recruiting others to their downline.

Before you ask, pyramid schemes have nothing to do with Ancient Egypt or ninth-grade geometry. Here’s how they work: Like in an MLM, investors in the scheme recruit others to work under them, promising “life-changing amounts of money” or the ability to “get rich quick.” To join the company, this second person has to “invest” a certain amount of money in the company, typically by buying a surplus of unsellable products. This money goes directly to the initial investor. The second investor then makes money by recruiting a third individual to work under them, and so on. The cycle continues until the pyramid gets too large to support the amount of people involved and topples.

Still lost? This classic scene from The Office might explain things a little better!

Wondering what companies are considered pyramid schemes? Well, if a company tells you that they’ll help you “get rich quick,” emphasizes enrolling others over selling products, and forces you to buy products when you haven’t sold what you already have, it’s likely a pyramid scheme.

Pyramid Scheme vs MLM: What’s the Difference?

So, what are the main differences between MLMs and pyramid schemes? Let’s sum it up!

  • MLMs are companies that sell products; pyramid schemes are scams. If you’re like me, you’ve likely asked yourself, “why are MLMs not illegal?” Well, this is why. MLMs offer real, tangible products and the opportunity for distributors to make money through sales—in addition to recruiting new sales representatives. It’s extremely risky to work with an MLM, but it’s not impossible to be successful. Pyramid schemes, on the other hand, offer products or services that are extremely unreliable or low quality. Ultimately, these schemes scam representatives through fraudulent promises, leaving them bankrupt or deep in debt.
  • MLMs reward distributors for building their downline; pyramid schemes require it. While MLMs give distributors more perks and financial rewards for recruitment than for selling products, building a downline isn’t necessarily required. Many MLMs emphasize it, however, and actually use their products as a front to outwardly minimize how much impact recruitment has on a distributor’s profit. Pyramid schemes, on the other hand, require representatives to focus on recruitment, as commission is based entirely on getting others involved.
  • MLM-based companies may buy back unsold products; pyramid schemes will not. Most MLM distributors purchase inventory directly from the company, then turn around and sell it to customers for a higher price. When a distributor calls it quits, some MLMs will buy back whatever product they have left. This isn’t always guaranteed, however, and many MLM companies make distributors go through all sorts of bureaucratic hoops to get rid of leftover products. Pyramid schemes, on the other hand, won’t offer any financial restitution at all!

Is Joining an MLM Smart for Parents?

Joining an MLM can be an attractive idea, especially for parents wanting to work from home. However, working with an MLM can require great effort with little to no financial return. In fact, this FTC report states that a whopping 99.997% of MLM distributors actually lose money! Before you get involved, do your research and ask yourself these questions: 

  • Why do you want to join an MLM? Are you excited by high-risk business ventures, or simply looking for a way to fill the time? If you have a solid business plan and enough tenacity to persevere through the hard times, working with an MLM could be for you. If your goal is to find financial stability, however, I’d recommend searching for a steady job first.
  • Can you afford to risk the money and time? Most MLM distributors have to buy products from the company, then sell them at a higher rate—and many MLMs have monthly or quarterly purchase requirements in order to remain an active seller. If you aren’t able to commit the time or money, joining an MLM can be financially detrimental. Do some research and study up on the company’s compensation plan and refund policy before you sign up.
  • What is the best MLM company to join for your lifestyle? From essential oils to skincare products, there are a plethora of product-based MLMs out there. The best MLM to join is one that sells products that you believe in yourself, because you’re a salesperson for the brand.

Do What’s Best for Your Family

Working with an MLM can be an exciting way for parents to make some extra money—but it’s extremely risky. Do some research before you sign up, and ensure that the company isn’t scamming you into joining an illegal pyramid scheme. Simply put: do what’s best for your family.

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And don’t forget to come on back to the Troomi blog whenever you need a little help parenting in a digital world.