You've got dreams of financial freedom, and that's something we can all relate to. There's nothing wrong with wanting a more comfortable and secure future for yourself and your loved ones.
I certainly get it.
However, it's crucial to tread carefully when navigating the world of income-generating opportunities. Both pyramid schemes and MLM programs can be enticing, with their promises of wealth and success, but they have vastly different implications.
It's no wonder many find themselves entangled in these ventures, drawn by the allure of quick money and the chance to build a prosperous life.
But the reality is that while some MLM programs may offer a legitimate path to financial success, pyramid schemes are deceptive and leave most participants with empty pockets and shattered dreams. The distinction between the two is vital to understand.
In this article, we'll explore the differences between pyramid schemes and MLM programs, dissect their structures, and delve into the consequences of participating in these ventures. With a comprehensive understanding of how they work, you'll be better equipped to make informed decisions and safeguard your financial future.
Differences Between Pyramid Schemes and Multi-Level Marketing Programs
Pyramid schemes and multi-level marketing (MLM) are often confused due to their similar structures, but they are fundamentally different.
While both involve a hierarchical system and the recruitment of new members, pyramid schemes are illegal and unsustainable.
In contrast, MLMs are legitimate business models, at least as far as the law is concerned.
Your personal opinion about MLMs may differ, which is understandable.
Having said that, regardless of what you (and I) think of them, there are critical differences between pyramid schemes and MLMs that make one illegal and the other legit.
Let’s start by defining both…
Defining Pyramid Schemes and MLMs
A pyramid scheme is an illegal and fraudulent business model that relies on continuously recruiting new members to generate income.
In a pyramid scheme, participants are promised high returns for recruiting others into the scheme without any real product or service being offered. The primary focus is recruitment, and the only way for members to make money is by bringing in new members.
On the other hand, multi-level marketing is a legal and established business model where independent distributors sell a company's products or services.
In MLMs, distributors can earn income in two ways. They can earn through direct sales of products to consumers and by recruiting others to join their sales network and earn commissions from their downline.
Here's a quick visual difference between the two, and then below, I'll go more in-depth…
Pyramid Schemes Vs. Multi-Level Marketing
| Characteristic | Pyramid Scheme | MLM |
|---|---|---|
| Structure | Hierarchical, with fewer participants | Hierarchical, with large networks |
| Legal Status | Illegal in many countries | Legal if it meets certain criteria |
| Income Source | Mainly from recruitment | Mainly from product sales |
| Product/Service | Non-existent or low value | Legitimate and useful |
| Sustainability | Unsustainable, collapses eventually | Sustainable if product sales are strong |
| Commission | Based on recruitment | Based on product sales and team sales |
| Recruitment Focus | Primary focus | Secondary focus, after product sales |
| Earning Potential | Dependent on recruitment, unsustainable | Varies, based on individual sales and team performance |
With that quick overview, let's dive deeper into the key differences between pyramid schemes and MLMs…
Product or Service
One of the most significant differences between pyramid schemes and MLMs is the presence of a legitimate product or service.
In a pyramid scheme, there is no genuine product or service being offered, while MLMs involve the sale of actual products or services. This can range from cosmetics and nutritional supplements to household goods and financial services.
Focus on Recruitment vs. Sales
Pyramid schemes emphasize recruiting new members as the primary source of income, while MLMs place a stronger focus on product sales.
In MLMs, individual distributors are encouraged to build their sales network, but the emphasis is on selling products, not solely on recruitment.
Sustainability
Pyramid schemes are inherently unsustainable, as they rely on an ever-increasing number of recruits to generate income.
Eventually, the market becomes saturated, and the scheme collapses, leaving most participants with financial losses.
In contrast, MLMs are sustainable because they are based on actual product sales and commissions earned from recruits' sales.
Legal Status
Pyramid schemes are illegal in many countries, including the United States, because they are deceptive and often lead to significant financial losses for participants. Regulators like the Federal Trade Commission (FTC) actively monitor and prosecute those involved in pyramid schemes.
On the other hand, MLMs are legal and regulated business models, provided they adhere to certain guidelines and focus on product sales rather than recruitment.
Compensation Structure
In pyramid schemes, the compensation structure is heavily skewed towards those at the top. Participants earn money solely from recruitment, and the funds flow upwards, benefiting the few at the top while the majority at the bottom lose money.
In MLMs, the compensation structure is more balanced, with distributors earning commissions from their direct and recruits' sales. This allows for greater income potential across all levels of the organization.
Transparency
Legitimate MLM companies are generally more transparent in their operations, compensation plans, and income potential.
They often provide income disclosures, clearly stating the average earnings of their distributors and emphasizing that success requires hard work and commitment.
Pyramid schemes, on the other hand, tend to be secretive and make unrealistic promises of easy, high returns.
Identifying an Illegal Pyramid Scheme from a Legitimate MLM Opportunity
Because of the hierarchical structure mentioned earlier, distinguishing between a pyramid scheme and a legitimate multi-level marketing (MLM) opportunity can be challenging.
However, keeping an eye out for the differences described above will help you identify the red flags that what you’re about to join is a pyramid scheme. Let’s go over them in more detail.
Look for a Genuine Product or Service
Legitimate MLMs revolve around the sale of actual products or services, while many pyramid schemes do not have a genuine product or service offering. However, this is not always the case.
Some illegal pyramid schemes have a product or service to create an illusion of legitimacy and to differentiate themselves from the blatant pyramid schemes that rely solely on recruitment.
When a business opportunity is focused on selling products and services that are attached or connected in some way to the actual membership, with no retail sales involved, it should raise concerns.
These are referred to as “membership-based sales”.
In a legitimate multi-level marketing company, the emphasis should be on selling products or services to end consumers, not just to those within the organization.
Here are some issues associated with MLM schemes that focus on membership-based sales rather than retail sales.
Lack of External Revenue
When there are no retail sales involved, the primary source of revenue comes from membership fees or the internal consumption of products and services by the members. This can create an unsustainable income model, as it relies on constantly recruiting new members to maintain cash flow.
Saturation and Recruitment Challenges
With the focus on membership-based sales, the market can quickly become saturated, making it increasingly difficult for participants to recruit new members. This leads to front-loaded profits for early participants and diminishing returns for new participants.
The collapse is inevitable in this scenario, and the majority of members who join later in the pyramid's life cycle end up losing their investment.
Inflated Product Value
In the absence of retail sales, the products or services are often overpriced or bundled with expensive membership fees (which is another red flag).
This inflated pricing can be difficult to justify to potential customers, further limiting the market for the products or services. In other words, the only people who are willing to buy the products are those who are involved in the opportunity.
Legal Scrutiny
Regulatory authorities, such as the Federal Trade Commission (FTC), view businesses that focus primarily on membership-based sales with suspicion, if not a full investigation.
A lack of retail sales is an obvious red flag because the only alternative is to put an emphasis on recruitment over actual product sales. If the pyramid doesn’t collapse first, it is likely to get shut down by the FTC.
Limited Income Opportunities
In an MLM scheme that focuses on membership-based sales, MLM participants may find it challenging to generate a sustainable income, as their earnings are ONLY based on recruitment.
The inevitable result is a financial loss for most participants, especially those who join the scheme later.
Low Product Value or Quality
When products or services offered by these schemes are low quality an provide little genuine value to consumers, it’s a huge red flag.
This is a clear sign that the scheme's primary purpose is to facilitate recruitment and not to provide a legitimate product or service to customers.
The “product” is a training package that teaches you to recruit – When the “product” in an MLM scheme is a course or coaching that teaches you to recruit more members, it’s obvious what’s going on.
The product itself is designed to perpetuate the recruitment process.
Inventory Loading
Some pyramid schemes with products encourage participants to purchase large quantities of inventory upfront, with the promise of high returns on resale.
This practice, known as inventory loading, can leave participants with significant financial losses when they are unable to sell the inventory due to the low demand or poor quality of the product.
Furthermore, this is often just a way to hide the scheme's “entrance fee” by getting new members to invest significant money upfront to join the program.
Emphasis on Recruitment over Sales
We talked about this above, but it’s not always so cut and dry. That’s because legitimate MLMs also encourage distributors to earn commissions through recruitment. It’s just that their primary focus is on product sales.
Or at least, it should be. Many walk a fine line.
However, when a company focuses on recruitment and selling “lifestyle”, even if they have a product to sell, there’s a possibility it could be an illegal pyramid scheme.
At the very least, this must be considered alongside other red flags.
Quite often, this is blatantly obvious, but scheme operators and high-volume recruiters are very good at convincing people otherwise.
Here are some methods many use to mislead prospective participants…
- They “remind” you that they have a product or service – Even though their product or service is irrelevant to them being an illegal scheme, they still bring it up as proof they are legit.
But it does not prove anything. - Success stories and testimonials – Scheme operators will showcase success stories and testimonials from high-volume recruiters or early participants who have made significant earnings.
These stories can create a false impression of widespread success and profitability, enticing new participants to join in the hopes of achieving similar results. - High-pressure tactics – Recruiters use high-pressure tactics to persuade prospects to join, including time-sensitive offers, aggressive sales pitches, and emotional appeals.
These tactics create a sense of urgency and can make it difficult for potential participants to think critically about the opportunity. - Appeal to authority – Scheme operators may use endorsements from celebrities, industry experts, or other authority figures to lend credibility to their program.
These endorsements can create an illusion of legitimacy and make it harder for prospects to question the business model. - Professional presentations and marketing materials – Schemes often invest in slick presentations, well-designed websites, and convincing marketing materials to create the appearance of a legitimate and successful business.
- Emphasis on personal development and growth – Personal development and growth is also part of many legitimate programs, so this is no smoking gun. However, they will use this to further cloud your judgment.
For example, they may offer training, mentorship, and support, which can make the opportunity seem more legit and, therefore, more appealing to those seeking personal and financial growth. - Association with legitimate MLM companies – Some schemes attempt to associate themselves with well-known, legitimate MLM companies to enhance their credibility.
They may draw comparisons between their business model and those of successful MLMs, making it harder for prospects to identify the differences.
The Anti-Establishment or Anti-Authority Narrative
In the section above, we talked about an “appeal to authority” by using celebrities and authority figures to legitimize the scheme.
This is the opposite of that.
When scheme operators and high-volume recruiters use an anti-establishment or anti-authority narrative, they aim to create a sense of mistrust in traditional systems and societal structures.
They may tell prospects that the “system” and “society” are designed to keep them from achieving financial success and that their opportunity offers a way out of this perceived trap.
This approach can be appealing to individuals who feel disillusioned or frustrated with their current circumstances.
Here are some common aspects of this tactic…
- Us vs. Them Mentality – By promoting an “us vs. them” mentality, recruiters can foster a sense of camaraderie and shared struggle among prospects.
This narrative can create an emotional bond and make the opportunity feel like a unique chance to break free from societal constraints. - Exploiting Dissatisfaction – Recruiters may exploit prospects' dissatisfaction with their jobs, financial situations, or overall life circumstances.
By presenting their scheme as an alternative path to success and financial freedom, they can make it more appealing to individuals who are unhappy with their current situations.
To be clear, this is not a sure sign of a scam or scheme, but when this tactic is applied as a pressure method to “convince” you of something that appears untrue, you should investigate further. - Promoting entrepreneurship – Schemes may emphasize the entrepreneurial aspects of their business model, encouraging prospects to view themselves as business owners rather than employees.
This narrative can be attractive to those who desire more autonomy and control over their work and finances.
Again, like the previous point, this is not unquestionable proof. It’s just one more piece to the puzzle. - Questioning traditional paths to success – Recruiters may encourage prospects to question the validity of traditional paths to success, such as pursuing higher education, climbing the corporate ladder, or working a 9-to-5 job.
By casting doubt on these conventional routes, they can make their scheme appear more attractive and viable. - Sense of exclusivity – Presenting the opportunity as a loophole, secret, or exclusive path to success can create a sense of urgency and exclusivity among prospects.
This tactic may make individuals feel that they are being given access to a unique and valuable opportunity that others may not know about, and they need to act fast.
Unrealistic Income Claims
These are usually easy to spot. You know the saying…
“If it’s too good to be true, it probably is.”
Pyramid schemes often lure people in with promises of easy money and high returns with little effort. And this causes otherwise rational people to abandon what they know deep down is true.
If this has happened to you, you’re not alone. Scammers and schemers are skilled at playing with your emotions because they understand how these cognitive biases work within all of us.
Here are some you probably recognize…
- Financial desperation or stress – People who are facing financial difficulties or experiencing significant financial stress may be more susceptible to the allure of quick, easy money.
In their desperation to improve their financial situation or even survive, they may be more willing to take risks or overlook warning signs. - Greed and wishful thinking – The desire for wealth and financial success can be a powerful motivator, causing people to engage in wishful thinking and ignore their rational instincts.
They may be more willing to believe in the possibility of earning easy money, even when it contradicts their better judgment. - Cognitive dissonance – Once a person has invested time, effort, or money into a scheme, they may experience cognitive dissonance, a psychological discomfort that arises from holding contradictory beliefs.
To resolve this discomfort, they may rationalize their involvement in the scheme, convincing themselves that it is legitimate despite evidence to the contrary. - Lack of knowledge or experience – Individuals who are not well-versed in the world of finance, investments, or business may be more susceptible to scams or illegitimate schemes, as they may not have the knowledge necessary to spot the red flags.
- Optimism bias – This is the tendency for people to overestimate the likelihood of positive outcomes while underestimating the likelihood of negative ones.
I've written about this in other articles, for example, when discussing reasons you should think like an entrepreneur.
However, while that article expains that thinking like an entrpreneur can help you counter the naive trust in the economy that optimism bias creates, that's not the case here.
It serves the opposite purpose here, and it's not necessarily helpful.
In the context of get-rich-quick schemes, individuals have an optimism bias about their chances of success, which can lead to dismissing any potential risks or challenges. - Confirmation bias – This cognitive bias refers to the tendency for people to seek out and interpret information in a way that confirms their pre-existing beliefs or desires.
When presented with promises of easy money, individuals may be more likely to pay attention to information that supports their hope for quick wealth while ignoring or downplaying any warning signs or evidence to the contrary. - Sunk cost fallacy – This cognitive bias occurs when individuals feel compelled to continue investing time, effort, or money into a situation because they have already invested resources into it, even if it is no longer rational to do so.
In the case of pyramid schemes and get-rich-quick schemes, the sunk cost fallacy causes people to be reluctant to acknowledge they have fallen victim to a scam or made a poor decision, and instead, they may continue to invest more resources in the hope of eventually achieving success.
These cognitive biases can make it difficult for people to think rationally when presented with seemingly attractive opportunities to make easy money with little effort.
They may be more susceptible to persuasive tactics used by scammers or promoters of dubious investment schemes, as their desire for financial success can cloud their judgment and make them more vulnerable to manipulation.
Targeting Individuals with Strong Religious Beliefs
I realize this is a controversial topic, but it’s also a common tactic of pyramid schemes, Ponzi schemes, scams, etc., to target people with strong religious beliefs.
Therefore, if you’re joining one of these hierarchical organizations and notice an unusually high ratio of religious to non-religious participants, there may be an underlying strategy going on here.
Not in all cases, but in some cases.
And there are reasons for this…
Trust and Community
Religious communities often foster a sense of higher trust and camaraderie among their members.
Therefore, people within these communities are sometimes more likely to trust one another without evidence and may be more susceptible to schemes presented by someone they perceive as sharing their values or beliefs.
Appeal to Authority and Faith
Schemers may use religious language, symbols, or connections to gain credibility and manipulate people's emotions.
They may exploit the natural inclination of religious individuals to trust and follow authority figures or to have faith in a higher power.
The anti-establishment narrative is also effective when combined with faith.
Moral Obligation and Altruism
Some schemers may present their schemes as opportunities for religious individuals to fulfill a moral obligation, such as helping others, supporting a cause, or spreading their faith.
By appealing to a person's sense of duty or altruism, schemers can make their scams seem more legitimate and appealing.
Prosperity Theology
Some religious beliefs, such as prosperity theology, promote the idea that financial success is a sign of God's favor and that faithful individuals will be rewarded with wealth.
Schemers may exploit these beliefs to convince religious individuals that their participation in a scheme is divinely ordained or a path to spiritual fulfillment.
Vulnerability and Hope
Religious individuals may be more susceptible to manipulation when they are experiencing personal challenges, such as financial difficulties, health issues, or other crises.
Promotors, scammers, and schemers may use religious language or themes to offer hope and support, making their scams seem like a lifeline or divine opportunity.
These factors can, but are not guaranteed to, make religious individuals more vulnerable to scams and schemes, as their beliefs, values, and community connections may be exploited by unscrupulous individuals seeking to take advantage of their trust and faith.
How to Protect Yourself from Pyramid Schemes
In addition to what we’ve already discussed above, here are some actionable steps to take to protect yourself from pyramid schemes.
Research Thoroughly
Investigate the company, its products or services, and its compensation plan. Thoroughly read their sales literature. Look for concrete information, such as income disclosures and detailed product descriptions.
Be wary of any company that is secretive or provides vague information. This is a blatant red flag.
Under no circumstances should there be a lack of transparency when it comes to this type of information, as it’s the same kind of information they would need to provide the FTC to prove they are legitimate.
Evaluate the Product or Service
Assess the quality, value, and marketability of the products or services being offered.
Legitimate MLMs typically have high-quality products or services that are in demand.
Consult with Others- Speak to current or former participants to gain insight into their experiences with the company.
Reach out to friends, family members, or professional advisors for their opinions and advice.
Verify Legitimacy
Check if the company is registered with relevant authorities or industry associations, such as the Direct Selling Association (DSA). Look for any regulatory actions or legal issues involving the company.
Identifying a pyramid scheme from a legitimate MLM opportunity requires due diligence, awareness of red flags, and a careful evaluation of the company's product or service offering, compensation plan, and overall transparency.
Pyramid Schemes and Psychological Manipulation
No discussion of pyramid schemes and how to identify them go without also discussing the psychological tactics that are used to promote them.
We discussed many of the elements promoters and high-volume recruiters use above, but they all fall under the umbrella of psychological manipulation or mind control, which can be understood as a deliberate attempt to influence or change a person's thoughts, beliefs, emotions, or behaviors for the manipulator's benefit.
The term “mind control” might be associated with more extreme cases, while psychological manipulation is a broader term that encompasses various strategies and tactics.
Some of the overarching strategies used by manipulators to influence people include…
- Exploiting Emotions and Vulnerabilities – Manipulators often target individuals when they are emotionally vulnerable or facing challenges in their lives. They use these vulnerabilities to create a sense of dependency or to exploit people's emotions for their gain.
- Controlling Information and Perceptions – Manipulators may selectively present or withhold information to shape people's perceptions, reinforce their beliefs, or create a sense of fear, uncertainty, or urgency.
- Creating a Sense of Obligation or Guilt – By appealing to people's moral values, altruism, or sense of loyalty, manipulators can create a sense of obligation or guilt that makes it difficult for individuals to resist their influence or question their intentions.
- Building Trust and Rapport – Manipulators often use charm, flattery, and other tactics to establish trust and rapport with their targets. By appearing friendly, supportive, or understanding, they can lower people's defenses and make them more susceptible to their influence.
- Isolation and Dependency- In more extreme cases, manipulators may attempt to isolate their targets from their support networks, such as friends and family, to increase their dependency on the manipulator and weaken their resistance to their influence.
- Using Authority and Social Proof- Manipulators may appeal to authority figures, social norms, or the opinions and actions of others to persuade people to conform or comply with their requests.
These strategies can be used individually or in combination to exert control over individuals and influence them to act in ways they might not otherwise choose to do.
Recognizing these tactics and understanding how they operate can help individuals protect themselves from manipulation and make more informed decisions about the people and situations they encounter.
And therefore, as a result, when these tactics are present, there’s a higher-than-normal chance that what you’re dealing with is an illegal scheme.
Are All MLM Businesses Considered Pyramid Schemes?
No, not all MLM businesses are considered pyramid schemes.
I’ll try to clarify the relationship between MLM businesses and pyramid schemes and, hopefully, dispel some misconceptions that all MLMs are pyramid schemes.
Why MLMs Are Not Pyramid Schemes?
- Product or Service – MLMs involve the sale of actual products or services with an emphasis on retail sales to end consumers. Pyramid schemes do not have a genuine product or service, or if they do, they are not for the purpose of retail sales or end consumers.
This distinguishes legitimate MLMs from pyramid schemes. - Focus on Sales – MLMs place a stronger focus on product sales than pyramid schemes.
Although distributors can earn commissions through recruitment, the primary source of income in MLMs is the sale of products or services. - Legal and Regulated – MLMs are legal and regulated business models, provided they adhere to certain guidelines and focus on product sales rather than recruitment.
Regulators, such as the Federal Trade Commission (FTC) in the United States, monitor and provide guidance about MLMs to ensure they are not operating as pyramid schemes. - Sustainable Business Model – MLMs are sustainable because they are based on actual product sales and commissions earned from recruits' sales.
In contrast, pyramid schemes are inherently unsustainable, as they rely on an ever-increasing number of recruits to generate income.
While both MLMs and pyramid schemes have this hierarchical structure and involve recruitment, as you can see, there are some significant differences.
MLMs can be legitimate business models provided they operate and grow with product sales and not solely on recruiting. This is the distinguishing factor, although, as we’ve discussed already, it’s not always easy to identify.
Legal Ramifications of Pyramid Scheme Participation
When discussing illegal pyramid schemes, it should be obvious that a heavy weight comes with the word “illegal”. In other words, you can’t have something illegal without also having legal consequences.
These schemes are fraudulent business models that deceive participants with the promise of high returns for recruiting others into the scheme.
Therefore, participating in a pyramid scheme, and especially operating and promoting one, can lead to serious legal consequences, including fines, penalties, and in some cases, imprisonment.
Here are some legal ramifications and potential consequences for those involved.
Legal Status of Pyramid Schemes
Despite what scheme promoters will tell you, in most countries, including the United States, they are just flat-out illegal.
Regulators, such as the Federal Trade Commission (FTC) in the US, actively monitor and prosecute those involved in pyramid schemes. At the end of the day, they are considered deceptive business practices that defraud participants and cause significant financial losses.
Legal Consequences for Participants
- Fines and Penalties – Individuals found to be participating in a pyramid scheme can face hefty fines and penalties.
For example, in the United States, the FTC can impose civil penalties of up to $46,517 per violation (as of January 2022) for those involved in pyramid schemes.
Additionally, participants may be required to pay restitution to victims who have suffered financial losses due to their involvement in the scheme. - Criminal Charges – In some cases, individuals involved in pyramid schemes may face criminal charges, including fraud, conspiracy, or racketeering.
These charges can lead to imprisonment, depending on the severity of the offense and the individual's level of involvement in the scheme. - Asset Seizure and Forfeiture – Authorities may seize and forfeit assets that were obtained through the pyramid scheme. This can include money, property, and other valuables that were acquired because of the illegal operation.
- Civil Lawsuits – Participants in a pyramid scheme may be sued by other victims seeking compensation for their financial losses. A successful lawsuit could result in significant financial liabilities for the defendant.
- Damage to Reputation – Involvement in a pyramid scheme can lead to long-lasting damage to an individual's personal and professional reputation.
The negative publicity surrounding legal actions and the stigma associated with participating in a pyramid scheme can have far-reaching consequences.
How to Succeed in a Legitimate MLM Business
Despite the less-than-favorable look at pyramid schemes so far, it must be noted that legitimate multi-level marketing can be a viable business opportunity for those who are committed, hardworking, and dedicated to building their network and selling products.
I’ll say this first…
I’m not a fan of MLMs, and my experience with them, for the most part, namely Amway, was not kind. It was frustrating, discouraging, and if I’m being blunt… soul-crushing.
And yet, it taught me a lot of lessons that I’ve carried throughout my life. I’ve found success in other areas and opportunities because of the skills I developed during my time in multi-level marketing.
So although I can’t recommend MLMs, I also don’t discourage them under the right circumstances for the right person. Only you can make that decision when faced with a multi-level opportunity.
Be aware though, that success requires a combination of skills, knowledge, and perseverance.
It also involves an uncommon personality and the rare gift of absorbing rejection without destroying your soul.
Here are some tips and strategies to help you succeed in a legitimate MLM business.
Choose the Right Company
This may be the most critical piece of advice.
As someone who spent many years in sales doing more than 30,000 sales calls, nothing made more of a difference than the company I was working for.
When I worked for a market leader in an industry with relatively low competition, I could do wrong. My wife and I opened a new branch in a new territory that grew faster than any other branch in the company’s 15-year history.
Understandably (or not), I was a little high on myself. I thought I was better than I actually was.
Even though I had already done tens of thousands of sales calls at this point, I still didn’t have the sales experience to realize how much of my success was because of the company I worked for.
But life has a way of humbling us.
Years later, I worked for another company that was, for all intents and purposes, a small fish in a big ocean. Getting new customers and increasing sales was like banging my head against the wall.
In fact, after four years, that company destroyed me for sales, and I quit the profession entirely to become an electrician.
So I can’t emphasize the importance of choosing the right company enough. And we’re talking about MLMs here. There are thousands out there, and any one of them will be happy to have you.
Just because a friend of your second cousin’s co-worker wants you to join theirs, you have options. ,
Do your research and choose one that aligns with your values, interests, and goals. Look for a reputable company with high-quality products or services that are in demand, as well as a fair and transparent compensation plan.
Pick a market leader if you can, not the “new guy on the block” who has no credibility or reason to convince established consumers to switch their allegiance.
Set Realistic Goals
Establish clear, attainable goals for your MLM business, including sales targets, recruitment objectives, and income expectations.
Make sure your goals are realistic and reflect the time and effort you are willing to invest in your business.
No matter what your sponsor or upline tells you, just do the math.
For example, $100,000 a year might sound good on a whiteboard or a webinar, but break that down and account for low conversion rates.
If your annual average revenue per downline recruit is $1000, you will need 100 recruits.
Now, if your conversion rate is 10%, which is optimistic, you’ll need to present your opportunity to 1000 people.
How long will that take?
Play around with the math…
What if your average annual per downline recruit is only $500?
What if your conversion rate is only 2%?
You play around with those numbers on our MLM income projection calculators.
Develop a Business Plan
Create a detailed business plan that outlines your marketing strategy, target audience, and sales tactics.
A well-structured plan will provide a roadmap for your MLM business and help you stay focused on achieving your goals.
Build Your Network
At the risk of stating the obvious, focus on building a strong network of customers and recruits.
As I said, it’s an obvious statement. This is multi-level marketing, after all. But think it through and beyond the traditional methods of recruiting.
Consider attending networking events, joining local clubs, leveraging social media platforms, and engaging with people in unconventional places.
MLM recruiting is mostly done online these days, but when I was in Amway, I’d stand around in grocery stores, striking up conversations at magazine racks.
Coffee shops and malls were other places I’d find recruits. Talk about going outside of your comfort zone.
Invest in Personal Development
Develop your skills and knowledge in sales, marketing, and relationship building.
Attend training sessions, workshops, and seminars to stay up-to-date with industry trends and best practices. Continuous learning and personal growth are crucial for success in an MLM business.
Be Persistent and Consistent
Success in MLM requires persistence and consistency. Be prepared to face challenges and setbacks, and stay committed to your goals.
Keep working on your business, even when progress seems slow.
Provide Excellent Customer Service
Offer exceptional customer service to build trust and loyalty among your customers. Be responsive to their needs and concerns, and always prioritize their satisfaction.
Focus on Product Sales
While recruitment is an important aspect of MLM, the primary source of income should be product sales. Concentrate on selling your company's products or services, and ensure your recruits do the same.
This will help you build a sustainable business and avoid the pitfalls associated with pyramid schemes.
Maintain Integrity and Transparency
Be honest and transparent in all aspects of your MLM business. Avoid making unrealistic income claims or promising quick success.
Uphold the highest ethical standards to build credibility and trust with your customers and recruits.
As mentioned earlier, succeeding in a legitimate MLM business requires dedication, persistence, and a strategic approach to building your network and selling products.
By choosing the right company, setting realistic goals, investing in personal development, and maintaining integrity and transparency, you can build a successful and sustainable MLM business.
And be patient. Your upline may be selling you a dream, but MLM success is slow. It takes more time and effort than most people are willing to give.
The History and Evolution of Multi-Level Marketing
Multi-level marketing has only grown in popularity, and yet, it’s still a misunderstood business model. That’s in part because it has evolved significantly over the years.
While controversial on the best of days, they do provide a unique opportunity for those rare individuals with unique circumstances and abilities to build a business.
But how did they come to be?
The origins of MLM can be traced back to the 1940s, beginning with the earlier establishment of the California Vitamin Company, which in 1939 was renamed Nutrilite.
Founders Carl F. Rehnborg and Lee S. Mytinger developed a unique sales model that allowed independent distributors to earn commissions not only on their sales but also on the sales of those they recruited.
This innovative approach laid the foundation for modern MLM and what would become a company you’ve most likely heard of, Amway.
In 1959, Nutrilite distributors Jay Van Andel and Richard DeVos founded Amway (short for “American Way”), which would become one of the most successful and influential MLM companies in history.
Amway initially focused on selling household cleaning products but later expanded its product line to include cosmetics, health supplements, and various other products.
Amway was my first introduction into multi-level marketing.
Their success helped legitimize the MLM industry and paved the way for the development of many other MLM companies. The company's innovative sales and marketing strategies, as well as its focus on distributor training and support, became the standard for the industry.
Regulatory Challenges and Reforms
As the MLM industry grew, so did concerns about its practices and potential for abuse.
In the 1970s, the Federal Trade Commission (FTC) in the United States began investigating Amway and other MLM companies, questioning their legality and likening them to pyramid schemes.
In 1979, the FTC ruled that Amway was not a pyramid scheme but rather a legitimate business model provided it adhered to specific guidelines. The ruling helped establish a legal framework for MLM companies and set the stage for future regulatory reforms.
The Internet and Global Expansion
The advent of the internet in the late 1990s had a massive impact on the MLM industry. Companies began leveraging the internet for marketing, communication, and sales, making it easier for distributors to reach a wider audience and recruit new members.
If you’re on the “older side”, as I am, you’ll remember this era. There was a rapid global expansion of MLM companies as they entered new markets and sought to capitalize on growing consumer demand for their products and services.
And this makes perfect sense. To continue selling the “opportunity”, you need more people. Going beyond borders postponed saturation and gave MLMs new life. It opened them up to an entirely new pool of potential recruits.
In recent years, the MLM industry has continued to evolve, with companies adapting to changes in consumer preferences, technology, and regulations.
Sales and Marketing funnels, email marketing, and social media platforms have all become cornerstone tools for MLM distributors, enabling them to connect with customers, share product information, and build their networks in ways that were previously not possible.
It was almost as if we had hit terminal velocity with the introduction and promotion of MLMs. Wherever you looked, there they were.
But the world was only getting its lips wet because a new invention would put the creation and marketing into overdrive. That invention was cryptocurrency.
Cryptocurrency and MLMs
The arrival of cryptocurrencies has provided new opportunities for businesses, including multi-level marketing (MLM) companies. And as their popularity has grown, some MLM companies have jumped on the bandwagon and incorporated digital currencies into their business models.
Crypto-based MLMs typically involve the promotion of digital currencies or related products and services.
But not always…
Some simply use it as their medium of exchange. In some cases, for simplicity. In other cases, for less than honest purposes such as tax avoidance.
Those MLMs and pyramid schemes built specifically around crypto often offer a range of crypto-related services such as trading platforms, mining operations, or investment opportunities. Participants are required to invest in the company's digital currency or purchase a package related to its cryptocurrency services.
They then earn commissions based on their investments and the recruitment of new members into the network.
The appeal of cryptocurrency MLMs can be attributed to several factors.
First, it’s a shiny new toy.
Second, the novelty and potential profitability of cryptocurrencies have captured our interest, making them an attractive, if not misunderstood, investment opportunity.
Third, the decentralized and unregulated nature of cryptocurrencies can create an environment where MLMs can thrive without the same level of legal scrutiny that traditional MLMs face.
I’ll say that again because it’s important, and many have lost their entire life savings for not paying attention to this specific point…
MLMs that use crypto in some shape or form, whether as a product or medium of exchange, can thrive without the same level of legal scrutiny that traditional MLMs may face.
This has created a firestorm of scams and people who have been fleeced and cleaned out.
To say the combination of cryptocurrencies and MLMs has raised concerns would be an understatement. That’s because the lack of regulation and transparency in the cryptocurrency market has made it difficult for investors to assess the legitimacy of MLMs.
Some cryptocurrency MLMs have been accused of operating as pyramid schemes and Ponzi schemes, where returns for earlier investors are paid from the investments of new recruits rather than from the profits generated by the business itself.
This can lead to the collapse of the scheme when new investments and additional investors dry up, leaving many participants with significant losses.
In response to these concerns, regulatory authorities in various countries have scrambled to take action, but so far, it’s been a losing battle.
Far more pop up each day than any regulatory body can take down.
The U.S. Securities and Exchange Commission (SEC) has charged multiple individuals and companies for promoting fraudulent cryptocurrency MLMs, but they persist. Therefore, potential participants in cryptocurrency MLMs should use extreme caution and conduct thorough research before investing in any of these opportunities.
Regulators and industry associations, such as the Direct Selling Association (DSA), have also worked to establish guidelines and best practices to ensure the legitimacy and sustainability of MLM businesses, but it has been an uphill batter.
Misconceptions about Pyramid Schemes and MLMs
We’ve covered the common attributes of pyramid schemes and MLMs, but there are also common misconceptions about both. Let’s start with pyramid schemes…
Common Misconceptions About Pyramid Schemes
Misconception 1 – All Pyramid Schemes are Illegal
It’s true that pyramid schemes are generally illegal, but it depends on where you live. The definition of a pyramid scheme may vary depending on local laws and regulations.
In some cases, schemes that resemble pyramid schemes may not be clearly forbidden, making it difficult for authorities to take action against them. This can lead to a legal gray area where some pyramid-like schemes continue to operate in some countries but not others.
Misconception 2 – Pyramid Schemes Collapse Quickly
Although pyramid schemes are unsustainable given enough time, they don't always collapse quickly. The duration of a pyramid scheme depends on its ability to attract new participants and the efficiency of fund redistribution by the organizers.
Consequently, some people can profit from pyramid schemes in the short term, maintaining the myth that they are legitimate income-generating opportunities.
They can also morph into something else by adding new membership levels. In fact, this is very common.
With a hierarchy of membership levels, often described with names like Amber, Emerald, Diamond, Gold, Platinum, VIP, etc., they can extract money from existing members by convincing members to reinvest in progressively higher levels.
When that process tapers off, they simply add a new level.
Misconception 3 – Only Gullible and Uneducated People Fall for Pyramid Schemes
Pyramid schemes have become very sophisticated, and their operators use highly persuasive recruiting tactics that play on human emotions, psychological biases, and the allure of financial success to convince potential participants of their legitimacy.
People from all walks of life and educational backgrounds fall victim to pyramid schemes every day. It’s extraordinary actually. But that’s why they’ve survived for a century, their history dating back to the Charles Ponzi era.
And with each new iteration, they get better at disguising themselves as legitimate businesses or investments.
Misconception 4 – Pyramid Schemes are Easy to Identify
Similar to the previous misconception, pyramid schemes can be deceptive and difficult to identify. Creators of these schemes understand the law around pyramid schemes and have come up with ingenious ways to push up against a legal grey area where regulators might not have a clear case.
This is why most schemes (and even many MLMs) cook up highly complex commission structures.
Some schemes cleverly disguise themselves as legitimate businesses or MLMs by incorporating products or services. Where it gets shaky is determined by who is buying the products and services and how they are classified.
For example, a product may be tied directly to membership in the organization, meaning you must join the hierarchy to purchase the product whether you want to participate or not. That’s illegal and unsustainable.
However, they may make a stipulation that to earn money from people who join under you, you must join some other part of the membership.
An example of this would be 7K Metal’s Autosave program.
The distinction between a “customer” and those who promote the business depends on whether they participate in the monthly AutoSave program. Since a percentage of members do not participate in that program, they are considered “retail” customers because they do not engage in the business opportunity.
But they are still part of the pyramid, and their ability to purchase the products still requires membership.
This is a legal grey area that makes it very hard to identify pyramid schemes. So hard, in fact, it would require a judge to make a ruling.
Misconception 5 – Joining is Risk-Free if You Get in Early
Some might think that joining a pyramid scheme early enough buffers them against risk because the market is still ripe. As a result, they expect to earn significant profits before the scheme collapses.
However, even early participants face risks, especially legal consequences if they promote it heavily and earn a lot of money.
Those who lose money in a pyramid scheme are typically not charged, but the FTC can come after “net-winners” as they did in the case of MOBE’s (My Online Business Empire) largest affiliates.
In other cases, the scheme might never take off regardless of how early join. Getting your money back and becoming profitable requires new recruits and that depends on you and your efforts.
And again, whether it’s early in the scheme or later, the inevitable collapse can lead to financial losses and damaged relationships with friends and family who were also recruited into the scheme.
Common Misconceptions About Multi-Level Marketing
These schemes and hierarchical organization clearly cause mixed opinions and confusion.
While some view MLM programs as legitimate opportunities to earn income and build a business, others still think of them as a scam, even if they are legitimate.
I’m not entirely against that opinion.
Of course, I understand the potential benefits, and for the right person, it’s a legitimate business opportunity. And I also understand the legal framework.
However, individual recruiters (not the company itself) who make false income and lifestyle claims or aggressively recruit people they know are likely to lose money are being deceptive and disingenuous.
The promise of passive or residual income is often misstated as well.
It's true you can earn money from your network of distributors, but it takes tremendous effort to maintain your organization. People quit at a very high rate, and those who remain require continuous motivation and training.
So although it’s a legit and legal opportunity, the individual conditions under which recruitment occurs can be, for all intents and purposes, a scam.
Despite that, there are also some common misconceptions about MLMs…
Misconception 1 – All MLMs are Pyramid Schemes
We already touched on this one, but for a quick summary… MLMs are not synonymous with pyramid schemes.
While both MLMs and pyramid schemes involve recruitment and have hierarchical structures, there are key differences between them.
MLMs focus on sales of actual products or services, while pyramid schemes are illegal operations that focus on recruitment and promise high returns without a genuine product or service offering.
Misconception 2 – MLMs are Illegal
MLMs are legal business models, provided they adhere to specific guidelines and focus on product sales rather than recruitment.
Regulatory bodies, such as the Federal Trade Commission (FTC) in the United States, monitor MLMs to ensure they are not operating as pyramid schemes.
While some unscrupulous operators may attempt to disguise pyramid schemes as MLMs, legitimate MLMs are entirely legal and regulated.
Misconception 3 – Most People Lose Money in MLMs
It is true that not everyone succeeds in MLMs. However, this is true for most types of businesses and at-home opportunities.
Success depends on various factors, including individual effort, skills, and persistence. You must also consider the number of successful multi-level marketers who had access to an existing network.
For example, many own businesses like dance studios or martial arts dojos. Some have an unusual position of authority, such as a police officer or a psychologist… not that those are common professionals who get involved in MLMs.
At the end of the day, those who are committed to their MLM business and invest time and effort into their own sales of products and building their network have the “potential” to generate income. But by no means is it guaranteed.
Misconception 4 – MLMs Exploit and Manipulate Participants
While some MLM companies have deservingly been criticized for their aggressive recruiting tactics and high-pressure sales environments, this is not representative of the entire industry.
Many legitimate MLM companies prioritize distributor training, support, and ethical business practices.
It is essential for individuals considering joining an MLM to research the company thoroughly and ensure it aligns with their values and goals.
Misconception 5 – MLM Products are Overpriced and Low-Quality
Some people believe that MLM products are overpriced and of inferior quality, which is true in many cases. I’ll be the first to say this.
However, I’ll reluctantly admit that this generalization is not necessarily representative of the entire range of products and services offered by MLM companies.
Many MLMs offer high-quality, unique, and competitively priced products that cater to specific consumer needs and preferences. As with any product, it is important for consumers to do their research and make informed purchasing decisions.
Final Thoughts
The journey toward financial freedom is filled with both opportunities and pitfalls. I know this all too well, and you probably do too.
As we’ve explored, the differences between pyramid schemes and MLM programs are significant and often confused. Understanding these distinctions is vital in making informed decisions about your financial ventures.
Always approach any income-generating opportunity with caution, and arm yourself with the knowledge to recognize the warning signs of a fraudulent scheme. By doing so, you'll be better prepared to navigate the complex landscape of wealth-building and better prepared to safeguard your hard-earned money while pursuing a brighter, more secure future.
Remember, the path to financial success is not a sprint, but a marathon. Keep learning, stay vigilant, and make the right choices for your financial well-being.
