What is the difference between mlm and pyramid scheme

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Table of Contents Expand. Table of Contents. Multilevel Marketing Can Be Good. How MLM Works. Pyramid Schemes. Recognizing a Pyramid Scheme. Pyramid Scheme vs. Better Alternatives to MLMs. By Susan Ward. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

Learn about our editorial policies. If you read this far, you should follow us:. Diffen LLC, n. Marketing Strategy Fraudulent scheme Setup Commission is paid to distributors at multiple levels when product is sold. No real product is sold. Promised compensation Enrollees are asked to pay money upfront in order to enroll. Enrollees are asked to pay money upfront in order to enroll. Participants in a pyramid scheme make money primarily from enrollment fees rather than by selling products.

Legitimacy Legal Illegal Product MLM is usually used as a channel for selling tangible products There is no product except a fake investment. Definition of MLM and Pyramid schemes Multi-level Marketing MLM is a marketing strategy designed to promote their product by through distributors, offering multiple levels of compensation.

Setup The main idea behind the MLM strategy is to promote maximum number of distributors for the product and exponentially increase the sales force. Legitimacy The Federal trade Commission FTC has set guidelines that help consumers discern legitimate plans from illegal ones. The difference between MLM and pyramid schemes under these guidelines are as follows: Sales of actual product or services to consumers: MLM offers products whereas Pyramid schemes do not.

Commissions are paid on sale of products and not on enrollments: MLM has a hierarchical commission set up on the sales of products, whereas pyramid schemes are based solely on new enrollments. Company buys back inventory from participants at the time of termination: pyramid schemes do not have any inventory.

Participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same. Legitimacy Learn more about the company, by finding and studying the company's track record. Do an internet search with the name of the company and words like review, scam, or complaint.

Look through several pages of search results. In the end, most people run out of money, have to quit, and lose everything they invested. Other MLMs may not be a good fit for your interests and lifestyle.

Here are some tips to help protect yourself against a bad MLM experience. Ask tough questions and dig for details. A good businessperson needs those answers.