There’s a fine line between multi-level marketing (MLM) businesses and pyramid schemes. Before you take your neighbor, best friend or brother up on that great business opportunity they’re offering, make sure that you know the difference.
What’s a multi-level marketing business?
You’ve heard the names: Amway, Herbalife, Nu Skin, Scentsy and Beach Body (among others). You may have even purchased a few things from them in the past. If you have, it probably didn’t take long before your salesperson was asking if you wanted to sign up to sell some items yourself.
MLMs operate a business model that may be best described as “the more the better.” Everyone who sells their products makes a little bit of money off the sale, but the real proceeds come from bringing other people into the fold and making them distributors beneath you. You get a cut or some kind of credit for every sale they make — or person they sign up.
Pyramid schemes operate largely the same way, offering “opportunities” for people to make money by roping in others. Each person who gets involved pays their investment money, startup fees or inventory costs up the ladder, to those higher on the pyramid.
So, why are MLMs legal and pyramid schemes not? While both can be bad deals (since even those working a legitimate MLM can struggle to make money), pyramid schemes offer no actual value for those on the bottom. If you’re on the lower steps of a pyramid scheme, your money is as good as gone.
How do you tell the difference?
The differences between a MLM and a pyramid scheme can be hard to spot. In general, pyramid schemes:
- Offer extravagant promises for very little effort
- Ask you to invest a lot of money up-front to join
- Provide no actual services or a product that is worthless
- Are more concerned about getting new investors or distributors than customers
- Require you to get new recruits to make money (and incentivize recruitment above sales)
If you’re unsure if someone’s “great deal” is a pyramid scheme, steer clear. Getting involved can lead to criminal charges — even if you never make a buck.