Has someone you know asked you to invest in a fantastic new business opportunity?
“All you have to do is invest some money and get others to join you!”
While it might sound like easy money, not knowing the difference between an MLM and a pyramid scheme can cost you.
The typical scenario is a friend, family member, or even colleague approaching you to check out a product. If you like it, you can purchase it directly from them instead of a store.
If you really like it, you can become part of the team – selling the product and earning a commission.
Businesses that involve selling products directly to your personal network of family and friends are called multi-level marketing (MLM), network marketing, or direct sales businesses.
To earn a significant income, you’ll eventually need to grow your network of prospects – and recruit people to build your team. But becoming a rep for a legitimate company can be an accessible and flexible way to earn money.
Pyramid schemes are scams disguised as MLMs. Pyramid schemes often use similar strategies as MLMs, but the main difference is that pyramid schemes don’t generate revenue by selling products. People involved in pyramid schemes can only make money by recruiting other people to buy into the program.
It can still be easy to confuse the two, as both involve recruiting other distributors to sell a product or service. But there are several key differences.
Read on for more information on how to spot these differences before you invest time, money, or effort into an MLM business venture.
What Are MLMs?
MLMs are businesses that rely on individuals to sell products to the public as individual contractors – often by word of mouth and direct sales. In addition to referrals and network marketing prospecting efforts – you can recruit and train other sales representatives and earn commissions on their sales, too.
The main idea behind the MLM strategy is to increase the number of product distributors and exponentially increase the sales force.
When you recruit someone, you receive a commission on their sales and any additional representatives recruited by the new team member.
Ideally, you find a way to duplicate the processes that work for you to boost your revenue.
Depending on the structure of an organization’s marketing plan, it may be possible for you to earn commissions on multiple levels of recruits.
What Are Pyramid Schemes?
“Pyramid scheme” has become a catchall phrase for scams of varying sorts. However, they are a particular type of illegal business with a specific structure.
In short, pyramid schemes are scams disguised as MLM businesses.
One of the main ways to spot a pyramid scheme and differentiate it from a lawful MLM business is that there’s often no actual product sold in a pyramid scheme.
Another key difference is that in a pyramid scheme, you make money solely by recruiting new distributors into the sales program. Your commission is from recruiting others who invest in the company. No one is actually selling anything.
The hallmark of these schemes is the promise of sky-high returns in a short period and often a significant investment upfront.
However, some pyramid schemes do sell products. This can make identifying them more difficult.
If real products are sold, you’ll likely be encouraged, or even required, to buy a certain amount of the company’s product at regular intervals. Even if you already have more than you could possibly use or sell.
You may also need to buy products before you’re eligible to receive any payments or bonuses. You’ll also likely have to pay for your training sessions and marketing materials.
Only a few people (those who started the scheme or are at the top of it) make money. When no new individuals can be recruited, the scheme fails, and the money you and others have invested in the company is lost.
Know the Difference Between an MLM and a Pyramid Scheme
Before you get involved in an MLM or direct sales, research the company you’re thinking of investing in.
You can look up any company online along with words like “review,” “scam,” “pyramid,” or “complaint” and see what you find.
You can also check with your state’s Attorney General or the Better Business Bureau (BBB). Any public complaints about any company you’re considering working with can be found in these places.
But keep in mind that a lack of complaints doesn’t guarantee a company is legitimate.
In your research, ask:
- How long has the company been in business?
- Does the company have a positive reputation for customer satisfaction?
- What are people saying about the company and its products on blogs and websites?
- Has the company ever been sued for deceptive business practices?
Since a legitimate MLM business often also requires an initial monetary investment, don’t sign anything or pay upfront until you’ve done your due diligence. It’s a red flag if the company asks for money before you’ve seen or sampled a product.
If you’re meeting with a recruiter, make sure to get the following information in writing before you sign anything or hand over money:
- The compensation structure and when you can expect to earn
- Your potential expenses and any upfront investment costs
- Support for claims about how much money you can make
- The name and contact information of someone at the company who can answer your questions
Finally, avoid investing in any business where the reward for recruiting new salespeople is more than it is for selling the products to the public. You should be making a commission off the sale of products in addition to what your sales recruits sell.
If it’s all about recruiting or enrolling people, that’s another red flag, and you should walk away.
The Right (Legitimate) MLM for You
There are many legitimate MLM businesses. To find the right one for you, research the products they sell, and don’t rush into any decisions.
Take some time to think about if it’s truly the right path for you and something you want to invest in and sell.
If you decide to join an MLM, you can improve your chances of long-term success if you pursue it like a real business from day one. That means sharing your story with new people every day – and consistently following up with interested prospects.
The RapidFunnel App keeps all your contacts organized in one place, and our Authentic Sharing Technology (AST) empowers genuine, person-to-person relationships to grow your sales – without sacrificing all of your time.
To discover more, schedule a demo with us today.