Differences between MLM and Pyramid Scheme
Multi-level marketing vs. Pyramid Scheme
Multi-level marketing (MLM) and pyramid schemes are business models that involve recruiting participants to sell products or services.[1][2] However, their legality and fundamental structure differ significantly. Legitimate MLMs focus on the sale of genuine products or services to consumers, while illegal pyramid schemes prioritize recruiting new members.[1][3]
The primary distinction lies in how participants earn compensation. In a legitimate MLM, earnings are based on product sales to the public and commissions from the sales of a distributor's recruits, known as their "downline."[4][5] In contrast, a pyramid scheme's compensation structure is heavily weighted toward rewarding participants for recruiting others. Revenue in a pyramid scheme is primarily generated from the entry fees of new members rather than from the sale of products or services.[1]
Regulatory bodies, such as the U.S. Federal Trade Commission (FTC), differentiate between the two based on their operational focus. A key factor is whether the products or services offered have genuine value and are sold to actual consumers.[3] Pyramid schemes may offer products, but they are often overpriced, of poor quality, or serve merely to disguise the recruitment-based nature of the scheme.
The sustainability of the business model is another critical difference. MLMs can be sustainable if they have a viable product and a focus on retail sales. Pyramid schemes, however, are mathematically unsustainable and are destined to collapse when they can no longer recruit new members, leading to financial losses for the vast majority of participants.[3]
Several high-profile companies have faced legal scrutiny over their business practices. In a 1979 ruling, the FTC determined that Amway was not an illegal pyramid scheme because its policies focused on retail sales. More recently, Herbalife agreed to a $200 million settlement with the FTC in 2016 and restructured its business to emphasize retail sales over recruitment.
Comparison Table
| Category | Multi-level marketing | Pyramid Scheme |
|---|---|---|
| Primary Focus | Selling products or services to consumers[4] | Recruiting new participants[1] |
| Revenue Source | Sales of products and services[1] | Recruitment fees and investments from new members |
| Compensation | Commissions on personal sales and sales of recruited distributors[4][2] | Rewards are primarily for recruiting new members, not for product sales |
| Products/Services | Genuine products or services with market value[1] | Often involves no genuine product, or products are overpriced and secondary to recruitment |
| Legality | Legal in many jurisdictions, but regulated | Illegal in most countries[3] |
| Sustainability | Can be a sustainable business model if based on product sales | Mathematically unsustainable and inevitably collapses[3] |
