There is a lot of truth and misconceptions about MLM companies and pyramid schemes going around with 2 being the most prevalent:
1) On one hand some people think all MLM programs are pyramid schemes.
2) And on the other, many people think they are 2 completely different things and that “every business” is a pyramid scheme.
The truth however is very different than both of these misconceptions and I’ll clarify that for you.
In the past few years MLM’s have been sprouting left and right. Many have failed. So how do you tell if the MLM you’re involved in or thinking about joining is running a legitimate business or a fraudulent pyramid scheme?
There are many ways actually, but what you need to understand is that every business, offline and online, is based on a pyramid model. However, there is are major differences between a pyramid model and a pyramid scheme.
What a normal pyramid business is (not a scheme):
A business which runs under a normal and legal pyramid model functions by providing it’s clients/customers (the people on the lower end of the pyramid) value. This value could come from a product or service that is being offered for a fair price.
What an actual pyramid scheme is:
In this business model, there is no actual value or product given to those on the lower end of the pyramid.
What usually happens in pyramid schemes is that the company which runs it convinces you to join and promises to pay you only to refer other people into it. The main purpose of a pyramid scheme is to get others involved into it in order to refer more people into the scheme.
Here is a Wikipedia article on pyramid schemes for extra research.
Within this pyramid, there is NO real value. There is NO real product offered. The only actual product is YOU promoting the business. In essence, this business model is nothing more than an illusion and in some cases a ponzi scheme. Unfortunately most MLM companies utilize this form of business.
Here is a picture describing the difference between the 2. If you’re REALLY interested to learn more about the difference, I strongly recommend checking out “Lou Abbots MLM” video on YouTube (direct link to it) as he covers this very in-depth:
What about MLM companies. Which category do they fall into?
By definition an MLM is a marketing strategy (online an offline) in which people who refer others into it are compensated for their referrals investment as well as any future investment their referrals will bring in. Here is an example:
- I am person A.
- I refer person B into my MLM company and get 50% of his investment.
- Then person B refers person C into the business and I get a percentage of person C’s investment.
- This is called a “downline” and in this case, there’s 2 levels. In some MLM programs, it can go far deeper and the bigger a downline, the bigger the odds are the MLM program is a pyramid scheme.
However if you’re trying to find out if an MLM company you’re trying to join runs an illegal pyramid scheme or a legitimate business model, you have to find out 2 things (there are more, but these are the most important):
1) Does the company provide any value to the customer?
Value means service/product which provides fair compensation for your investment.
2) Does the price of entering the company fit the value you’re given in exchange?
For example, with MLM programs I would consider pyramid schemes, here’s how this plays out:
- If you’re charged $100 for a service that normally costs $20, then you’re being ripped off.
- If you’re being charged $100 for a product and you can get a similar product in other places for way less ($30 for example), then you’re being ripped off.
On the contrary, if the MLM program:
- Charges $20 for a service that also normally costs $20, then it’s legit.
- If you are being charged $30 for a product and other similar products elsewhere also cost this much, then it’s a fair, legit product.
Here is how the answers determine if an MLM program is a pyramid scheme (or not):
- If the answer is yes to both questions, then the company is legitimate.
- If the answer is no to any of the 2 questions, it is a pyramid scheme.
Note: The term “network marketing” is often used when talking about this subject, but it is not the same as an MLM. See how network marketing and MLM differ.
Examples of pyramid model businesses (legal):
- Local small businesses.
- Amway (This one is controversial) because in many aspects it does have the makings of a pyramid scheme, but because it offers it’s members value as well as actual products to sell, it was deemed (by courts) as a legal business.
Examples of pyramid scheme businesses (illegal):
Zeek Rewards: A $600 million dollar ponzi scheme which basically lured investors into it, promising riches by sharing it’s daily profits as well as getting people to refer others into it for 50% of their investment. It then turned out there was NO value or product offered. It was just investors paying investors. Full report on Zeek Rewards.
Empower Network: This is an MLM company which gets you to join it for $25, then “persuades” you to invest in it’s other up-sells to the tune of $5,000+. The only “value” you get from this company is the training which teaches you to promote the company itself to others. This training even if legitimate is beyond over priced, which is further evidence of a pyramid scheme.
In reality the only thing you’re really doing with Empower Network is paying to promote the business itself to others. This is one of the worst reviewed companies I have ever investigated. Full report on Empower Network.
Most MLM’s: I can’t speak for all of them, but the ones I have reviewed/seen all make a lot of promises without going into detail on what it is they actually do/offer. Any company which stresses more so how much you can make, instead of actually explaining what it is you’re going to get (value) for buying should be a red flag to anyone. And by the way, you paying to be able to promote a business does not count as value.
5 more ways to tell if a MLM program is a pyramid scheme:
1) If the MLM you are in or thinking about joining pays you to only refer people into the company, it’s a pyramid scheme (no actual product).
2) If the MLM emphasizes more so on you making money than actually explaining what it provides you and your customers, it’s most likely a pyramid scheme.
3) No actual product involved. Most MLM’s which are pyramid schemes classify training as a product. In some cases it can be, but if it’s ridiculously overpriced ($100’s, $1,000’s), then it’s a pyramid scheme.
4) If an MLM you join requires you to join higher level memberships for ridiculous prices in order to be able to promote that aspect of the business to others, it’s a pyramid scheme. Example: Empower Network requires you buy it’s higher level memberships in order to make commissions of that product. If I wanted to promote their “15K Formula” which costs $1,500, I would first have to buy it in order to actually get others to buy it and make a commission of it.
5) MLM’s which run pyramid schemes also have a common practice of luring you in for free or a small price, and then bombarding you with up-sells. Empower Network is a great example of this. If you ever join an MLM for a small price/free, and then are told you need to upgrade for extra to get any actual training, turn the other way and demand your money back.
Have any questions?
If you’re currently interested in an MLM and can’t tell if it’s legitimate or not, feel free to leave a question/comment below and I’d be more than happy to answer it :). You can also read this article on succeeding in MLM for safer ways to start a legitimate business in none MLM fields.
What you need to know is that when it comes to making a legitimate second income, don’t go through sources which promise you easy money. In most if not all cases, these routes are through pyramid scheme type companies or just plain old scams that take your money and leave you hanging. They prey on those special words that turn you to them and get you to fork over your money.
What I do for business (instead of MLM):
Affiliate marketing and I promote companies that offer a fair product/value at good prices. And I make a good income from this and recommend that over being involved with MLM programs. If you’re interested to see more, check out Wealthy Affiliate, which does teach people about this. The skills are also applicable to promoting MLM programs too.
36 thoughts on “The Difference Between Pyramid Schemes And MLM Companies”
I just recently started work for a company by the name Velocity Financial Partners. Its a very small business but I had my suspicions about it being a pyramid scheme or a bogus MLM.
When I attended my first meeting (over zoom) they showed me an image of what really looked like an MLM but it looked different at the same time. There was a character at the top of the image with a line coming down to on other person, then that person was connected to two others who were connected to about 4 others. But it wasn’t displayed in a pyramid fashion..
Anyways, I was wondering if you may have the time to look into this company. I don’t think that it is a scam considering we sell an actual good product (Insurance) through triple A companies like Transamerica. I was also not promised EASY income or a GET RICH QUICK path. I was told it will be hard work and dedication but it still seems like the person that hired me is going to get a percentage of MY earnings. Which I suppose is how most business works but I guess I will find out later on. Anyway, I hope you find time to look into this business and find out that it is legit. Thanks!
Hi Alex, thanks for your comment. I looked around on Google for this company you mentioned, and found one called Velocity Financial Inc, but not Partners like you said. The site I did find did not seem like an MLM at all, so I was wondering if you could provide me with a more direct URL for me to have a closer look.
Now based on what you said, my initial suspicion is that it could very well be an MLM, but that doesn’t automatically mean it’s a pyramid scheme, so I wouldn’t jump the gun on that. But if this company is requiring a large payment for starting work with them, that is something I’d be careful about.
A lot of MLM opportunities do this to their customers and promoters, by making them pay a big amount for their products and being a part of their opportunity. I’m not a fan of this model and even though certain programs that I recommend that aren’t MLM also charge to join them and get started, at least they aren’t MLM oriented.
My next opinion is that if you’re not just selling insurance, but also some sort of recruitment model, then that’s another yellow flag I’d consider.
Honestly, if these 2 things are present, I’d honestly consider a different program, like Wealthy Affiliate, because that one teaches people open ended ways to make your own independent business (No MLM).
The last thing I’ll say is that if selling insurance isn’t your thing, then it’s another reason I’d give the Wealthy Affiliate program a risk free trial to see that there are none MLM ways of starting your own online business and getting it to a point where you’d be happy with it.
Let me know if you have anymore questions!
Can you say something about the UDS game? Is it a scam? I see in the comments that you tried to do some research about it earlier. Is there any new info? Thank you.
Zarko hi, I apologize but I haven’t had much time to check out information on this topic. Do you mind if I ask what you’ve heard regarding it? Does this topic correlate with the MLM and pyramid scheme stuff I talked about here?
Hi Vitaliy, Zarko,
I have the same question now, do you know anything about UDS and their model now? It is an MLM scheme for recommending the app, but the product looks really useful and great for the businesses and customers? Thanks.
Hi, I have never heard of UDS but when you say that this model is a scheme, how can you say it’s a good product too? Usually those 2 things never combine together. I would like to get more info on UDS before making a better decision on it.
Hello, have you heard of Senegence cosmetics? I’m wondering what you think of them. Also NuSkin. Thank you. With less jobs, more people are shopping online and the MLM business is saturating our market and small communities, its almost tough to have a small business.
I’ve never heard of either, but MLM programs come out in droves every year Chris. Luckily, if you apply the principals I listed to spot the bad ones, you don’t really have to dig too deep into each, the main problems will be seen on the surface of these companies quite fast. However, I will look into both of them now that you brought them to my attention.
I will also say that I disagree with you about there being less jobs. Most western and developed countries experience constant growth, although it’s not always large, it’s still prevalent. But more than anything, the opportunity to make a business is ALWAYS growing, and especially with the internet being such a huge contributor to sales these days, you can absolutely start a small (None-MLM) business. Here’s info.
Saturated or not, when you have a good product or idea and platform to drive customers to it, you can succeed, believe me. That’s why I advocate making an online business vs a physical one, you’ll save tons of money and avoid the big financial risks. As for MLM programs, I will never advise joining them, even the good ones. Their contracts are typically too constraining and their products are easily beaten by outside competitors who sell their none-MLM products for cheaper prices.
That was a really great article that I can tell you put a lot of research and time in to. It is unfortunate when people get involved in a ponzi scheme that justice is never fully served when the leaders of these schemes end up getting arrested. Thanks for going in to the level of detail that you did. Hopefully this will reach a lot of people and help them avoid the bad schemes out there.
Well many of the leaders do indeed go unpunished, but it’s not really them I worry about, it’s their top earners who after the ponzi scheme breaks down, take their leads to the next ponzi and keep extracting money with the excuse that “this one” will make their leads money.
Hi there Vitaliy,
Outstanding explanation between the difference between schemes and scams in regards to the pyramid model.
Actually, the pyramid scheme of manufacturer –>wholesellers or distributors—>retail clients-Consumer (customer) as shown on the right-hand side is the very business model recommended by Harvard Business School!
And they are not teaching or training scammers but captains of industry!
It’s a completely different type of pyramid, but one that provides a structure and product/service in fair exchange for money. There is something tangible being produced, given out and served vs the nothing that is promised on the other pyramid, so yeah, the former pyramid is a good business model to follow.
I would like to thank you a lot for the great information you provided about illegal business strategies that scam and spam us .
Actually, in lieu of the subject, I would like to point out that due to the increased number of people on earth and scarcity of jobs, I have seen a lot of employment companies recently play in this illegal field. They promise you a service that is finding a job for in the gulf or in one of the developed countries. The first thing they do is they build an email list and sell it and you will have hundreds of advertisement emails from different sources, the second thing is that they try to scam and spam you by offering you job offers, contracts to sign, and at the end they try to make you pay for processing of papers while they actually do not provide any service or value.
Thanks for the great article and I would like to see more like this on this great site so that we always be aware of illegal businesses. In addition, I believe they are evolving to more advanced methods to their fraudulent businesses.
Well you’re talking more so about common scams Sam, I am talking more so about pyramid schemes which may seem too complicated to unravel, but really if you follow this tutorial, it’s easy. No matter how advanced they get, the core principals of fraudulent business models stay the same, so if you know how to spot the core, you’ll spot the scam.
What is your thoughts about Questra Holdings Inc?
One of my friend advising this, but by viewing their profile, seems like the source will not be credible as its kinda of buying the stocks for a low price and sell them for higher amount once the stocks get more value.
Can you please comment on this.
Hi Aman, I took some look at this company and most of the first page results are people who investigate it, the domain name itself for Questra Holdings is not ranked very high on the first page for it’s actual keyword term.
There are speculations about a name change (not good news), about it only being a program with no product (more bad news), an 11 tier referral system (MLM likely…) and a bunch of other things which to me did not show a lot of transparency.
Basically, I am very skeptical of this program, although I do admit not really looking that deep into it. I did look for some key bad things as I mentioned above and unfortunately I do see a lot of them. I would really be very careful with this place and personally, I would not join it, that’s my opinion.
As I’ve said to other people who ask me about various MLM programs and such, to avoid them and go with an online business plan that is NOT MLM structured, one that you can build in Wealthy Affiliate, for example.
Thank you for your reply. I have read your article on WA and from the screenshots it seems like idea is working. I definitely will try it out and share my experience.
Just to verify: you have mentioned that UDS game is not something new and there are other similar products or companies which offer same services. Have you come across with those companies? If yes, can you please name them, as I want to do my research as much as possible to find some pros and cons.
Will appreciate your soonest reply.
Well I can’t really name the programs right of my memory, but the idea of consolidating services such as the one the program mentioned isn’t new. There’s lots of programs in various niches that aim to help business owners/app makers organize their programs/leads/business functions so I look at this program like that.
Because I am personally not into this type of market, like I said, I cannot remember the specific names of these companies, but they’re out there. I think you’ll really enjoy WA though, I would look at them first before you venture into the other niche markets like this one.
I have never been a huge fan of a pyramid approach to business. I myself got involved with one or two in the past and they were more trouble than they were worth.
It sounds very easy when people say ‘hey, just get a few people to join under you and you will make good commissions.’
The thing is, these other people also need the same discipline when it comes to getting others to join, and because it is not easy, they fall by the wayside.
I guess it is just not for me, I prefer to run a business that I can call my own and be responsible for its success or failure. Relying on others to have the same mindset as me simply has not worked in the past,
Have you had success in this area?
Hi Chris, I totally agree with your position on MLM programs. Regarding if I had success, the answer is yes, just with something non-MLM related, I do affiliate marketing through Wealthy Affiliate.
I’m thinking of joining one company called Global Intellect Service which provides an IT product which called UDS Game. It is available on Google play or Apple store for your reference. And also if you search by UDS Game reading in Google, you will find their official website.
UDS is abbreviation which stands for United Discount System.
The idea is impressive, however, in the marketing plan, I have seen some related points mentioned in your article.
Would appreciate if you may help me verify if it’s a legitimate company to join?
Thank you very much in advance.
Hi Myrat, so I tried to translate the official Global Intellect Service website. It is apparently only in Russian, however Google translate didn’t work on it so I can’t check that out.
I was however able to read about the “UDS Game” you mentioned and see a website for it. I honestly can’t say the idea is amazing, because I’ve seen this type of stuff in other programs. From what the website says, it just looks like a program that helps you optimize your customer base for a product or digital service you offer and that is a vague description, but that’s honestly how vague the site itself is. And to be honest, it is not the first type of program I’ve seen that is like this.
Therefore it is hard for me, based on this small research alone to judge whether one or more of these programs/services/companies is a pyramid scheme or even an MLM program at that.
However, it’s obvious to me you are very interested in starting an online business or at least venturing into new opportunities. What I would say is you may want to hold off on this program you mentioned, or at least do other research and try to find if there are any complaints or at least negative/critical feedback and judge them against the positive ones.
But, what I can recommend you may want to look into is the program I am part off which not an MLM, but just one which helps you more accurately find your hobby to build something off it. Take a look at Wealthy Affiliate, I honestly think given what you’ve told me, that may be a better alternative for you to try, at least at first.
Hi there! A well explained article.
Have you heard of SNE Marketing? What are your thoughts on that?
Please give me details for Qnet.
I’ve never heard of Qnet until you mentioned it Vikram, but I did a little bit of research and it showed me it’s a big company which has a lot of controversy. I’ll check it out further, gather as much information as I can and probably do a full review in the near future.
I would disagree with you that MLM’s are all or mostly alike. Apparently you haven’t sampled enough of them to give such a review. I have seen some pretty good ones that are very legit. The thing that creates variation in them are obviously the products, comp plans, and costs. Yes be aware of the scammers but please do not characterize all MLM’s in the same category.
I have to mostly disagree Chris. I do admit I have a certain bias against MLM programs but they are not all bad, even by my high standards of what they should be. As long as they charge you a fair price and provide good quality products and their referral program isn’t complicated, I will agree to it being legitimate.
Great Post! Have you heard of MYNT? It stands for My Nutrition. Was approached by a friend about it and just wondered if you’ve run into it and have any opinions? Thanks for any light you can shed. Sounds like an amazing opportunity because it is backed by so many professional celebrities and I’ve heard that millionaires are made by getting in at the beginning of the life cycle. They have a great product and a great business model. Just thought I’d ask…
Sounds like an MLM to me Tracy. I’d be VERY careful about millionaire claims and celebrity endorsements. I tried to Google MYNT but nothing came up. Either way, like I said before, my advice is to avoid MLM’s. These get rich quick approaches almost always fail.
please check mynt. tell me what you think. pyramid scheme or not?
Hi Rob, I had to erase some stuff on your comment as I don’t allow people posting links on my site. But I did check out Mynt. Currently this site has not officially launched and there is very little information on it so I can’t make the assumption on whether or not it’s a pyramid scheme.
However, from what I have seen browsing around, there is no actual explanation on what the product is. It’s just hype on it’s launch which is not usually a good sign. I’ll wait until it launches and do an official review. My recommendation would be to avoid it for now, wait until reviews come out and then make the decision.
But above all, since it is an MLM, I doubt I’ll have good things to say about it. Instead I prefer my #1 recommendation since it is NOT an MLM. Hope this helps.
Hi Vitaliy. First of all… Great site, nice work:-)
I really love your outline on these pyramid and mlm scams. This will help a lot of people online, to point them in the right direction away from the scamsters!!! I will come back to your site in a while to learn more, thanks man!!!
Anytime Johan! I appreciate the feedback and if there’s any questions, feel free to ask. All the best!
I had no idea what the difference was between Pyramid schemes and MLM schemes. Nor did I stop to think that there is a legitimate pyramid model, as opposed to the pyramid scheme. Thank you so much for writing something that really informs the reader about such things. If we know what we’re up against, we can protect ourselves.
Truth be told Max, there isn’t much of a difference between MLM’s & pyramid schemes. Very few MLM’s actually provide the user with value and for a fair price. I honestly can’t even name any, but I know they are out there (maybe Amway, though I don’t like it).
Very good information here. You clearly break down the differences between the scams and legitimate businesses.