There are many programs and schemes that are a part of the corporate and financial world. Some are illegal, while others are considered valid by the law and the government.
Multi-level marketing (legal) and Pyramid Schemes (illegal) are two different schemes that are very widely known.
Key Takeaways
- MLM focuses on selling products/services and recruiting others, while pyramid schemes prioritize recruitment and lack a legitimate product.
- MLM companies offer ongoing support and training, whereas pyramid schemes provide limited guidance.
- Pyramid schemes are illegal in most countries, but MLMs operate legally with proper regulations.
MLM vs Pyramid
MLM is a legitimate business model where individuals earn a commission based on the products they sell and the sales of the people they recruit into the network. Pyramid schemes are illegal schemes that focus on recruiting people rather than selling products. MLMs are legal, unlike pyramid schemes.
Multi-Level Marketing is basically a marketing strategy that is carefully designed in order to promote a product with the help of distributors.
These distributors are offered compensation at different levels, which is a very important factor in bringing in enrolments. It is a legal marketing strategy.
The pyramid schemes are considered to be frauds or fraudulent schemes. Using a multi-level marketing strategy is wise, but it is a completely different concept.
There are no sales of real goods and just fake investments, which later on were revealed as a big fraud.
Comparison Table
| Parameters of Comparison | MLM | Pyramid |
|---|---|---|
| About | Multi Level Marketing or MLM is a Marketing Strategy. | Pyramid is regarded as a Fraudulent Scheme. |
| Setup | At the time of product selling, the commission is given to the distributors. | No real selling of product takes place. |
| Compensation | People make money by selling products as well as by enrolling. | More money is made by enrolling than selling of products. |
| Legitimacy | Multi Level Marketing is legal. | The pyramid scheme is not Legal. |
| Product | Tangible products are sold under Multi level marketing. | No actual product is sold under the Pyramid scheme, and it is all just fraud investment. |
What is MLM?
Multi-level marketing is a very well-known and beneficial marketing strategy that mainly focuses on the promotion of a product with the help of its many distributors.
The strategy of bringing in more and more distributors is offering them compensation for selling goods at many different levels. The main idea of justice is to bring more and more distributors so that the sales of the product increase exponentially, and they can benefit from it.
The distributors are offered a wide variety of benefits under multi-level marketing. The more distributors a marketing team member brings, the more compensation they receive.
Not just receive profit amount of sale goods but also get a certain compensation on the enrollment of new distributors.
The device factor that distinguishes multi-level marketing from pyramid schemes is that in multi-level marketing, actual products and services are sold to the customers.
Multi-level marketing schemes have inventory which they buy back from the participants at termination time.
However, even though multi-level marketing is regarded as legal, there are still many cases in which people have lost money while participating in these companies, and therefore it is advisable to be cautious and always invest in such types of schemes thoughtfully.
What is Pyramid?
There was a time when pyramid schemes were at the top of the market due to their promises and offers, which they gave to innocent customers.
But as time passed, people gradually realised that payment schemes are nothing but a huge fraud hiding behind the mask of multi-level marketing strategy.
Therefore, people are advised to beware of the schemes they started to invest in.
These pyramid schemes put up a show of being a multi-level marketing program, but their activities are a lot different. There are no sales of goods or services in a pyramid scheme but just false promises of providing services.
They attract a customer’s attention by offering them compensation or enrollment of as many distributors as they can bring. In the latest cases, compensation is provided, but schemes fail to offer any actual goods at the end of the day.
The enrollment of new distributors charges money which is then distributed among the people who started the scheme, and a very small portion of it is given to the person who brought the distributor.
Further, when they fail together any more distributors, the scheme is considered to fail, and no promoters get the money they were promised.
Main Differences Between MLM and Pyramid
- MLM, or Multi-Level Marketing, is a renowned Marketing Scheme, whereas Pyramid Scheme is just a fraud.
- The commission is shared among distributors at the time when the product is sold in Multi-Level marketing, while no sales of an actual product take place in a Pyramid Scheme.
- In Multi-Level Marketing, people make money by enrollment and also by selling products. On the other hand, in Pyramid Scheme, more focus is on making money by enrolling people rather than selling goods.
- According to the law and government, Multi-level marketing is legal, whereas a Pyramid Scheme is illegal.
- Tangible products are primarily sold in Multilevel Marketing, while no sales of the actual production take place in a Pyramid scheme, and it is all just a fraud investment.
- https://www.emerald.com/insight/content/doi/10.1108/JFC-10-2016-0062/full/html
- https://journals.sagepub.com/doi/abs/10.1509/jppm.21.1.139.17603
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