Multilevel Marketing vs Pyramid Scheme
Multilevel marketing and Pyramid Scheme are two terms related to business marketing. Multilevel marketing is a practice applied by companies to increase their sales by motivating existing distributors to recruit new distributors. The existing distributors are paid for the sales that the recruits sell. A pyramid scheme is a business model that promises a payment for the member who recruits more members.
Multilevel marketing is the process of improving the sales of a company by recruiting a set of laborers who are not directly paid, but paid according to a pyramid system. The existing distributors of a company are known as the down line distributors. For recruiting new distributors, these existing distributors are paid a part of the revenue the former make.
A pyramid scheme is a business model that explains the method of payment for multiplying customers for a business. At first, an individual has to pay for being a part of the business. Then this person works to improve the network of this business. At one point in time, it becomes difficult to achieve the target, and hence this method is often treated illegal.
The difference between Multilevel Marketing and Pyramid Scheme is that multilevel marketing is the technique in marketing where distributors are paid for adding more distributors to the business. A pyramid scheme is a scheme where a person pays to enter the business and works to improve the network of the business.
Comparison Table Between Multilevel Marketing and Pyramid Scheme (in Tabular Form)
|Parameter of Comparison||Multilevel Marketing||Pyramid Scheme|
|Definition||Multilevel marketing is the method of improving the network of the business by existing distributors.||Pyramid scheme is a process in which the existing agent is promised a share of business he/she brings by adding more customers.|
|Permission||This is considered as a legal activity.||This is an illegal activity as one cannot always expect the promised amount.|
|Sales||In MLM, products are sold and customers can become distributors if they wish.||No products are sold. Only the initial amount is the investment here.|
|Focus||MLM focuses on increasing the business by improving the network of customers they have.||Pyramid scheme only focuses on increasing the customers in a network.|
|Returns||A member can expect a return if he/she has supported the business.||As the pyramid scheme is illegal, there is no surety about returns if many people join the network.|
What is Multilevel Marketing?
Multilevel marketing (MLM) is also called network marketing, referral marketing, and pyramid selling, As the name suggests it is a marketing technique that works to improve the network of the business. A distributor who works in a particular business sells the products to a customer and also refers them to be a part of the business.
When a distributor brings distributors from their effort and reference, a share of the business that is improved by them is given to them. This payment is done in two methods. The first one is when the distributors acquire commission for selling a certain product to a customer. The second method is when the distributors sell wholesale purchases; the ones who recruit them get commission.
Most of the income arises from the profit of products sold in an MLM. In this scheme, the workforce is not paid a regular salary. They get the salary through the commission they make by improving the network of the company. Hence this process needs co-operation from all the laborers who work in a company.
A legal and legitimate MLM has to earn their income through the sales of their products/services. But if they increase their profit by increasing their network, this practice is not entertained. Such institutions are MLMs for just namesake.
What is Pyramid Scheme?
A pyramid scheme is a business model that promises the participants a payment if they add more participants into the scheme. In this business, no products/services are sold. When a person joins the scheme, a certain amount is to be paid by him/her. It is with these fees, the pyramid scheme gets functional.
When a person involved in a pyramid scheme adds more members in his/her reference, this person gets a fixed amount that is mentioned in the pyramid diagram. This diagram has the tariff details of the amount that is to be paid if a certain number of people are recruited. The tariff details are sometimes very high and hence this method is often considered illegal.
This model acts partially for the members who work as laborers. When a labor recruits another member, a part of the fees collected is passed to their superiors and only the remaining is accessible by them. This gives a clear data that the superiors do not have to put any effort in increasing the network and can earn if their laborers work.
The pyramid scheme works exponentially. At a point of time, the tariff rate demands a very huge number of people if a certain amount is to be collected. This is practically impossible as the earth contains a finite number of people. This is also a reason why the pyramid scheme is considered illegal.
Main Differences Between Multilevel Marketing and Pyramid Scheme
- Multilevel marketing is the method of increasing the network of a company by selling the products and in return adding more members, if interested. In Pyramid scheme no products are sold, only members are added for improving the network
- Multilevel marketing is a legal activity that is approved by the government. The pyramid scheme is considered illegal since it works unacceptably.
- In MLM, products are sold for incurring income whereas, in a pyramid scheme, income is obtained from the fees that a new member provides.
- MLM focuses on improving the business and profit by selling their goods while the pyramid scheme only focuses on the profit by improving their network.
- In an MLM, the commission of adding a distributor can be expected by an existing distributor. In the Pyramid scheme, since the rates are fixed for exponentially increasing people, returns are not given as promised.
Multilevel marketing strategies help in widening the network a company possesses. They help in selling a product as well as advertising. When more people join as distributors, more amounts are incurred as profit. Also, many more will be encouraged to join them. Amway is an example of a company working in a similar method.
A pyramid scheme is a type of business that improves the network by adding more people. In this business, nothing is sold. Only the fixed rate of fees is taken as the income. This practice is considered as illegal as this method is not a promising one.
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