Is MLM a Pyramid Scheme?

Is MLM A Pyramid Scheme?

Is MLM a Pyramid Scheme?So, someone has approached you about their mlm opportunity and you are wondering,  “Is MLM a Pyramid Scheme?”. Let’s find out together.

According to the Federal Trade Commission, there is a difference.
They have this to say about MLM:

Businesses that involve selling products to family and friends and recruiting other people to do the same are called multi-level marketing (MLM), network marketing, or direct marketing businesses. Some MLMs are illegal pyramid schemes. Before joining an MLM program, here are some things to know.

MLM companies sell their actual products or services through person-to-person sales. That means you’re selling directly to other people, maybe from your home, a customer’s home, or online.

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If you join an MLM program, the company may refer to you as an independent “distributor,” “participant,” or “contractor.” Most MLMs say you can make money two ways:

  • by selling the MLM’s products yourself to “retail” customers who are not involved in the MLM
  • by recruiting new distributors and earning commissions based on what they buy and their sales to retail customers

Your recruits, the people they recruit, and so on, become your sales network, or “downline.” If the MLM is not a pyramid scheme, it will pay you based on your sales to retail customers, without having to recruit new distributors.

The actual definition of a pyramid scheme is:

a form of investment (illegal in the US and elsewhere) in which each paying participant recruits two further participants, with returns being given to early participants using money contributed by later ones.

When I get the question, “Is MLM a Pyramid Scheme?”, I usually ask. “How do you define a pyramid scheme?” This is where I typically discover that most people have no idea what a pyramid scheme actually is. They are just repeating something they’ve heard someone say.

It’s understandable. Nobody wants to be taken advantage of. We all know “that one guy” who tried “one of those deals” and lost his shirt, right? Nobody wants to be in line to be the next victim.

So, let’s take a look at what building a real mlm business is about:

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You are going to be in sales. 

A real mlm business involves the sale of products and/or services through your network. This can include friends and family as well as people you meet through networking, advertising, etc.. Without the sale of actual product or service, you are not going to make money in mlm.

You can build via recruiting.

You have the option (not a mandatory requirement) to build a larger business by recruiting others to follow the same business model with you. If you are selling and you recruit others who sell to more customers, you can begin to build a business and earn commissions through your team via their sales.

You are going to risk money and time.

Like any other business model, you are going to spend money to get started and you will spend time learning and then doing the work. Any business model you look in to is going to require that you spend money and time.

Your income is not guaranteed.

MLM is “performance based income” meaning: on guaranteed pay check. If you are productive and you do a good job of selling and recruiting, you can build a large business and achieve your goals. Understand that success in ANY business venture will involve risk, learning, and effort. MLM is no different.

The important thing to remember is that you are evaluating a business. Make business decisions. Is there an actual demand or need for the product being offered? Is the compensation plan fair? Is there a good system in place to help you achieve the results? Are you prepared to take on business ownership and the work it will involve?

If you are, then MLM may be a good fit for you.

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