Multi-level Marketing vs Pyramid Schemes

The year was 1879. An eccentric lady of Boston, Sarah Howe founded what appeared to be a mini hedge fund. She named it “Ladies Deposit” with the grand mission of ‘helping women invest their money.’ She promised to double any sum invested with her and the maturity period was just 9 months. The ladies of Boston were ecstatic about this deal and fell over each other for it. Not long after, the Boston Daily Advertiser revealed the scam and Lady Howe was thrown behind bars for 3 years. Though of less notoriety than the later saga of the Italian American —Charles Ponzi (after whom all other illicit schemes were named), what is clear is that these schemes have been around for a while. It continues to evolve to this point where we can hardly distinguish them from genuine business opportunities.

This article looks to explain Multi-level marketing and Pyramid Schemes. Comparing them and showing how one can easily identify a pyramid scheme.

Multi-level Marketing (MLM)

Multi-level marketing businesses are those that involve direct selling of products or services to family and friends, and recruiting others to do the same. In MLM you basically make money by selling products directly to people or recruiting other and earning a commission based on what they buy and their sales to others.

Pyramid Scheme

A pyramid scheme is an illegal investment scam that is based on a hierarchical setup of network marketing. The basis and focus of all pyramid schemes are new recruits from whom they get their funding or returns. In most cases, a pyramid scheme does not sell an actual product, and even where there is a product, there is much more emphasis on the recruitment of new members than the actual sales of a product. This foundation makes the scheme a zero-sum game. From the moment it begins, its liabilities are bound to exceed its assets. So, it is only sustainable as long as new members continue to join. Once it loses steam and new members fail to join, the pyramid collapses like a pack of cards.

Differences between MLM and Pyramid Schemes

People have joined pyramid schemes with the assumption that they are part of a multilevel marketing program while others have been skeptical of joining multilevel marketing programs suspecting it to be pyramid schemes because of their similarities. So, one must ask what the differences are, between them.

• MLM is legal while a pyramid scheme is not.

• In Multi-level marketing, the emphasis is on sales and distribution of products while, pyramid schemes are more concentrated on recruiting more people than the actual sales of any product.

• MLM aims to sell its product primarily to consumers while a pyramid scheme (if they sell any product) aims to sell primarily to members who must recruit new members to buy their product.

• Most MLM have favorable terms like “product buyback” to help investors recoup their funds if they are unable to sell their products but such terms are simply non-existent in pyramid schemes.

• Returns on MLM are modest and realistic while returns on Pyramid schemes are outrageous and unrealistic.

STEPS TO IDENTIFY A PYRAMID SCHEME

To identify a pyramid scheme, you need to look out for these signs.

• To make your money back with profits, you will have to invite or register some more people and your profit or income is contingent on the number of people you are able to register.

• There is usually an exorbitant registration fee or a large initial deposit.

• You may be required to buy things you don’t need or cannot sell, just to remain relevant in the scheme.

• There is usually the promise of outrageous returns within very short periods.

When you see some or any of these points listed above, you should be skeptical because you are most likely joining a pyramid scheme, NO GO FALL MAGA O!

Contributors:

• Chibuike G. Offor
• Ajayi Omoshola
• George Kaduru