Are MLM Companies a Pyramid Scheme?
No. MLM companies are legal and trusted companies that allow their distributors or recruits to legally make money based on product sales or the sales of those below them. So long as they are not being paid exclusively for signing people up or being compensated for the amount of product they themselves must purchase, then there is no pyramid scheme occurring
A pyramid scheme is a type of business model where a person recruits others with a promise of making money for enrolling others rather than selling products and services. The scheme gets the name pyramid from its shape, putting one individual at the top with multiple layers of individuals stacked underneath, each being cheated while those on top benefit profusely. Individuals are tricked into thinking that by recruiting more individuals, they will make money. Even though no product has been sold, no investment made, no wealth created and no service provided, the empty promise of getting rich quick fools more people than it should.
It is important to note that pyramid schemes are, in fact, illegal. Pyramid schemes most often make themselves evident in Ponzi Schemes or fraudulent MLM companies.
Ponzi schemes are illegal. It starts by taking the money an investor has given you, and rather than investing it, it is used to pay past investors…after of course, paying yourself a handsome salary. The investor never receives disclosure as to what will happen with their investment, or they are lied to and given false hope. The investors never know that they invested into a Ponzi scheme and they almost never get their money back. The only way they receive any ROI (return on investment) will be if another investor is tricked into “investing.”
Unlike pyramid schemes and Ponzi schemes, MLM companies that use the network marketing model are perfectly legal. Unfortunately, there are a few bad eggs that have used this model as an illegal front. Pyramid schemes using the guise of an MLM company will more often than not to sell products or services with no independent value. On other occasions, they may require their distributors to find and recruit new people to the company solely for the purpose of driving profit to the company. The Federal Trade Commission (FTC) closely monitors MLM companies to ensure that each MLM company is operating legally and truthfully.
You are probably wondering, how do people end up getting involved in a pyramid scheme? One aspect that is particularly dark is how recruiters within the pyramid scheme blindly rob innocent people by convincing them to spend their hard-earned money on a lie. These consumers are led to believe that by “investing,” they will not only be paid but will profit greatly in a relatively short period of time. Soon after “investing” into the scheme, the money is given to the initial recruiter. In order for them to be profitable, they must now bring on more people under them, each of whom will go through the same buy-in process. The promise is usually conveyed as the ability to make a large profit with just a small investment or small amount of work – the classic “get rich quick” mentality.
Unfortunately, as more people are duped into joining the pyramid scheme, the base of the pyramid becomes increasingly weak, eventually reaching a point where it is no longer strong enough to support the upper parts of the pyramid. One of the biggest deceptions of a pyramid scheme is the investment and/or company will simply sustain itself. It is not possible for this to happen due to the fact that there is no actual business taking place. It is simply an intricate process of money changing hands, ultimately ending up on the top of the pyramid. It is only a matter of time before the new recruits or investors lose the money they have invested in being a part of the company.
The bottom of the pyramid scheme — where the majority of people are located — is the most vulnerable portion of the scheme. It soon becomes impossible to find the number of new investors and people needed to pay the level above. Mathematically, there is no possible way for those on the bottom of the pyramid to make money. Those at the bottom of the pyramid are always the ones who lose as their money is taken from those on top.
Do yourself a favor and always research a company thoroughly before you make any sort of commitment. A few MLM companies that have had run-ins with the FTC and it is a good idea to research if there are any open claims against the company. Simply do an online search for the name of the company and scam. For example, you could search for Kyani scam or DoTerra scam. This should bring up any results with the FTC Scam Alerts pages if there are any. Now that you know that MLM companies are not pyramid schemes, you can simply do the research on the company you are thinking about joining.