Monday, June 4, 2012

MLM basic: why is MLM not a pyramid scheme?

In studying MLM for several years, it has been my experience that vast MAJORITY of people in MLM have NO BASIC CONCEPT of what a pyramid scheme is. They hear some super-short summary of denial by their upline on how their MLM is NOT a pyramid scheme, and they take that at face value, without ANY fact checking.

So consider this a basic education, what is a pyramid scheme, how similar is network marketing to pyramid scheme, why is network marketing legal while pyramid scheme is not?

First of all, a pyramid scheme is an ILLEGAL BUSINESS MODEL, where the primary emphasis is on recruiting people, and have them put money into the system, so people on top of the pyramid can take money out and reap the rewards.

The simplest and most used example is the 8-ball scam, i.e. airplane game.

A simple binary tree diagram illustrating the ...
A simple binary tree diagram illustrating the hierarchical structure of a multi-level marketing compensation plan. (Photo credit: Wikipedia)
In the airplane game, i.e. 8-ball scam, you originally starts as one of the red balls at the very bottom. Your upline (not your direct upline, who's a level above you) needs bodies to full all the red ball spots. Once it's filled, he's "done", "cycled out", gets the reward. Maybe he can join someone else's game and start over from the bottom.

You will then start your own "airplane", by adding recruits under you, as your downlines, WHILE you still below in your direct upline's tree. Every person you recruit helps your upline fill up HIS airplane as well.
Usually there's a price to pay to join. $250 is a common number. You pay, then you recruit people (who also pay), then when you "cycle out" you get nice big number, usually half of all the people in the airplane. As there are 15 people in the airplane, assume $250 buy-in, total money is $3750.

The actual scheme can go quite fancy. Instead of "two" direct downlines you can have three, four, whatever. Instead of only 3 levels down (4 levels total) you can go only 2 down, one down, or infinite levels down. You can get "spill over" where your upline may have recruited extra people that doesn't fit into his/her direct downline so they go down the tree branch and fill in YOUR empty spot instead. You can get "jump over", "fill in", and other fancy shmancy names, but the common factor is the same

  1. You pay to join  (legalese: "consideration")
  2. This enterprise / scheme / organization / whatever 
  3. and get the right to recruit other people (who also pay to join just like you) 
  4. and you get paid (legalese: "compensated") when you recruited more than one people (either directly or indirectly)

Why is MLM not a Pyramid Scheme? 

When Amway, granddaddy of all MLMs launched, it was indeed sued by the FTC as a pyramid scheme. As a result, Amway and FTC reached a definition that has defined MLM ever since:

MLM pays on SALES, not recruitment.   Thus, it does NOT fit (4) above.

You sell stuff, you get paid commission / profit margin. That's any business.

In MLM, your upline is also paid on how much you sell, NOT on whether you joined the organization or not. If you sell nothing, he doesn't get paid (except whatever he's sold himself, or maybe he has other downlines who sell). Thus, MLM fits only three out of four criteria.

How can Pyramid Schemes be disguised? 

Pyramid schemes can be disguised as MLM easily, thus creating what I called "pseudo-MLM schemes", by disguising one or more of the 4 criteria above. They generally do so by the following tactics:

  • Token product / service as disguise (disguise #1)
  • Combining pay on recruitment with pay on commission into hybrid model (disguise #4)
  • Combining recruitment and sales with "starter kits" (disguise #2)
  • Offering free-to-join in addition to pay-to-join (bypass #2)
  • Insist that it is NOT MLM, but something else entirely

How to tell if the product / service is a token disguise

Many pyramid schemes operate as pseudo-MLM schemes by adopted product or service as disguise.

Read the compensation plan carefully: how are you paid? Are you paid on SALES, or recruitment? Any sort of 'cycle out' terminology is immediately suspect. You can only "cycle out" if you recruit. 

A fake travel MLM claim to sell hotel vouchers, plane tickets, vacations, and whatnot, but the comp package would not explain how much commission you get from selling those, just how you can "cycle out" by recruiting more members. 

How to tell if the hybrid model is a pyramid scheme or not

Many suspect schemes have two sides: a perfectly legal side that pays on sales, and a potentially illegal side that pays on recruiting. These schemes are referred to as "hybrid models". The part that pays on recruitment is often called a "bonus".

Hybrid models are the favorite disguise of pyramid schemes, as often its defenders will simply point to the legal side (i.e. pay on sales) and smile smugly "You see? Legal!"  While pretending the other side does not exist.  Or if they do admit it, they say "we are MOSTLY not that." Unfortunately, you either are a pyramid scheme, or not. It's much like "pregnancy"... You can't be "sort of" pregnant, just as a business can't be "sort of" pyramid scheme.

How to tell if starter kits are used to disguise a pyramid scheme

A lot of these pseudo-MLM schemes claim their fee is either a membership or for purchase of a large starter kit (costing several hundred, of course). You are supposedly buying samples as demonstration to prove to others that this is a great product/membership/whatever. It doesn't change the 4 criteria above, specifically (1).

If you actually *can* sell the stuff you get then it probably is NOT a pyramid scheme.

If you are told to enjoy the stuff yourself, then it probably *is* a pyramid scheme. Self-consumption is a very thorny issue between DSA and FTC. DSA wants self-consumption to be legitimized, FTC sees it as a lessor form of inventory loading and thus illegal.

So-called "travel MLMs" are almost always pyramid schemes as the "starter bonus" includes a trip for yourself, not something you resell.

How to tell if the opportunity is really free to join

If the opportunity claims to be "free to join", look closer to see if they offer some sort of an upgrade, or a paid affiliate level. Often, the opportunity will offer a free level, but in order to actually earn income, you need to join as a PAID affiliate. Thus, it's NOT really free.

How to tell if it's a MLM even if the promoter claim it is not

There are bull**** promoters out there that claimed that their model is not MLM, but BETTER than MLM.    They will claim it's a new sort of franchising, evolved network selling, or some such buzzword filled bullsh__.

Some promoters also use alternative explanations such as "buyer's club" or "discount club" and so on. However, those do NOT provide income. Costco, the best known buyer's club, do NOT promise huge income if you refer to them large number of customers. Claiming that income opportunity is like Costco style buyer's club is bullsh__. After all, you don't "buy a discount".

If the promoter can't explain what it REALLY is, but have to resort of bogus comparisons or buzzwords, then it's probably a pyramid scheme.


Sometimes, they may be telling the truth: the scheme they are promoting is actually more of a Ponzi scheme instead of a pyramid scheme, but that's for another discussion.

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  1. This comment has been removed by the author.

    1. Did you bother reading the blogpost at all? Let me refresh your mind: "why is MLM not a pyramid scheme?"

      So no, I did not call every MLM a pyramid scheme.

      YOU DID.

      And all that for what? For spam your URL in my comments section?

      I'll gladly critique your blog, but don't be surprised if your defense was revealed to be bull****, which usually results in you being furious.

  2. i don't subscribe to bad language!!!

    But again its so sad that your title and what you wrote are two different things....In essence the content of your blog calls all mlm a pyramid scheme? Did you write this blog??? or you simply put the title???

    I suggest you read again your blog and revise your title you meant to say every mlm is a pyramid scheme.


    1. It is you who need glasses. Quoting from the middle of the article: "Pyramid schemes can be disguised as MLM easily, thus creating what I called "pseudo-MLM schemes", by disguising one or more of the 4 criteria above. "

      I never wrote or IMPLIED that all MLMs are pyramid schemes. I wrote Pyramid schemes can be disguised as MLMs.

      If you don't understand the difference you need a course in basic critical thinking and logic.

      And thanks for proving that.

    2. Oh, and a review of your rebuttal is up

  3. With help of MLM binary plan the distributors can with ease counterpart the success and completion of the heads. This is considered to be the best way of accomplishing their networking business.

  4. It's clear that the writer of this spam message is NOT a native English speaker.

    And the REAL Miss Beckham (whose photo is on LinkedIn, and id'ed herself as someone who has nothing to do with MLM) is probably wondering who's masquerading as her to spam ads about "MLM Software Provider", who's so shady they reg'ed their domain privately. Probably some fly-by-night outfit out of India.