There are many programs and schemes that are a part of the corporate and financial world. Some of them are illegal, while others are considered to be valid by the law and the government. Multi-level marketing (legal) and Pyramid Scheme (illegal) are two different schemes that are very widely known.
MLM vs Pyramid
The main difference between MLM and Pyramid is that in Multi-level marketing, the schemes and activities are valid, whereas, in Pyramid Scheme, everything is illegal and is also considered to be a fraud. Both of these Schemes are very popular among people and have their own strategies for working.
Multi-Level Marketing is basically a marketing strategy that is carefully designed in order to promote a product with the help of distributors. These distributors are often offered compensation at different levels, which is a very important factor in bringing in enrolments. It is a legal marketing strategy.
The pyramid schemes are considered to be frauds or fraudulent schemes. It is wise to be a multi-level marketing strategy, but it is a completely different concept. There is no sales of real goods and just fake investments, which later on and as a big fraud.
Comparison Table Between MLM and Pyramid
| Parameters of Comparison | MLM | Pyramid |
| About | Multi Level Marketing or MLM is a Marketing Strategy. | Pyramid is regarded as a Fraudulent Scheme. |
| Setup | At the time of product selling, the commission is given to the distributors. | No real selling of product takes place. |
| Compensation | People make money by selling products as well as by enrolling. | More money is made by enrolling than selling of products. |
| Legitimacy | Multi Level Marketing is legal. | The pyramid scheme is not Legal. |
| Product | Tangible products are sold under Multi level marketing. | No actual product is sold under the Pyramid scheme, and it is all just fraud investment. |
What is MLM?
Multi-level marketing is a very well-known and beneficial marketing strategy that mainly focuses on the promotion of a product with the help of its many distributors. The strategy of bringing in more and more distributors is offering them compensation for selling goods at many different levels. The main idea of justice is to bring more and more distributors so that the sales of the product increase exponentially and they can benefit from it.
The distributors are offered a wide variety of benefits under multi-level marketing. The more distributors a member of the marketing team brings, the more compensation they receive. Not just receive profit amount of sale goods but also get a certain compensation on the enrollment of new distributors. The device factor that distinguishes multi-level marketing from pyramid schemes is that in multi-level marketing, actual products and services are sold to the customers.
Multi-level marketing schemes have inventory which they buy back from the participants at termination time. However, even though multi-level marketing is regarded as legal, there are still many cases in which people have lost money while participating in these companies, and therefore it is advisable to be cautious and always invest in such types of schemes thoughtfully.
What is Pyramid?
There was a time when pyramid schemes were at the top of the market due to their promises and offers, which they gave to innocent customers. But as time passed, people gradually realised that payment schemes are nothing but a huge fraud hiding behind the mask of multi-level marketing strategy. People are therefore advised to beware of the schemes which they started to invest in.
These pyramid schemes put up a show of being a multi-level marketing program, but their activities are a lot different. There are no sales of goods or services in a pyramid scheme but just false promises of providing services. They attract the attention of a customer by offering them compensation or enrollment of as many distributors as they can bring. In the latest cases, compensation is provided, but at the end of the day, schemes fail to offer any type of actual goods.
The enrollment of new distributors charges money which is then distributed among the people who started the scheme, and a very little portion of it is given to the person who brought the distributor. Further, when they fail together any more distributors, the scheme is considered to fail, and no promoters get the money they were promised.
Main Differences Between MLM and Pyramid
- MLM or Multi-Level Marketing is a renowned Marketing Scheme, whereas Pyramid Scheme is just a fraud activity.
- The commission is shared among distributors at the time when the product is sold in Multi-Level marketing, while no sales of an actual product take place in a Pyramid Scheme.
- In Multi-Level Marketing, people make money by enrollment and also by selling products. On the other hand, in Pyramid Scheme, more focus is on making money by enrolling people rather than the selling of goods.
- According to the law and government, Multi-level marketing is a legal activity, whereas a Pyramid Scheme is an illegal activity.
- Tangible products are primarily sold in Multilevel Marketing while no sales of the actual production take place in a Pyramid scheme, and it is all just a fraud investment.
Conclusion
The market of schemes is a very dangerous and risky one. No matter it is a multi-level marketing strategy or a pyramid scheme, both of them have their own risk and problems related to them. While multi-level marketing strategy is considered to be a legal one still there are many cases in which people lost their money while investing in them.
On the other hand, pyramid schemes have always been a fraud and never have people who joined them as secondary members get their money. Therefore, it is always advised to seek professional help and guidance before investing in such schemes.
References
- https://www.emerald.com/insight/content/doi/10.1108/JFC-10-2016-0062/full/html
- https://journals.sagepub.com/doi/abs/10.1509/jppm.21.1.139.17603