Multi Level Marketing (MLM) and Pyramid Scheme are in some ways different, but share one thing in common. The people who invest during the later part of the marketing operation or pyramiding scheme are the ones who end up empty handed. .
Back in the days when product brands like Tupperware, Amway, Avon, and The Pampered Chef were still popular, a lot of women found those MLM businesses as good sources of supplementary income. Yet the MLMs of before provided support by training sellers free of charge, and allowed members to sell only on consignment;
Why Today’s MLMs are Similar to Pyramid Schemes
The problem with today’s MLMs is that to become a seller, one must buy into the business by paying beforehand, a subscription fee. In return, subscribing members receive goods to sell equal in worth to the value as the subscription fee they paid.
In order to gain quick returns on their initial investment, they are encouraged to recruit members who will be their so-called “downliners” and earn a commission for every new recruit. In the same way, new recruits will invite friends and family members to join the MLM business, so they can also earn commissions.
The initial recruiter creates her own network of members and from every level, stands to gain a commission on each new recruit, down to the latest level of “downliners.” If they get to sell their inventory, the better; as it means they were able to get back their initial investment. In the meantime, if their network of members keep growing, money coming in as commissions from “downliners,” practically poses as profits realized from joining the MLM business.
This system works well for those who joined early on, but hardly compensatory for late joiners, since the market eventually becomes saturated. Even the product they were supposed to sell, will no longer be viable in a saturated market. That is why MLMs purporting themselves as legit businesses eventually operate the way pyramid schemes do.
How Do Pyramid Schemers Scam People?
Pyramid Schemes basically operate in ways similar to MLMs but are different in some aspects. While MLMs sell a particular product, Pyramid Schemes sell “dreams,” usually targeting people who want to strike it big in as little time as possible.
In a get-rich-quick-scheme, participants need only to convince a specific number of new investors, 3 at the least. The 3 recruits will likewise try to convince another set of 3, and so it goes with every new recruit in each level. In the process, the number of new investors multiply at the bottom line, forming a pyramid with the agents and the founders positioned at the top.
Since every recruiter earns a percentage from the money invested by the network of recruits, those at the top has a longer string of money to claim and collect as earnings than those in the middle and bottom levels of the pyramid. In the event that no more new recruits bring in fresh funds, the scheme collapses; leaving many of those at the lower level of the pyramid with nothing to claim at all, not even the money they invested.
Inasmuch as the founders and the agents are aware when their scheme is about to unravel, they have enough time to pack up and disappear. They will lay low for awhile in order to elude any ensuing investigations. Once the furor over the scam dies down, they will once again start a new pyramid scheme in another location.