Network Marketing vs. Pyramid Scheme - What's The Difference

 I'm frequently asked "Is network marketing (or MLM) illegal pyramid scheme? 

And the answer is NO. Let me explain, every company, government or any enterprise or organisation uses a pyramid organisational structure. In a company, there is usually one President or CEO, several senior heads of different departments, managers, assistant managers and salespeople. The number of levels of the pyramid depends on how big the company is. Let's look at the organisational structure of any ABC company:

You can see that pyramid structure does not only work but also perfectly legal and widely accepted without a second thought.

 However, a pyramid structured business can be illegal under certain circumstances. When these businesses are created so those on top will make all the money... and all the others who participate won't. 

Pyramid selling is a fraud. It is a mechanism by which promoters of so-called "investment" or "trading" schemes enrich themselves through the payments made by recruits to such schemes. Numerous legislatures around the globe have banned pyramid selling. 

"A pyramid scheme is a scheme in which a recruit pays a high entry fee with no sales of goods for the opportunity to receive future benefits(money or privileges) which are primarily derived from that recruit's introduction of additional participants in the scheme, rather than from the legitimate sales of product by recruits to consumers."

Thus, the scheme's rewards effectively come from the addition of the new participants and their investments, not from the sale and distribution of real products to persons who actually use or consume them. No substantial trading in viable goods or services takes place and the scheme essentially involves an internal redistribution of wealth from new entrants to the promoters. 

The scheme serves no legitimate commercial function. Because pyramids are structured similarly to legitimate MLM companies, people many times confuse the two and seek to prohibit legitimate companies.

The following factors differentiate illegal pyramids from lawful Network Marketing businesses:

Network Marketing	Pyramid Selling
1. Primary income earned from retailing of products. No income simply for recruiting.	1. Primary income earned from recruiting. Income from retailing is incidental or spurious.
2. Anyone can earn big money. Income is based on personal achievement, not position in the organisation. Business opportunity improves with time and exposure.	2.  People at top make the real money until a day comes when the pyramid collapses. Everyone who joins has less opportunity than the person who recruited them.
3. Legitimate product or service is being sold because repeat sales is the key to success.	3. No legitimate product or service is sold.
4.  The appeal is to nobler attributes i.e. Sharing and helping others to succeed. Top achievers typically help others and rewards follow naturally.	4. Main appeal is to selfishness, greed, envy and laziness.
5. Legitimate opportunities may be taken up with minimal start-up costs and little or no inventory investment.	5. Conversely, pyramid selling schemes often require high entry fees and/or substantial “investment” in inventory.