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Is multi-level marketing a pyramid scheme?

A multi-level marketing strategy (MLM) is often misidentified as a pyramid scheme. The two terms are significantly different, though. With an MLM strategy, the goal is to maximize distribution by increasing the sales force. There are real products that are created for the program, like makeup, tools or other items.

When a person brings on a new sales recruit, that person gets a commission for each sale the new recruit makes. The recruit also makes a commission. Therefore, by adding more recruits, the person at the top of the chain can continue to bring in residual income even without having to sell products themselves.

A pyramid scheme is different because money is charged when someone enrolls in the scheme but no product is ever sold. For example, if you buy your way into a program that simply has you promote a webpage that others sign up to, that could be a pyramid scheme. No product is ever sold, just the enrollment itself. The only people who benefit from a pyramid scheme are at the top of the pyramid. Eventually, no new recruits are available and anyone below the top loses their money.

As long as a company does sell a real product, it's likely a MLM strategy. Although a MLM company may charge for enrollment, enrollees often receive products as an incentive to sign up. Additionally, they have the ability to earn by selling real products to the market.

If you're not sure if a campaign you want to be part of is MLM or a pyramid scheme, you may want to reach out to your attorney. He or she can help make sure you're not involved in a criminal act.

Source: Diffen, "MLM vs. Pyramid Scheme," accessed April 07, 2017

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