What Is an MLM? Is it a Pyramid Scheme?

(Last Updated On: January 2, 2020)

What Is an MLM?

You may be wondering how exactly multi-level marketing (MLM) works, which is a nice proxy way of asking “how bad are MLMs for you”? But hopefully things aren’t as bad as they seem as we take an adventure into the world of multi-level marketing. 

Multi-Level Marketing (MLM)

For starters, you’re not really going to be buying MLM products off of store shelves. If you’ve seen them at all, you’ll know that it’s mostly online (read: social media) networking that gets the job done for an MLM.

Recruiting

Instead, an MLM will pitch itself to you. Well first you should understand that they’re trying to recruit people to distribute their products. We use the word “distributor” very loosely, because some 99% of people who are part of MLM companies lose money

When recruiting, an MLM will pitch itself as this ultimate lifestyle change. They’ll tell you that you can be your own boss and present a scenario where you have a bunch of money. Normally they’ll also tell you that you don’t really have to do anything either. At least it’s “easy.” Oftentimes this scenario is too good to be true. Good rule of thumb, if someone promises you that if you leave your job to do something super easy and you’ll end up with more money, it’s probably not true. Namely, the company shouldn’t lose money by hiring you. 

But here’s the catch to recruiting. It’s not just the heads of the company recruiting. Once they get you in, your job is not only to “distribute product,” but to also recruit others. Which means one person recruits a couple people, who all recruit a couple more people, and so on down the line. Oftentimes, an MLM will dangle financial benefits and bonuses in front of people as well. 

Now, our visual readers may have seen the kind of shape this makes. If you haven’t seen it already, we highly encourage you to draw it out.

Yes it makes a pyramid. You know, like a pyramid scheme. The illegal one.

MLM vs. Pyramid Scheme

In fairness, MLMs are not technically pyramid schemes. Something their CEOs will go to very great lengths to tell you. Pyramid schemes are illegal in part because they don’t actually have a “real” product to distribute (we’ll get to that). MLM systems technically have a product, but the other operations are incredibly similar. 

The Federal Trade Commission (FTC) has an outline of pyramid schemes and MLMs. They outline that a pyramid scheme keeps everything in a kind of closed loop. The recruiters/distributors buy product from the company that they’re supposed to sell. But the product they’re selling (product they buy from the company) is normally only sold to people they’ve recruited. So money doesn’t really go outside. It just gets funneled back up to the top dogs of the pyramid scheme, while product gets funneled down. 

A legitimate business makes its money by selling product to people who are not a part of it. Not something we should have to explain, because that’s just how everything else works.

Regardless of that outline, the FTC still advises you to be vigilant of MLM systems. Because the distinction is so fine, pyramid schemes will often wear the mask of MLMs. Prime example being the MLM (read: pyramid scheme) Herbalife. They settled with the FTC for $200 million because they were basically scamming people out of their money.

If it walks like a pyramid scheme, and it talks like a pyramid scheme, it’s probably really bad for your wallet. 

Also if it’s trying really hard to tell you it’s legal because it doesn’t seem legal, it’s definitely in some weird grey area. 

How do MLMs Make Money?

You might be wondering how an MLM makes money, if they’re not a pyramid scheme. A pyramid scheme requires you recruit, just like an MLM. We’ve established that. However, a pyramid scheme requires you to buy the company’s product and sell it (also like an MLM). The key difference is that the pyramid scheme’s faux employees often are required to buy an unrealistic amount of product. Oftentimes, these people are required to buy this product at an incredibly inflated price. 

An MLM won’t “require” you to buy X amount of product, heck, they’ll sell it to you (the suckered recruiter) for a discount. That sounds like a really good deal, right? Buy a bunch of product at a discount, and then sell it back at the regular price. Profit right there. Kind of like how it’s cheaper over time to buy in bulk; that’s why everyone loves Costco (if you have one in your area).

Here’s the catch. The distributor/recruiter has to buy a certain amount of product at regular intervals to maintain their discount. So in the end, they’ve been tricked into buying more product they can possibly sell. 

Other MLMs do a ranking system, and maintaining your status is inherently tied to buying more product. There may be refund programs to help recruiters, one might argue. Just remember the refunds are rarely at 100%, so you still lose money in the end. 

You might also like: What Is a Ponzi Scheme?

How does the MLM Get You Money?

In theory, an MLM is a legitimate business. And in practice, they technically are. But you’ve already seen how following the letter of the law doesn’t mean you’ve got the moral high ground.

Anyway, as a recruiter in an MLM, you’re theoretically making money by selling the product you bought from the company to other people. Which yes, you do get some money out of that. But getting people to buy cruddy protein shake mix for $60 ($40 + $20 shipping) on eBay seems like a hard sell. Because it is–you can buy it better and cheaper from the local grocery store. Here’s some Herbalife stuff at nearly $110! Also, there’s something to be said about Googling “Herbalife” and returning mostly eBay hits. You come to your own conclusions.

So how do you as the poor recruiter make money? Well you recruit other people. There are a lot of financial benefits to recruiting. That’s why prospective recruiters are told they just gotta recruit like 5 people, who will then recruit another 5 people and so on. Which builds a pyramid but that’s neither here nor there. Through the power of math, you can only really do that like 13 times before it exceeds the population of Earth. Just do 5 to the power of n+1 over and over again until you hit the about ~7 billion we are now as a species. 

Basically the model isn’t sustainable, and you should be skeptical if a corporation says something is too good to be true. 

Multilevel marketing schemes are a lot. So let’s just turn our brains off and look at baby animals?

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About Kyler 561 Articles
Kyler is a content writer at Sporcle living in Seattle, and has just finished his undergraduate at the University of Washington. He's been writing for Sporcle since 2019 and has accumulated so much random, general knowledge he'd rather not think about it. Most of his free time is spent drinking black coffee like water.