Is MLM a pyramid scheme? A simple test to tell the difference

When I was digging the foundations for the seating area Lenka wanted so much, one thing occurred to me. A pyramid is built from a wide base, where there are the most people, up to a narrow top. And that is exactly how people picture it when you say network marketing.

I understand. But the question “is MLM a pyramid?” has an honest answer and it isn’t one sentence. So let’s look at it properly.

Is MLM a pyramid?

Network marketing (MLM) is not a pyramid if the company sells real products to real customers and the reward comes mainly from their sales and consumption. A pyramid, by contrast, is a system that pays out primarily for recruiting more people.

The word “primarily” is important here. In every team people are brought in, and that is natural. The question is whether that is the main reason the system works.

Anyone who claims MLM is always a pyramid is wrong. Anyone who claims there is never a pyramid in MLM is wrong too. It depends on the specific company and its rules.

What is a pyramid scheme?

A pyramid scheme is a system in which a person pays for the chance to receive a reward that depends primarily on bringing in more people, and not on selling or consuming products. Put simply: you are paid for bringing in more.

The Unfair Commercial Practices Directive (2005/29/EC) lists it in Annex I among the practices prohibited in all circumstances. Every EU country has transposed this rule into its own law.

It is also called a pyramid promotional scheme, a gifting circle or the “airplane game”. Different names, the same principle: a few people at the top, many at the bottom, and those at the bottom pay.

How do I tell the difference between MLM and a pyramid?

You tell the difference by what the system stands on: legal network marketing stands on selling products to customers, a pyramid on the entry payments of new members. In a pyramid the product is just a backdrop.

MLM and a pyramid scheme: the main differences

Area	Honest network marketing	Pyramid scheme
What it stands on	Selling products to customers.	Payments from new members.
Who buys	Customers outside the team too.	Almost only members of the system.
Entry	Low, with no pressure for big purchases.	High entry or a compulsory package.
What is paid for	Sales and leading a team.	Mainly bringing in more people.
When recruiting stops	Products keep being sold.	The system collapses.
The law	Legal business.	A prohibited practice.

What is a simple test of whether it is a pyramid?

The simplest test is the question of whether people would go on buying the products if new members stopped being brought in. If so, it is a business. If not, it is probably a pyramid.

I would add a few more questions. Always ask, never be shy:

1. Who is the customer? Are there people who buy the product but build nothing?
2. What is the reward paid for? Ask to see it in writing, not just in a presentation.
3. What do I have to buy? Is the purchase voluntary, or “without it you have no entitlement”?
4. What happens if I stop? Am I entitled to return goods and how?
5. Who is telling me this? A person who teaches me, or a person who mainly tries to get me to sign?

If you want to ask in more depth, I wrote about it in the article How to choose an MLM company.

What does a disguised pyramid look like?

A disguised pyramid is a system that poses as ordinary selling of products, but in reality pays out mainly for recruiting and for the compulsory purchases of its members. That is why the law and the courts look at the actual state of affairs, not at the title on a business card.

Warning signs worth your attention:

• The emphasis is on how many people you bring in, not on who the product helps.
• You have to buy big packages of goods to “stay in the system”.
• The products are unreasonably expensive and hardly anyone would buy them outside the team.
• Nobody wants to show you the rules in writing, they only make promises.
• They press you to decide straight away.
• They promise high amounts and quick results.

The last two points are the loudest alarm for me. An honest person gives you time and guarantees nothing.

Why do people mix up MLM and a pyramid?

People mix up MLM and a pyramid mainly because both have a structure in which a person brings in more people, and from a distance they look similar. And also because in the past there were companies that crossed the line.

When you say you do network marketing, you often hear: “Oh, a pyramid.” I understand. They have heard about bad examples and don’t want to get burned.

My answer is calm: it is a fair question. It deserves an answer, not an offended look. What network marketing is, I described in the main article What is MLM.

Frequently asked questions

Is MLM a pyramid?

Honest network marketing is not a pyramid, because the reward flows from selling products to customers and from consumption, not from a person paying for the chance to bring in more people. A pyramid scheme is prohibited across the EU. How it is with a specific company, you have to judge by its rules.

What is a pyramid scheme?

A pyramid scheme is a system in which a person pays for the chance of a reward that depends primarily on bringing in more participants, not on selling products. At the top are a few people who live off the payments of those below them. When the newcomers run out, the whole thing collapses.

What is the “airplane game” and is it a pyramid?

The “airplane game” is a popular name for one form of the pyramid scheme. Players join, each brings a deposit, and the reward goes to the one at the top. The principle is the same as with a pyramid: rewards flow from the deposits of newcomers, not from the sale of goods. Such a model is prohibited in the EU.

Are pyramid schemes prohibited in the EU?

Yes. The Unfair Commercial Practices Directive lists the pyramid promotional scheme among practices prohibited in all circumstances, and every EU country has transposed this into its own law. Fraud is a crime in every EU country, and running such a scheme can fall under it. A specific case is always judged by the national authority and the courts.

How do I know a company is a pyramid?

You can tell by the products being sold almost only to members, by you having to buy big packages and by people being paid mainly for recruiting. Another signal: nobody wants to give you the rules in writing and they push you to decide quickly. If you have doubts, ask for time and get advice.

So is MLM a pyramid, or not?

A pyramid stands on the bottom paying and the top collecting. A terrace stands on foundations that nobody sees but that carry everything above them.

I prefer the terrace. You just have to dig a lot for it.

If you want to see how I do it, arrange a private presentation. And feel free to ask about everything, even this.

Sources

• Directive 2005/29/EC concerning unfair business-to-consumer commercial practices (Annex I)

Tom