Ponzi Scheme Vs Network Marketing What's The Difference?

While you must generally purchase items in a legitimate multi-level marketing program, if the business has a no-return policy or charges large “restocking fees,” it is a big red flag. If the business accepts returns, get the policy in writing. In a pyramid scheme, Jimenez says you start by paying an initial joining fee, sometimes up to $500. The main characteristic of a pyramid scheme is that participants make money by recruiting more members. Also, a multilevel marketing organization lacks control over its salesforce. It may experience damage to its reputation if some of its distributors are acting irresponsibly or not keeping trustworthy to customers.

According to a report that studied the business models of 350 MLM companies in the United States, published on the Federal Trade Commission's website, at least 99% of people who join MLM companies lose money. Nonetheless, MLM companies function because downline participants are encouraged to hold onto the belief that they can achieve large returns, while the statistical improbability of this is de-emphasized. MLM companies have been made illegal or otherwise strictly regulated in some jurisdictions as merely variations of the traditional pyramid scheme, including in mainland China.

They can receive sufficient commissions from their downline teams’ sales. The commission system effectively motivates existing distributors to build up or expand their downline teams. It allows the company to employ a bigger salesforce, and thus, access to a larger customer base. Multilevel marketing is a strategy that sells products and services through a non-salaried workforce in a pyramid-shaped commission system. The MLM strategy is also known as network marketing or referral marketing.

It can be done via media like newspapers, flyers, paid ad-campaigns, tv ads, and much more. Ultimately, everyone around the closest group will be directly affected and become prey. When they finally realize what they are up to, then the only thing they can perform will be blaming each other.

Avoid promoters who fail to explain their plans clearly and in detail. In particular, read the company's mlm scam prospectus or other written material. (A prospectus is a legal document that gives prospective investors information about a company.) If you don't understand it, get someone independent of the company to explain it to you. Pyramid promoters often target closely knit groups such as religious or social organizations, sports teams, and college students to increase pressure to participate. Some even expressly state that they are not a pyramid scheme.

Scammers use the legitimate business model as a mask and convince this group of people, they fall for the scams. The imbalance caused by pyramid schemes and the world’s economy is thus highly interlinked to each other. The above data explores the U.S economy and the people live there, a similar course of circumstances exists in other countries. Together they bring down the economy and cause an imbalance. As per the survey, 31% of the basic typology of pyramid schemes evolves from chain letters, 21% are from general pyramid schemes, 12% of gifting clubs, and finally, 7% of them from Ponzi schemes.

One study by AARP found that 73% of sellers either don’t earn a dime or actually lose money from the venture. One highly-circulated report from the Consumer Awareness Institute puts that number at closer to 99%. At some point, you’ve probably been contacted by a family member, friend or Facebook acquaintance who fancies themselves a budding entrepreneur. Maybe they want to offer you the “amazing business opportunity” of joining their team and becoming a seller too.

Many pyramid schemes resemble multilevel marketing businesses, which also involve a chain of adding new people to the operation. The key difference is that while a legitimate MLM focuses on bringing in people to sell the product, pyramid promoters emphasize the recruitment itself. Multi-level marketing is the model of selling products through a network of distributors. Distributors buy stock in the company’s product and then sell it on, keeping a cut of the profits. Money is not just made from selling, but also from recruiting new distributors – if someone signs up under you, you become their “upline” and receive commission from their earnings, too.