Are MLMs pyramid schemes?

Sam (No)

Pyramid schemes are fraudulent business models that rely solely on the recruitment of new members. Due to their hierarchical structure, they are often confused with MLM businesses (short for Multi Level Marketing). However, while pyramid schemes promise new recruits the returns from an “imaginary investment,' MLMs center on real products and services to their members and clientele. Participants in MLMs work as independent sales representatives—not just recruiters. Only when an organization focuses on recruitment over sales can it be investigated for operating as a pyramid scheme.

Because of their fraudulent nature, pyramid schemes are illegal in the United States and many other countries around the world. The US Federal Trade Commission receives thousands of reports of pyramid schemes every year, which relevant law enforcement agencies then investigate. If MLMs were pyramid schemes, they would not be allowed to operate in the country. On the contrary, MLMs make up a multibillion-dollar industry within the American economy. Tupperware, a well-known American MLM, raised $1.3 billion in 2022.

This is not to say that MLMs cannot be predatory. Many MLM businesses require new recruits to purchase a starter pack to ‘kickstart’ their business. These packs can even include the products that they will have to sell. Then, when the members can’t sell enough to make up for how much they’ve spent, they go into debt. This is a negative potential consequence of multi-level marketing. But, as long as a business is legal and centered around an actual product or service, it doesn’t fit the definition of a pyramid scheme.

Rob (Yes)

MLMs and pyramid schemes share many similarities, making them essentially the same thing with slight differences. For starters, both benefit most from recruitment and struggle when recruitment stagnates. Even though MLMs deal with product sales, the real money is made from recruiting new participants into the business rather than by selling the actual products, making them no different from pyramid schemes. 

The structure of this business funnels most of the earnings to those at the top of the hierarchy, with the new recruits and lower-level participants earning less. In fact, research published on the FTC website shows that 99.6% of reps actually end up losing money. This anemic business model relies more on the continued initiation of new participants into the business, who all typically pay some registration fee to keep money flowing. Most MLMs make most of their revenue from internal sales and purchases from their own distributors rather than an established external customer base. This is typical with pyramid schemes where money flows within an organization without necessarily any legitimate outside sales.

Since they mostly lack an established customer base, most MLMs deal in inventory loading, where participants are pressured to purchase large quantities of the organization’s products upfront to qualify for bonuses and commissions. This gives an illusion of a thriving business, whereas, in reality, most of the participants are left with unsold inventories and financial losses. Most of them end up leaving the 'business' once they realize the unsustainable nature of it. This also explains why MLMs have a high attrition rate, with most participants typically quitting within a year. The MLM pyramid scheme is unsustainable for workers and clients, who are sometimes one and the same.