Pyramid Scheme vs MLM – What’s the Difference?

Illustration of “MLM”, businesspeople, calendar, money, and a target.

Many critics have hurled accusations at direct selling over the years, calling it every name from pyramid scheme to Ponzi scheme. In truth, multi-level marketing (MLM) is a legitimate and legal form of business in India. When naysayers use inflammatory terms referencing illegal networking schemes, disinformation can spread like wildfire.

While it is crucial to be aware of the banned MLM companies to avoid, the disinformation about MLM is costing many potential entrepreneurs the chance to chase their dreams. Current legislation in India states that multi-level marketing is permissible as long as the company does not qualify “as a Ponzi scam or an unlicensed pyramid scheme business,” according to the Journal of Legal Research and Juridical Sciences.

To explain the distinction between pyramid schemes vs MLM, it is important to first define multi-level marketing. Multi-level marketing “is a method of selling products directly to consumers using independent sales representatives.” (Forbes) These sales representatives are independent business owners, selling by word-of-mouth. MLM companies are product-focused, not recruitment-focused, and dedicated to empowering entrepreneurs to make their dreams come true.

Though no longer available in India, Mary Kay is a prime example of a successful MLM. The company was founded over 50 years ago to empower women in their careers outside of the home. These beauty consultants and Mary Kay’s famous pink branding have changed the world of network marketing forever.

Attacks against direct selling often mistakenly compare MLM to pyramid schemes. This could not be further from the truth, as the goals of the two are so vastly different. There are many differences between pyramid schemes and direct selling, but the most important is the focus of the company. Is it all about the money, prioritizing getting rich quickly, or does the company revolve around a product?

Learning the difference in values between direct selling and pyramid schemes will empower you to know which MLM companies to avoid. We will you educate the warning signs of a company violating India’s laws and regulations around direct selling and explain how to be confident in your investments.

Is There a Distinction Between MLM vs Pyramid Scheme?

Two smiling Asian women in glasses, smiling in front of a laptop while surrounded by cardboard boxes.

Opponents of multi-level marketing often state that because the company is structured like a pyramid, it therefore counts as a pyramid scheme. The distinction between legal network marketing and illegal pyramid schemes is that illegal schemes require individuals to pay a fee to join their organization. In illegal pyramid schemes, the whole focus is on the money. In MLM companies, the focus is the product! 

How to Spot an Illegal Pyramid Scheme

Multiple factors set illegal pyramid schemes apart from safe multi-level marketing companies. The following is a list of the warning signs you should be aware of before investing. Please stay safe and aware of disinformation and scams.

  • Focus on Recruitment

If the wealthy members of a network are getting richer by recruiting others and charging a fee to join, this goes against India’s pyramid scheme legislation. A legitimate company will focus on its product, not on how many people are in one’s “downline”.

  • Misleading Promises of Income

A well-meaning multi-level marketing company will consider finances a “mere stepping stone to improving lives and making lasting change.” Be wary of any company that promises you will “get rich quick”. These companies are likely bad players in an otherwise safe field.

  • Lack of Focus on Product

A pyramid scheme doesn’t care about what they’re selling; the product is just a red herring to increase recruitment. Only trust a company that asks you to sell a product they truly believe in.

  • Violation of Laws and Guidelines

A company in violation of India’s pyramid scheme laws may cheat, exaggerate benefits, or employ outrageous markups to their prices. It’s important to do your research and be aware.

Sorting disinformation from truth is difficult, and takes practice. See our tips on how to spot disinformation and learn the truth. Word-of-mouth is a valid and long-established business model worldwide, but that doesn’t mean there aren’t bad actors out to take advantage of you.

MLM Companies to Avoid

We want to stress the fact that India is incredibly particular in their pyramid scheme legislation because they want to keep both consumers and investors safe. Over 4,000 companies have been outed as fraudulent in India.

Direct selling is a legal and valid way to make money; however, if any of the previously listed red flags come up in your research, please stay away from that company! Click here to see the full list of 4,000 scam companies by Strategy India.

Pyramid Scheme vs MLM vs Ponzi Scheme

The final red flag in network marketing is something known as a “Ponzi scheme.” This very specific and malicious type of fraud involves a promise of something nonexistent. These schemes are perpetuated by new investors supplying a flow of money, which the culprit then spreads around to older investors, thus delaying their eventual exposure.

Multi-level marketing and Ponzi schemes have nothing in common. Direct selling is a safe and legal form of entrepreneurship with a focus on a real product. While many MLM companies have been accused of being Ponzi schemes, the truth is easy to find.

The Direct Selling Disinformation Centre was created to dispel the harmful myths that surround multi-level marketing. These falsehoods break trust, hurt individuals, and harm the economy. For example, fake news costs the United States stock market $39 billion annually  Disinformation is a real problem!

We believe that network selling is a market ripe with opportunities for entrepreneurs to fulfill their dreams. Both the spreaders of disinformation and fraudulent companies that call themselves MLMs should be held accountable for the impact their lies have had on a legitimate industry.

It truly is important to stay safe and know which MLM companies to avoid. India’s laws are in place to protect both businesspeople and individuals. We ask you to learn the warning signs, to research the legality of a company before you invest, and to trust the safe and legal multi-level marketing opportunities that come your way.

Learn more about MLM best practices.

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Fighting Disinformation, with Awareness, Knowledge, and Action