How MLMs Avoid Being Illegal

Network Marketing vs. Pyramid System - The Differences!

First of all, a pyramid scheme is illegal, while network marketing or MLM is a completely legal distribution system. But why is this actually the case and how do the two systems differ?

A pyramid scheme can only work if the sales partner constantly recruits new customers and they invest their money. This capital is then poured into the pyramid scheme. If no new money is brought in, the system collapses and the partners have lost their invested capital.

A Network Marketing System (MLM), on the other hand, always works for itself without bringing in new customers or new capital. The sales partner does not necessarily have to set up a sales structure and can earn money in direct sales alone by buying products and using them himself.

This brings us to a very important difference between network marketing (MLM) and a pyramid scheme. In a pyramid scheme, the members invest their money and usually do not receive anything in return. They will only get their capital and any profit back if they recruit new members and bring them into the pyramid scheme. Sometimes a pyramid system is also used in this context. What is meant is always a system that only works by recruiting new participants and investing their money.

In network marketing or MLM, on the other hand, there is always a service in the form of products for the money deposited. The networker invests money in products and receives compensation for this. If he builds up a structure, he receives additional remuneration for the products sold within his structure. He also receives this remuneration if the development of the structure stops or individual sales partners discontinue their activities.

With some Network Marketing (MLM) systems, a license fee is charged for use, which is most comparable to the classic franchising fee.