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What Is the Difference Between Multi-Level Marketing, Direct Sales, and Pyramid Schemes?

What Is the Difference Between Multi-Level Marketing, Direct Sales, and Pyramid Schemes?
What Is the Difference Between Multi-Level Marketing, Direct Sales, and Pyramid Schemes?

What Is the Difference Between Multi-Level Marketing, Direct Sales, and Pyramid Schemes?

Amanda Harding | MORE ARTICLES

September 13, 2018

There are people who use the terms multi-level marketing, direct sales, and pyramid scheme interchangeably – those people are wrong.

Not everyone who hits you up on Facebook to buy their amazing new essential oils is involved in a pyramid scheme. It might be annoying to get sales pitch messages from former acquaintances, but what they’re doing isn’t illegal. In fact, thousands of people are either supplementing their part-time or full-time jobs with these unique and flexible opportunities. Stay at home moms are making the most of naptime by listing leggings and hosting makeup parties.

Like any businesses, certain direct sales companies have better reputations and opportunities than others. The best tactic? Don’t believe everything you read both from critics or from company literature. Usually somewhere in between, you can find the truth.

What is multi-level marketing?

Woman with megaphone

Woman with loudspeaker | Siphotography/iStock/Getty Images

Multi-level marketing, commonly referred to as MLM in the industry, is a form of retail where products are sold by independent salespeople representing the company. There are no physical retail locations for MLM products – rather, buyers must find a consultant for that product line to purchase what they want. These products are often presented at in-home or online parties where party hosts are offered generous discounts or free products. That’s because word of mouth marketing is crucial for sustaining the MLM business model.

The Better Business Bureau has a few red flags to watch out for before signing up for an MLM. They are the promise of high earnings with little effort, the requirement to purchase a large amount of inventory to start with no guarantee of being able to return it, and the request for cash or money order for the initial investment. You can also read reviews on BBB or other reputable websites to ensure you’re not getting involved in a scam.

What is network marketing?

Network marketing can be used interchangeably with MLM because essentially sales distributors are doing the same thing – cutting out the middleman and connecting buyers with the sellers directly. The big difference? Network marketing has a greater focus on products rather than recruiting more sales consultants to work under more senior sellers.

The higher up in the chain the seller, the more residual income they make from the people in their “downline.” Multi-level marketing or network marketing companies rely on a “warm market” of friends and acquaintances to sell products.

What is direct selling?

Typically, direct selling refers to higher ticket items where the sales distributor sells fewer products but earns a higher sales commission. This type of retail selling also removes the middleman, but rather than recruiting more people to sell, direct sales consultants focus on selling more, often going door to door.

High ticket items might include vacuum cleaners, air or water filters, or pricey home goods that buyers won’t need to purchase frequently.

What is a pyramid scheme?

First and foremost, pyramid schemes are illegal.

There can often be a fine line between figuring out if you’re getting involved with a pyramid scheme or a legitimate MLM company. An easy rule of thumb: pyramid schemes are more concerned with profits than they are with products. A pyramid scheme company would focus on recruiting new sellers to work under you and would put very little focus on the items being sold. Some red flags include promises to make thousands or millions of dollars with no effort, multiple “success” stories of people becoming millionaires with the company, large start-up costs, and revenue coming from recruitment rather than product sales.

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