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MLM, Pyramid Schemes and Ponzi Schemes: Are they the same?

Scams or fraudulent schemes have been prevalent since the beginning of time. Since the existence of money, there has always been some scheme created to part people from their hard-earned money. In this current age and time, pyramid schemes are usually disguised as multi-level marketing or MLM ventures as a means to scam unsuspecting victims.

Inherently, most scams work because at the core of it all – greed prevails in the heart of men. And scammers know this well. They use this knowledge to their advantage and prey on people that are looking to get rich quick. It’s not just the poor and middle-income that fall for these schemes, even the rich and well-educated are not spared from these felonies.

However, there are ways to distinguish between MLM, pyramid schemes and Ponzi schemes. They may appear similar in some ways, but they are inherently different to the well-informed.

Multi-Level Marketing

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MLM is a marketing strategy that generally showcases real products to be sold through members who also may act as distributors. In order to entice people into joining them, they reward their members through sales-based commission for every successful recruitment. It is a multi-level tiered system whereby many individuals (at different levels of the scheme) will get paid depending on the total sales volume. However, at this stage MLMs are still considered legal because real, tangible products are being sold instead of mere “memberships”.

To name a few, MLMs have different types of commission plans such as the Unilevel, Matrix and Hybrid scheme.

Unilevel

This is the most basic rewards system in MLMs. Person A can recruit as many new members as possible to have a supply of unlimited distributors for the sale of the product. In return, the recruits are encouraged to recruit more people – which potentially brings the commission level up to seven tiers.

Matrix

The Matrix rewards system is quite similar to the Unilevel system – but with one difference. There is a set number of members that can be sponsored or recruited at any level. And once that target number is reached, a new Matrix system is formed.

Binary

This rewards system has only two members or distributors at the sales front line. If there are more members, they will move to another level. This ensures that at all levels of this plan, there are only two members that are required to meet the sales target. Consequently, the two distributors will split the commission between them. It should also be noted that there is a set number of sales targets to achieve and it cannot be exceeded.

Hybrid

As the name implies, this rewards plan is a combination of any rewards system.

Pyramid Schemes


Picture from: HERE

A pyramid scheme is a straight-up financial scam. Unlike MLMs, there are no existing sales or investments products sold to the public. Instead, members of the scheme earn solely through the recruitment of new members. To incentivize existing members, operators reward them with a cut from every additional new member into the scheme.

To join the scheme, new members are first required to pay a membership fee. This money is then used to fund the older members’ payout in the scheme. As the scheme continues, it quickly becomes unsustainable due to the sheer volume of people needed to join them to keep the money flowing in. Simply put, there are not enough people in the world’s population to sustain it and the pyramid eventually crumbles.

And typically after some time, only directors and people at the top of the pyramid are able to receive payouts. The people at the bottom of the pyramid lose money due to the nature of the scheme. And sadly, most people are at the bottom rung of the pyramid, while the few on top take home the largest share of the pie.

Charles Ponzi – The Man who puts “Ponzi” in Ponzi Schemes

It’s usually an honour to have something named after you. But not when it’s named after a scam – especially one that is so infamously fraudulent, that no honourable men would want to be remotely associated with it. Unsurprisingly, the most famous (or infamous, rather) scheme is named after the man behind it, an Italian swindler and con artist called Charles Ponzi.

Ponzi schemes are often mistaken for pyramid schemes although they are inherently different from each other. While pyramid schemes are based on network marketing and selling “memberships”, Ponzi schemes operate on the principle of “robbing Peter to pay Paul“.

So, how does the Ponzi scheme work?

Operators attempting to lure new investors into their scheme tend to over-promise their victims with unbelievably high returns for their investments. To gain their trust, they tend to back their claims through falsification of documents which show false data on their invested funds.

In truth, there are no real returns because there weren’t any investments made in the first place. Any so-called return of investments received are pooled money from new, unsuspecting investors waiting to land their first golden nest; while blissfully unaware that there wasn’t one to start with. In other words, earlier investors are paid using money dumped in from new investors. This cycle goes on until – like the pyramid scheme, it becomes unsustainable which leads to the collapse of the scheme.

Stay Vigilant

Scammers don’t just commit their crime face to face. In the advent of technology advancements these days, they are able to carry out their modus operandi online, to the masses and within a short period of time. With just a click of a button, they are able to wipe your entire fortune out in seconds – if you let them.

The bottom line is, if something sounds too good to be true, it probably is. Look out for red flags in any “lucrative, low-risk” investments pitched to you. It could also be someone close to you, so do not assume if it’s a close friend and relative, you will not be a victim. It’s best to evaluate based on hard facts, ask for a second or even third opinion and do your research on the investment or operator in question.

If in doubt, don’t do it.

Interested in other articles on financial scams? Check these out to safeguard yourself and your family:

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