MLMs, or what I prefer to call “product-based pyramid schemes” (PPSs), are structured exactly the same as classic, cash-based
no-product pyramid schemes (NPSs). With unlimited (endless) chains of recruitment, they both assume an infinite market, which does not exist in the real world. For both, the only way to advance in rank to where profits are possible is to recruit (or purchase products for) a “downline.” Both have a ‘pay-to-play” feature, with purchases typically more ongoing and substantial over time for PPSs than for NPSs. And commission structures for both are top-weighted, meaning the bulk of the rewards go to those at the top of the pyramid of participants, while almost everyone else loses money. This is upside-down from legitimate direct selling or retailing, in which the person or retail merchant doing the selling gets the bulk of the rewards for selling to actual customers.
The primary difference between the two classes of pyramid schemes is that to participate in a (cash-bsed) NPS, investments are made in cash, whereas in a PPS (MLM), the investments are in the form of purchases of products through an MLM company. Therefore, after covering costs of products and company infrastructure, a lower percentage of revenues is rebated as commissions back to the network of participants. Also, the downline networks for PPSs are far more extensive. Classic 1-2-4-8 pyramid schemes (NPSs) have 15 participants with 100% of the money going to the person at the top, But with PPSs (MLMs), after covering product and company costs, generally less than 50% goes back to the participants – most of it to those at or near the top of their respective pyramids, which pyramids may include thousands of downline participants. So because less commission money is rebated to a much larger pyramid of participants, the loss rate of MLMs is far greater than is the case for NPS schemes, which are clearly illegal. (This will be explained in greater detail below.)
Persons in a cash-based (no-product) pyramid schemes are organized into levels in a pyramid of participants. In a classic 1-2-4-8 pyramid (pictured below), all the money invested by participants goes to the top person in the pyramid, and everyone else loses. The only way to profit is to climb to the top (or start another pyramid. (Corporations are also organized like this, except that those at the bottom levels get at least a minimum wage.)
No-product pyramid schemes (MLMs) are typically organized with a much more elaborate pyramidal structure (see example below) with commissions from purchases of those at the bottom levels going primarily to those at the top levels – who usually were the first to enter the pyramid. Approximately 99% of participants under TOPPs (top-of-the-pyramid promoters) lose money, some thousands or even tens of thousands of dollars. The lucky ones are those who spend a few hundred dollars and walk away. Even luckier are those who refuse to be conned into buying into the program at all. (In the example below, Blue Diamond distributors at the top of a mega-pyramid of distributors receive approximately 61% of the commissions for the entire organization.
With less money shared by far more participants, and most of the commissions going to those at the top of the pyramid, the loss rate for PPS schemes (approx. 99.7%) is far greater than it is for NPSs (approx. 90%). So a person has over ten times as much chance of profiting from an NPS as from a PPS (MLM). PPSs are far more harmful than NPSs by any measure – loss rate, aggregate losses, and number of victims.
The Direct Selling Association and other industry defenders, have endeavored to confuse the issue by focusing on behavior of participants (“retail rules,” etc.) in defining what is a pyramid scheme, rather than the fundamental structure. They have also rebranded MLM as “direct selling.” But in legitimate direct selling, those doing the selling are paid the bulk of the commissions, whereas MLMs incentivize recruiting, with compensation plans that provide huge rewards for recruiting a large downline, leaving those at the bottom levels to suffer losses. MLMs also require ongoing purchases to qualify for commissions and/or rank advancement to levels in which profits are possible – which few ever achieve.