Difference between Direct Selling, MLM & Pyramid Schemes: There are a lot of different sales and marketing professionals who consider MLM and direct selling to be the same. However, in reality, these two terms are completely different from each other. And there are lots of fraud MLM Companies that are running pyramid schemes by using dummy products.
Moreover, not every new startup that is selling luxury products on Facebook is a part of the controversial pyramid scheme. A lot of companies are safe, reliable and are not involved in any unethical or immoral practice.
So in this post, we will understand the meaning of basic terms Direct Selling, MLM, Network Marketing & Pyramid Schemes.
What does direct selling mean?
Contrary to general perception, direct selling actually involves higher ticket products. In this method, the distributors try to sell fewer products on a high commission rate. This selling practice also bypasses the middleman.
In direct selling independent distributor or we can say, direct sellers, take place of wholesalers and retailers which is a different practice from the traditional market.
Now direct selling is mainly divided into 2 different types on the basis of the structure or way of people engagement.
- Single Level Marketing
- Multi-Level Marketing
Generally, Single level Marketing is known as direct selling and people take Multi-level marketing (MLM) as a different concept. MLM involves more people in the direct selling industry, hence MLM gots more popularity. If we say the direct selling industry, then it includes all MLM Companies as well.
Various groups consider Party Plan also as a type of direct selling.
What exactly is multi-level marketing?
MLM stands for Multi-level marketing, is a unique marketing practice where retail products are endorsed by fulltime or part-time salesmen that are associated with the plan or company. The ultimate job of the people in any MLM Plan is to recruit more people like them and sell more products.
The most important thing which people don’t know about MLM is that MLM Companies pay according to direct and downline sales, not on recruiting people. But recruitment is also important because more people are directly proportional to more sales If active members are recruited. Active Members are those people who actually recruit more peoples and promotes sales.
MLM plan and compensation structure vary according to the company. If you are more familiar with the MLM, you may know types of MLM Plans such as binary, generation, matrix, etc.
Then what is Network Marketing?
Network Marketing and MLM are exactly the same things. But after 1990, the bad reputation of the term “MLM” invented a new term “Network Marketing“.
MLM is also known as chain marketing, referral marketing, pyramid marketing, etc. Note that, Pyramid scheme and Ponzi scheme both are illegal.
How multi-level marketing works?
First of all, interested people have to register with the company. Nowadays Indian Direct Selling Guidelines force MLM Companies to do not take any joining fees. But now MLM Companies emphasis to buy products/services of a fixed amount which vary according to the company.
After joining an MLM Company person called as a company member, direct seller, representative, distributor or associate.
So the products/services offered by the MLM Companies don’t have conventional retail outlets. In order to buy these products, buyers need to look for a distributor to buy what they are looking for.
Important things to consider before opting for multi-level marketing
There are some important things a person must consider before opting for this type of marketing.
Many brands guarantee high earnings in less time and effort which is totally wrong. MLM takes around 2 to 3 hard years to get succeed. Many MLM companies require sellers to invest a lot of cash for purchasing the inventory. Many brands don’t even buy the leftover products back that were not sold. This makes it difficult for the sellers to recover their investment and make a profit.
According to the 15-year long research on 350+ MLM Companies including Amway & Herbalife by Dr. Jon M. Taylor proved that MLM success rate is just 0.04% which is even worse than winning gambling. Single Level Marketing which we often called direct selling, its success rate is 80% which is way far better than MLM.
Jon M Taylor’s research is officially promoted by the American Government’s agency FTC (Federal Trade Commission). You can read his book The Case (for and) against Multi-level Marketing to know more about his research.
In India, before indulging in any activity in the Direct Selling Industry please read central and your state direct selling guidelines which will help you to a better understanding and facilitates safe business practice.
Is multi-level marketing a safe and legitimate marketing practice?
In order to avoid being scammed, it is recommended to opt for reliable sources that care for its team and salespeople. If your eyes on a particular company then do check the name of the company in Legal Direct Selling Company List which is officially launched by the government.
The best way to check the authenticity of an MLM Company is to analyze the products/services. If the products are good in quality and reasonable to price then the company is legitimate. You should understand the difference between product-based MLM companies and companies with dummy products.
Please note that few states in India banned MLM Companies with products/services like online courses, gift vouchers, holiday packages, and cryptocurrency. More information you can find in Direct Selling Guidelines.
We suggest you to check our list of the best MLM Companies in India where we have listed top MLM Companies to join this year.
Pyramid schemes – Are they legit?
Pyramid Schemes are completely illegal as Ponzi schemes. Pyramid Schemes and MLM are much similar structure-wise, but the main difference is of products/services provided.
As we have said earlier, MLM Companies pay according to the product sold directly or in the downline. Unlike MLM, pyramid schemes pay on recruiting people.
Generally, Pyramid Schemes companies call themselves an MLM Company and takes huge joining or membership fees which they circulate in the network and people only at the top get handsome profit and most of the people lose their money. To remove these pyramid schemes, the government forces the direct selling companies to not take any joining fees.
But the story does not end here. Various MLM Companies use dummy products that are highly overpriced. And the commission of these products they rotate in the network. The most shocking fact is that these companies are still running in India and lakhs of people actively work in these types of companies.
Even in truly-products based MLM Companies, money-circulation held where upline gets the profits from the downline. But that profit is generated from product selling and satisfied customers are using those products.
Unlike MLM, in Pyramid Scheme people are motivated and lured to invest their money in the scheme and in the end, more than 99% of people are losing money.
Ponzi schemes asked for investment and promises for high returns. Ponzi schemes are not structured like pyramid schemes.
Reference: This post is contributed by Umer Ishfaq from HashtagStudio.com (Digital Agency in Dubai).
I hope this post is beneficial for you to understand the terms direct selling, MLM, Network Marketing, Pyramid Scheme and Ponzi scheme with the basic difference. If you have any queries or suggestions feel free to comment below.