If you’ve ever been pitched an “amazing business opportunity” by a friend or seen a glamorous income post on social, you’ve probably wondered: Is this a real business or a pyramid scheme dressed up as one? You’re not alone. Many people confuse multi-level marketing (MLM) with pyramid schemes because they can look nearly identical on the surface.
This guide breaks it down in simpole way. You’ll learn what each model is, the red flags that matter, how to vet an opportunity, and safer alternatives if you decide MLM isn’t for you. My goal is simple: give you clear, practical tools so you can make a confident call before putting in your time and money.
Quick definitions
What is a pyramid scheme?
A pyramid scheme is a scam where money primarily flows from recruitment, not from selling real products to real customers. You’re pushed to “bring in two who bring in two,” and so on. Eventually the structure collapses because there aren’t enough new recruits to feed the payouts—meaning people at the bottom lose money. These schemes are illegal in the U.S. and can hide behind real products or flashy bonuses.
What is an MLM (multi-level marketing)?
An MLM is a sales model where independent reps earn commissions from retail product sales and (sometimes) bonuses from a team’s sales across multiple “levels.” Some MLMs follow the law; some don’t. The key test is how the compensation plan works in practice—not just what’s written in the brochure. An MLM can still be an illegal pyramid scheme if the plan, in reality, incentivizes recruiting over retail.
Bottom line: Real businesses pay mainly for real retail sales. Schemes pay mainly for recruitment, inventory loading, and fees.
2) The big picture: how to tell them apart
At a glance: Pyramid vs. Legit MLM
| Feature | Pyramid Scheme | Legitimate MLM |
|---|---|---|
| Primary way people get paid | Recruiting new participants, enrollment packs, and internal purchases | Retail sales to real customers outside the network |
| Product reality | Often a weak or overpriced product used as a cover | A real, consumable product people buy again because they like it |
| Compensation plan incentives | Push recruiting; “rank” depends on bringing people in or buying in | Rewards designed around real customer orders and repeat use |
| Upfront costs & inventory | High buy-ins, pressure to stock up (“inventory loading”) | Low entry cost, strong inventory buyback, minimal pressure |
| Legal status | Illegal | Legal if pay is truly tied to retail and claims are truthful |
| Typical outcomes | Many lose money when recruiting slows | Many still earn little; a few earn a lot—based on true sales, not hype |
Why the nuance? U.S. law doesn’t rely on a single percentage test. Regulators and courts look at how the plan operates in practice—what it incentivizes and what reps actually do. There’s no safe-harbor formula like “X% retail = legal.” Federal Trade Commission
The law
- No “percentage magic.” There’s no fixed percentage of retail sales that automatically makes an MLM lawful or unlawful. Investigators look at incentives, behaviors, and whether recruiting drives pay.
- Real products don’t save a bad plan. An MLM can sell good products and still be a pyramid scheme if rewards are mainly tied to recruiting or buying product to qualify for bonuses.
- Courts care about reality, not slogans. In the BurnLounge case, the Ninth Circuit affirmed that a program can be a pyramid scheme when the focus is promoting the program (recruiting) rather than selling products.
Red flags that scream “pyramid”
If you spot several of these, walk away.
- Recruit, recruit, recruit. The pitch centers on “building your team” and chasing ranks—not on serving customers.
- Upfront buy-ins and inventory pressure. You’re nudged (or required) to buy starter packs, autoship, or big monthly orders just to “stay active” or hit rank.
- Lavish lifestyle claims. Promises of quick riches, luxury cars, or guaranteed success. (A handful at the top may earn big—but that’s not typical.)
- Complicated, recruitment-heavy pay plan. The only realistic way to earn is by getting others to sign up and buy.
- Weak retail story. Few genuine customers outside the network; revenue depends on distributors buying and stockpiling product.
What a compliant MLM tends to look like
A lawful, consumer-friendly MLM should make it possible to earn primarily from retail sales to non-participants—and its plan should make that obvious. Look for:
- Clear retail focus. Training, tools, and tracking revolve around finding and keeping customers—not just recruiting.
- Verifiable retail orders. Systems that capture real customer purchases (not self-purchases disguised as retail).
- Sensible costs and strong buyback. Low-pressure inventory policies and meaningful refunds for unsold stock.
- Truthful income claims. Conservative marketing, with disclosures that reflect what most reps actually earn after expenses.
Even then, be realistic. Most people in MLMs earn little or nothing, and many lose money after expenses. That’s not an opinion—that’s consistent with consumer guidance and recent analysis of income disclosures.
What people actually earn (and why that matters)
The Federal Trade Commission’s 2024 review of 70 MLM income disclosure statements found that many participants received no payments, and the vast majority earned $1,000 or less per year—before expenses. That’s under $84 per month on average. Also, disclosures often exclude people who made little or nothing, and they rarely deduct costs like autoship, travel, samples, and events.
The FTC’s consumer advice echoes this: most people who join MLMs make little or no money, and some lose money. So if your goal is reliable income (rent, groceries, debt payoff), treat MLM earnings claims with healthy skepticism and run your own numbers.
Real-world cases (what they teach you)
- BurnLounge (2014, Ninth Circuit). The court upheld an order against BurnLounge, emphasizing that when a program’s focus is recruitment, it’s a pyramid scheme—even with products attached.
- Fortune Hi-Tech Marketing (2013). Operators were banned from MLM and surrendered millions in assets after regulators said their plan rewarded recruiting, not real retail.
- Herbalife (2016 settlement). The company agreed to tie distributor rewards to verifiable retail sales and paid $200 million for consumer redress. The order required a top-to-bottom restructuring to align compensation with real customer demand.
Takeaway for you: courts and regulators keep coming back to the same core question—does this plan pay people mainly for real customer sales, or for recruiting and buying to qualify? If it’s the latter, it’s trouble.
The risks you should weigh (even with “legit” MLMs)
Even if an MLM isn’t a pyramid scheme, the math can still be rough:
- Low typical earnings. As noted, “average” figures can be misleading, and most participants earn little before expenses.
- Real costs. Autoship, samples, conferences, travel, ad tools, and returns eat into margins. Many disclosures don’t deduct these costs.
- Social strain. Selling to friends and family (and recruiting them) can stress relationships.
- Time sink. Prospecting, follow-ups, parties, training, compliance—time adds up fast.
If you still want to try, set strict caps: a monthly money limit you’re willing to risk, an hours limit, and a timeline for hitting a realistic retail goal (not a rank goal).
A simple, no-nonsense due-diligence checklist
Use this before you sign anything or pay a dollar.
Comp plan reality check
- Can you be paid well from retail sales alone (no recruiting)? Ask to see examples and rules.
- Do ranks and bonuses require recruiting or minimum “qualifying volume” that participants often meet through their own purchases?
Income truth test
- Ask for the latest income disclosure statement and read the fine print. What percent earned $0? What percent earned ≤ $1,000/year? Are expenses included?
- If someone claims big earnings, ask for substantiation (that’s a legal standard, not rudeness).
Customer demand
- How many non-participant customers regularly buy at full price? Can the company verify that?
- Would you personally buy this product at retail if there were no business opportunity attached?
Cost controls
- What’s the buyback policy for unsold inventory? What fees are required (autoship, sites, events)?
Reputation + complaints
- Search the company name with “review,” “complaint,” and “scam.” Also check with your state attorney general office.
Pressure test
- Are you being told to “act now,” discouraged from independent research, or steered to buy big packs to “qualify”? That’s a red flag.
If you still want to join, set yourself up the right way
- Start tiny. Avoid large inventory buys. Prove real retail demand first with small test orders.
- Track every expense. Treat this like a business: spreadsheet your costs, taxes, and true profit.
- Build a real customer list. Focus on repeat buyers who aren’t in the network.
- Stay compliant. Use only substantiated income and product claims. When in doubt, don’t say it.
- Set milestones. For example: “If I can’t maintain 20+ real repeat customers in 90 days without recruiting, I’ll quit.”
Good alternatives if MLM isn’t your fit
If your goal is part-time income with fewer red flags:
- Freelancing (writing, design, bookkeeping, tutoring)
- Affiliate marketing for products you genuinely use
- Local services (pet sitting, lawn care, organizing)
- Reselling (thrift flips, niche eBay shops)
- Simple e-commerce (print-on-demand, small Etsy stores)
All of these can be started small, tested quickly, and scaled if the numbers work—without recruiting.
FAQs
Q: Are all MLMs scams?
No. An MLM can be lawful if pay is truly tied to retail sales to real customers and marketing is truthful. But many people still earn little or nothing, so be careful.
Q: Can you make good money in an MLM?
Some do, most don’t. The “average” can be skewed by top earners. Look at median and percentage earning $0 or ≤ $1,000 to understand your real odds—and remember that expenses matter.
Q: Why do pyramid schemes use products at all?
Products can camouflage recruitment-driven plans. Courts and the FTC look past labels to see if the plan incentivizes recruiting or self-purchases to qualify for pay.
Q: How do I report a suspected pyramid scheme?
File a report with the FTC (ReportFraud.ftc.gov) and your state attorney general. Keep contracts, screenshots, and messages.
Your 5-minute decision framework
- Would I buy this product at retail with no opportunity attached?
- Can I earn fairly without recruiting—just from retail customers?
- Do real numbers show most reps earn meaningful profit after expenses? (Not anecdotes, documents.)
- Is there pressure to buy big packs or stay on autoship to qualify?
- If I stop recruiting today, can this business still pay me well?
If you can’t answer “yes” to most of these, it’s probably not worth your time or money.
Conclusion
Here’s the simple rule I want you to remember: Real businesses pay mainly for real customers.
If the plan pays mainly for recruiting, big buy-ins, or hitting volume targets that people meet by buying their own inventory, you’re staring at a pyramid-style model—no matter how glossy the product or how inspiring the success stories sound.
Protect your time. Protect your savings. And if you decide to explore an MLM, go in eyes-open, with a small test, tight cost controls, and a fast exit plan if the retail math doesn’t work.