Manila, Philippines

Difference of Pyramid Scam vs Multi-level Marketing

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Yes, I’m sure you’ve heard of the Aman Futures Investment scam. If not yet, where have you been? (get a glimpse here). Again thousands were duped of billions of pesos. Some might blame it to greed, some to innocence. In this post, I’d like to give my personal unofficial distinction between pyramid scams and multi-level marketing(MLM).

Pyramid Scams

Investment scams such as pyramiding (also called Ponzi scheme) usually offer outrageous unrealistic returns. As they say if it’s too good to be true, chances are it is. The likes of double your money or earn 50% in just a matter of days where seemingly no legit investment can guarantee. Even stocks are capped at 50% gain or loss per day but it’s never guaranteed. 

Guaranteed, there comes the blinding greed (and ok fine innocence)so these scams will ask you to put in some money, entice you with big returns in just a short time. After a mind-boggling return on initial investment, you reinvest a bigger amount, invite others to do the same. Returns keep coming, rollovers get bigger. Pool compounds and grows exponentially, promised returns even a lot bigger. You give, you take, you give again. Then suddenly returns become shady and shaky. Cheques bounce, payouts delayed.

What really happens is that the returns you get were actually the money invested by others after you. The scam merely circulates the money. Fresh investments are paid out as returns. The eventual crash occurs when the fresh supply is no longer enough to payout the returns of the maturing placements. And/Or when the dubious investors finally to run with all the money.

There was no real investment to begin with, just change of pockets. Crucial here is people get hooked early on to make them come back for more. As they go back for more, they give out more. But the more returns expected will no longer come back. The Aman scam was never the first. The people have been duped again and again. I’m sure, unfortunately, this will not be the last.

Multi-Level Marketing

Now for MLM. This is actually a legit business model used by a number of companies. Sure there are also lots of bogus MLMs out there, but for the sake of discussion let’s talk about the legit legal ones. MLM usually invites members to join for a minimal fee and be a retailer of something: prepaid load, clothes, apparel, health and beauty products, insurance, etc. 

Of course you earn from selling these, but there is also the marketing networking aspect. If you invite or refer others to be retailers as well, you get extra income or commission or what have you. They become your direct lines or one downs or whatever fancy name they call it. In turn, if your one downs successfully sell items or invite others to become sellers as well, they earn something while you get something as well from your now two-downs. The tree gets taller with more down levels, tree gets fatter. Earnings go upwards, those newbies at the bottom of the hierarchy must refer their own sources of income. You earn from other people who join through you and the other people who joined through them.

The more you invite, the more returns you get. You invest in time and getting referrals, and not necessarily rolled-over money. And here returns are never guaranteed. If you don’t get successful referrals, you won’t earn or maybe not as much.

Again, main difference is that no return is guaranteed here. Though I’ve noticed that the way they sell MLMs, outrageous returns are used as examples. That’s why many people join but don’t necessarily get those outrageous returns. That’s why many people as well mistake MLMs as scams.

Is it bound to crash? Well I won’t say crash since there is no guaranteed return to begin with. But I would say it can get saturated at some point. There will be a time when earnings will slow down, when then are less people who are interested to join. Or when the whole target market has been penetrated, where everyone now sells load and beauty products and there’s no one else to sell to.

Sadly, some Filipinos shy away from MLMs but get blinded by pyramiding scams. Well not all of us were cut to be successful MLM members (such as me) but it is not necessarily a bad investment. Just ensure that the MLM is legit to begin with.

As for too good to be true investments, chances are, it is.

Ironic but true: We get blinded by the return, and overlook the rational.

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