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What is Pyramid Scheme? MLM, Ponzi and Pyramid Scheme Definition

What is Pyramid Scheme? MLM, Ponzi and Pyramid Scheme Definition. Difference between Ponzi Scheme and Pyramid Scheme, Difference between MLM and Pyramid Scheme, Are Pyramid Schemes legal or not?

A Pyramid scheme is an illegal business model that looks like MLM (Multi-Level Marketing) business model but is more focused to recruit the people than selling the products. Most of the Pyramid Schemes sell affiliate membership instead of selling real products. A Pyramid Scheme always lure the people by offering unexpected ROI on their investment amount. But, the fact is that it operates by paying old members by using the money invested by the new members, completely illegal and even can't sustain for the long run. That is because the ability to recruit the new members will be dry up sooner or later and the market for that company to get new members will be saturated and the whole system start to backfire and ultimately collapse.

Many confused MLM with Pyramid Scheme and also Pyramid Scheme with Ponzi Scheme, however here, we are going to provide you the exact difference between Ponzi Scheme and Pyramid Scheme and also the difference between MLM and Pyramid Scheme.

What is the difference between Pyramid Scheme and MLM?

Although most of the Pyramid Schemes look like MLM, you must know the fact that the legit MLM businesses are more focused to sell their products than recruiting the new members and MLMs pay their affiliates from the profit that they make by selling their real products, not by using the investment of new members. However, the Pyramid Schemes, either offer products to sell or not, but they are more focused to recruit the members and sell their products or membership to those members than to the consumers. But, the MLM is more focused to sell their products to real consumers.

So, to differentiate MLM with Pyramid Scheme, simply you have to look at the compensation plan of the company and need to find out either they are focusing on selling their products to the real consumers or to the members themselves. Yep, we agree that there are some MLM companies that have blurred the line between MLM and Pyramid and make it more difficult to differentiate. But also, if you can earn more money in the company by recruiting members and selling their products or membership to the members than the real consumers, then that involves Pyramid Scheme which can have a legal issue anytime in the future.

What is the difference between Ponzi and Pyramid Scheme?

Actually, both Ponzi Schemes and Pyramid Schemes are illegal business models where the existing members are paid by the investment made by the new members, but also Ponzi Scheme is more dangerous than the Pyramid Scheme because most of the time participants in Ponzi Scheme are unaware that they are involved with Ponzi Scheme, instead, they believed that they have invested on actual security and will just earn back a certain percentage of ROI when the company makes the profit.

However, at least the participant who involves in the Pyramid Scheme, most of the time they are aware of the fact that they can earn only by recruiting new members into the system, some of them even aware that the investment from the new members is a source of profit for existing members.

Since the members in Ponzi scheme think that they can get a return of their investment after a certain period of time with a certain percentage of ROI even without recruiting and they believe that profit is generated by the company itself without using the money of new members, so most of the members in Ponzi Scheme just invest money from their own pocket but doesn't involve actively to recruit new members. But, since the compensation plan of the Pyramid Scheme itself shows that the only way to earn money from that scheme is by recruiting the new members and using their investment, so the members of the Pyramid Scheme highly involve in recruiting the new members.

Although, both Ponzi and Pyramid Schemes involved to compensate the existing participants from the investment made by new participants, however, also participants of Ponzi scheme believe that they are earning returns from their own investment, not by the investment of new members, while participants of Pyramid Scheme are aware of the fact that they can earn money only by recruiting new participants.

As per the record and business nature, we can say that Ponzi Scheme can sustain for many years, however, Pyramid Scheme collapses quickly because Pyramid Scheme needs rapid growth to sustain, but Ponzi Scheme doesn't need that. Even it is always hard for concerned authorities to spot the Ponzi Scheme.

For example, the Ponzi Scheme operated by Bernie Madoff was able to run for over 30 years by offering steady returns to investors. But, in 2008, due to the economic downturn, Madoff wasn't able to pay his investors as most of them tried to cash out of the market and his scheme collapsed and revealed as a Ponzi Scheme and then he was arrested in 2009 for running Ponzi Scheme and now he is in jail for 150 years, or we can say for a lifetime prison sentence. So, this incident also makes it clear that it is very difficult to spot the Ponzi Scheme even by the concerned authorities. As you know that we are here to provide the guidance to make money online and spot the scams, but also sometimes even it is very difficult for us to spot the Ponzi Scheme.

Yep, there are some companies that really makes a profit and pay back a certain amount of ROI, but the maximum numbers of companies who offer ROI in a certain period of time are Ponzi Schemes. In order to spot either they are Ponzi or not, we need to see their business plan and need to find out their real source of income is enough to pay back the committed ROI to their members or not. However, there are some companies that never declare the return period of that ROI and only commit if they make a profit, they will share the revenue, if not, they will not. So, those kinds of sites are known as Revenue Sharing sites. But, most of the Revenue Sharing sites are also turned out to be a Ponzi scheme. Some of the Revenue Sharing sites have already faced legal issues and having court cases.


Aforementioned, the main focus of a Pyramid Scheme is to recruit new people so that they can pay the money to the existing members by the investment of the new members. Most of the time, in Pyramid Schemes, they do pay the highest ROI to the beginner investors and shows the dream to the new investors to earn the same amount of ROI, but the new recruiters won’t even get a close to that ROI amount because the structure of Pyramid Scheme only serves to the members at top of the Pyramid Scheme which obviously will be those who join the system first. In this way in Pyramid Scheme, more new members join and invest, those new members will earn relatively low amount than those old members and at last, some new members start to lose money and then leave the system which will backfire all the system from down to up and the system start to dry up and ultimately the whole business will collapse.

There are lots of companies out there which are pretending to be MLM business and fooling around the people by using a Pyramid Scheme business model due to which most of the people are being victims of such kind of Pyramid Scheme, illegal business model. However, as we have mentioned here some facts about Pyramid Scheme with some difference between MLM and Pyramid Scheme as well as also the difference between Ponzi and Pyramid Scheme, hope this helps you to figure out the legal business from the illegal ones.

However, even you find out the legit MLM, still, our recommendation will be always to work with an affiliate program than with MLM because the affiliate program is much more less risky and easy to work, such as eBay, Amazon, etc.

Please feel free to share this post about Pyramid Scheme with your friends and families through your social media accounts to make them aware of Pyramid and Ponzi schemes.

It will be our pleasure to see your comments below. So, please feel free to leave your comment below if you have any queries related to Pyramid or MLM or Ponzi or anything related to the Online Work Industry.

We will be more than happy to help you and hear from you.

Good Luck!

author avatar
Deroka Author
Hello, I'm Deroka (Suman Roka). I'm a part of the team that has written many reviews, articles, and posts on I'm the one who researches and writes the reviews of various online companies. Additionally, I take on the role of editing the reviews, articles, and posts on NewsOnlineIncome. If you want to learn more about our team members, you can visit our About Us page. To know more about me, you can follow my Facebook Profile. I also recommend you to check our Reddit Page for more info on scams.

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