The difference between a MLM and a pyramid scheme can be blurry, both legally and practically. It’s never been legally defined in the US by a statute, but the FTC defines it as whether a consultant can make an income by selling to the public alone without having to recruit consultants underneath them. “Not all multilevel marketing plans are legitimate,” the FTC states in its literature on MLMs. “If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s probably not. It could be a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”
The question for would-be marketeers is... what is "X," and how can it be predicted to maximize profits? The fact that "X" is hard to pin down does not mean that it does not exist, and every Widget built beyond "X" will end up producing a problem for the organization. The market only wants "X" Widgets at $100. What are you going to do with your extra inventory of Widgets beyond "X" that no one wants, and the sales people you hired to sell them?
Some variation on this structure is common at most MLMs. Financial analysis on Pink Truth, a website that analyzes Mary Kay and other MLMs’ business practices, estimates that as a LuLaRoe seller advanced up the ranks, had 10 people below her, and garnered 3% of her recruits’ inventory-buy value, she could make a bonus of $1,500 a month—but only if her downline spent about a combined $35,000 on merchandise. That’s why struggling sellers used to be told to buy more inventory: Not only did their higher-ups get a cut of each bulk buy, but if their downline didn’t hit the minimum purchase mark, no one got a bonus. “The entire year that I did LuLaRoe, I was pushed to continue buying and buying more and more and more, no matter how the sales declined, and that buying more and more was the only solution to get more sales,” Sophie says.

“Multi-level marketing is one form of direct selling, and refers to a business model in which a company distributes products through a network of distributors who earn income from their own retail sales of the product and from retail sales made by the distributors’ direct and indirect recruits. Because they earn a commission from the sales their recruits make, each member in the MLM network has an incentive to continue recruiting additional sales representatives into their ‘downlines.'”


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