Multi-level marketing (MLM) is a sales and distribution model in which a business contracts with representatives to promote and sell the company’s products to customers, while also recruiting those customers to become representatives themselves. Amway is one example of a multi-level marketing company.
Representatives generally have to purchase the company's products to sell, display or demonstrate to potential customers. Recruiters usually keep some portion of the sales proceeds from the representatives they have recruited. That benefit is designed to motivate participants to recruit more participants.
Multi-level marketing has some of the same characteristics as a pyramid scheme and the two are sometimes confused. A pyramid scheme is an illegal sales model based on the idea that participants stand to make a great deal of money by recruiting additional individuals. Primary sales for the company are realized through selling products to participants rather than to customers and to collecting fees from participants.
In some cases, a pyramid scheme does not involve any products or services but simply asks recruits for money and tells them that the model ensures they will receive back many times what they invest. The individuals at the top of the pyramid receive money from the participants they recruit, who pay in the expectation that they will receive money from the individuals they themselves convince to invest.
How to spot a pyramid scheme: