The rewards flow from recruitment rather than from selling, which is what defines a pyramid scheme

The argument

Proponents of this position argue that the question is settled by looking at where the money comes from rather than at how the arrangement describes itself. A genuine sales business pays people for moving goods to customers who want them; the reward tracks the sale. A pyramid scheme pays people for enrolling other people; the reward tracks recruitment, and goods are present, if at all, to give the payments a lawful appearance. On this account multi-level marketing belongs to the second description, whatever the first-order claim about products may be. The reasoning turns on the structure of the compensation rather than on any individual's conduct. Where earnings depend substantially on the purchases of a recruited network rather than on sales to people outside it, the rational strategy for any participant is to recruit, since effort spent selling to customers yields a fraction of the return that effort spent enrolling does. Proponents argue that this is why recruitment dominates the activity in practice: participants are responding correctly to the incentives they were given. They add that requirements to buy stock in order to qualify for a rank or a commission complete the pattern, because the recruit then becomes the customer, and the sale that the model points to as evidence of legitimacy is a sale to the salesforce. Proponents conclude that the label follows the substance. A scheme in which the participant is the market, and in which the reward for enrolling exceeds the reward for selling, has the economics of a pyramid regardless of whether a product changes hands along the way.

Premises

Counter-arguments

Opponents answer that the premise mistakes one variant for the whole category: compensation plans differ, and where commissions are paid only on sales to genuine end users the model does reward selling, which is precisely the distinction the law draws. A second objection is that the presence of a real product sold at a real price is not cosmetic but decisive, since a pyramid scheme collapses when recruitment stops whereas a business with outside customers does not. Others argue that concentrating on recruitment reflects what some participants choose rather than what the structure requires, and that pointing to the behaviour of the worst operators does not establish a verdict on the model itself.

Rejecting the premises

[Rejecting P1] The distinction is not binary, since ordinary businesses also reward the building of teams through management commissions and franchise structures without becoming pyramid schemes. [Rejecting P2] Compensation plans vary widely, and where commissions are paid only on documented sales to outside customers the incentive the premise relies on does not exist. [Rejecting C] An economic resemblance is not an identity: a model that also sells to genuine customers has a revenue source a pyramid scheme lacks, which is the feature that determines whether it can survive without recruitment.