Affiliate marketing vs. pyramid schemes

In mentoring a student last week, I did a deep dive on affiliate marketing. What I found was that there seemed to be a lot of confusion as to what was affiliated marketing and what was a pyramid scheme (especially when pyramid scheme operators use the term “affiliate”).


Why it’s an important distinction

Quite simply, pyramid schemes (also known as multi-level marketing) are bad news. Many who find themselves a part of a pyramid scheme end up losing money due to startup costs, quitting their jobs to work on the scheme, etc. They also end-up losing their friends and family because the schemes emphasize recruiting friends and family into the business, which usually backfires.

The promise is the potential for large gains in money, but the reality is much different. The Finance Guy did a great breakdown of costs and income on pyramid schemes. For example, in 2010, active Amway members made an average of $2,424 per year. Their costs? $3,600 per year. So, they lost $1,176 on average per year.

But the main reason to stay away from pyramid schemes is that they are a scam, and because you are recruiting others in the scam, you could be charged with conducting illegal behavior.

Affiliate marketing isn’t without faults (potentially poor products, ethical issues such as disclosing you are an affiliate, etc.) but as a general rule, affiliate marketing is considered legitimate.


The difference between affiliate marketing & pyramid schemes

The main question to ask is: What is the primary way you make money?

In affiliate marketing, the primary way you make money is selling a product or service. You refer people to the company and the company pays you based on the number of referrals or the sales from the people you referred. For example, if you have a blog with a link to company’s product and that company pays you a commission for any sales that come from the link on your blog, then that’s affiliate marketing.

In a pyramid scheme, the primary way you make money is recruiting others. You may make a little bit on sales of a product or service, but the real money is recruiting others to sell the product or service and for them to recruit others. Usually the pitch goes something like “If you recruit ten people and they each in turn recruit ten people, then you could make a lot of money!”