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Affiliate Marketing vs Pyramid Scheme: 3 Critical Differences

November 10, 2022

People often lump affiliate marketing in with disdained business models like the pyramid scheme. However, when comparing affiliate marketing vs pyramid scheme, there are 3 critical differences that set them apart. Affiliate marketing is a legitimate and valuable service, just like a local lead gen business, whereas a pyramid scheme is nothing more than a scam that essentially steals money from people. In the following article, we’ll take a closer look at each of these business models, which you should choose, and the step-by-step process to start making money ASAP!

What is affiliate marketing?

Affiliate marketing is a digital marketing strategy where businesses outsource marketing activities to third-party marketers, often called affiliates, who promote the business’s products for a commission on the sale. Affiliate marketers connect with brands directly or go through an affiliate network to receive their own unique affiliate link used to track and award sales. When a potential customer clicks on this link to reach the business’s website and makes a purchase, the affiliate marketer is credited with and receives a predefined portion of the sale.

What is a pyramid scheme?

A pyramid scheme is a form of “business” or “investment” that funnels money from new members to older members as each member pays something to join and then recruits at least two new members into the scheme to continue the cycle. 

2 Options for making money with a pyramid scheme

  1. Start your own - Starting your own pyramid scheme places you at the top of the pyramid! This allows you the greatest potential for passive income profit, but it also places you in the crosshairs of the law when the whole thing comes crashing down...
  2. Sell for another business - Joining a currently operating pyramid scheme as a distributor or sales agent is another way to make money. However, don’t be surprised if you spend more money than you actually make if going this route.

Is a pyramid scheme the same as multilevel marketing?

Multi level marketing, also known as network marketing, is a business strategy where you, as a distributor or sales agent, earn commissions primarily on selling consumer products and services. As an MLM distributor, you are not an employee of the company you’re selling for, but are instead responsible for your own MLM business and the creation of a distributor network. Aside from earning money by selling to customers, distributors in an MLM company also make commissions when the distributors they recruited make sales.

However, as a network marketer in an MLM scheme, the majority of your commissions must come from sales to the ultimate customer, not on recruiting activities. Whereas a pyramid scheme primarily generates revenue from new recruits, a MLM business generates at least 70% of its revenue from sales to non-distributors. 

3 Famous pyramid scheme examples

1. Fortune High Tech Marketing

Fortune High Tech Marketing promoted itself as assisting the average person to attain financial independence. According to Reuters, it recruited people to sell various products, including those made by Dish Network, Frontpoint Home Security, certain cell phone providers, and a range of health and beauty products. However, in order to receive sales commissions and recruiting bonuses, salespeople had to pay $100 to $300 in annual fees.

# of people affected: 100,000

2. Business in Motion

A Canadian company selling vacation club packages, Business in Motion promised its sales agents around $5,000 for each vacation package they sold. However, before selling anything, agents had to pay $3,200.

# of people affected: 2,000

3. BurnLounge, Inc.

This digital music store company sold packages ranging from $29.95 to over $429.95/year to aspiring music creators for an online store and webpage. The company paid a commission of just $0.50 for the sale of a $9.90 album, but paid $10 to $50 dollars if existing store owners sold the company’s product packages to other aspiring musicians. The company generated a whopping revenue of $28.3 million, but only $500,000 actually came from the sale of music. 

# of people affected: 50,000

Are there any similarities between affiliate marketing and pyramid schemes?

It’s surprising that affiliate marketing gets brought up in the same discussion as pyramid schemes, because there are really only two similarities between the two business models. Both affiliate marketers and those who work under a pyramid scheme make money by selling the products of others to earn a commission and can generate passive income from their efforts. Aside from that, the two business models couldn’t be more different from one another. 

Affiliate marketing vs pyramid scheme: 3 Critical differences

Affiliate marketing

  • Make money from retail sales
  • Free to sign up
  • Legal

Pyramid Scheme

  • Make money from recruiting (primarily)
  • Buy in required
  • Illegal

1. Making money

Affiliate marketers make money solely by promoting or referring others to buy a product. Distributors in a pyramid scheme are usually "tasked" with selling a product or service, but make the majority of their money by recruiting others to join the business. 

2. Cost to join

You can sign up to an affiliate program for free and get access to thousands of brands to promote. Sellers under a pyramid scheme first pay a membership or similar type of fee before they can start making sales with the company. 

3. Legality

Affiliate marketing is a completely legal business activity that over 80% of businesses engage in. According to Zippia, there are over 11,400 affiliate programs in the US alone. On the other hand, a pyramid scheme has been determined illegal by the Federal Trade Commission (FTC) in America and the government agencies that protect consumers in many other countries as well. If you get caught participating in an illegal pyramid scheme, especially if you're responsible for starting one, you could face years in jail and harsh fines if convicted. 

Why you should avoid a pyramid scheme 

A pyramid scheme really isn’t a viable option and comes with substantial risks you’re better off avoiding. For starters, pyramid schemes are illegal in most countries and getting caught up in one puts you at risk of the legal consequences. Besides that, there’s a good chance you’ll be taken advantage of and end up losing money in a pyramid scheme, which is why they’re illegal in the first place. 

Tips for avoiding a pyramid scheme

  • Be wary of high returns promised in a short period. If it sounds too good to be true, it probably is.
  • Verify whether there is a genuine product being sold.
  • If there are any upfront fees you’re required to pay, get a breakdown of what they contribute to.
  • Confirm that recruiting activities aren’t better compensated than actual retail sales.
  • If possible, reach out to others involved to hear their experience.

An alternative passive income online business model

Another passive income business model you can do entirely online from anywhere is local lead generation. Unlike a pyramid scheme, local lead generation is completely legal. Distinct from affiliate marketing, the market for local lead generation doesn’t have nearly the same high level of competition and market saturation. Depending on your circumstances and online business goals, you may find local lead generation is the best option for making real money online. 

A local lead generation business involves finding a local market with low competition and high search volume potential, such as a suburb of Chicago, building a niche business website, like for lawn care or window cleaning, and getting it to rank on Google for the local market. Then, when someone in the area you targeted looks for the business service you built the website for, they’ll see your website as one of the top listed options. You can then turn around to local businesses in that area who offer that service and sell them the high potential leads for hundreds to thousands of dollars every month, depending on the business niche and location.

4 Steps to earn money with affiliate marketing

When comparing affiliate marketing vs pyramid scheme, affiliate marketing is clearly the better option. As an affiliate marketer, you can live that dream online business lifestyle that allows location freedom while generating a pretty good income. According to Truelist, average affiliate marketers can expect to make around $65,800/year, with some high achievers making up to $154,700! If you want to start earning money with affiliate marketing, follow these four simple steps to create and generate income with an affiliate marketing business. 

1. Choose a niche to create content around

Niche selection is the most important step of affiliate marketing because it provides the foundation of your business and has a major impact on your success. If you choose a niche with not enough interest, you’re limited in your ability to sell products and won’t be able to generate much income. On the other hand, many high-volume niches are already over-saturated with affiliates, so if you’re not careful in avoiding those, your content and efforts will probably get lost in the noise. The key is to find a niche with enough volume to build a valuable audience around, but isn’t so simple that it’s highly competitive. 

Select a market and niche down

A great way to choose your niche is to choose some general markets that interest you and that you have some expertise in to enable you to create high-value content. Common affiliate marketing verticals include:

  • Health and fitness

  • Dating

  • Personal finance

  • Insurance

  • Pets

Once you choose some general verticals, you’ll want to narrow down your focus into a micro niche to establish a more targeted audience. For example, if you want to be an affiliate in the personal finance vertical, narrowing your audience to personal finance for college students would allow you to create more targeted content. 

There are plenty of great affiliate marketing niches out there to choose from and taking the time to find the right one can really make or break your success. 

2. Get affiliate links

Next, you’ll need to get some affiliate links for relevant products within your niche that your audience would be interested in buying. You can reach out directly to brands you want to work with to see if they have an affiliate marketing program, but more commonly, you’ll find your branded affiliate link through an affiliate network. Affiliate networks like Amazon Associates, ClickBank, and Impact are platforms that connect brands who want marketing help with affiliate marketers who want to earn money promoting products.

3. Decide which channels to promote through and create content

Now that you have those money making links ready to use, you need to build an audience and get those links in front of them. Affiliate marketers have many digital channels at their disposal to choose from. Three popular channels affiliate marketers use to promote affiliate product offers are: 

  • Blog - According to SimilarWeb, blogging makes up to 65% of affiliate marketing efforts. Blogging is highly popular for affiliate marketers because you create a digital property that you own directly. Incorporating your affiliate links within your blog post content is an effective way to promote your affiliate products to your audience. 
  • Social Media - Social media platforms like YouTube or Instagram are free channels to communicate with your audience and recommend products. Although placement of affiliate links on social media platforms isn’t as accessible for your audience as with blogging, social media is still a very useful marketing channel to reach audiences that prefer more visual or audio-based content types. 
  • Email - Many affiliates leverage the benefits of email marketing within their affiliate marketing strategy. Aside from sending email blasts to your entire email list, you can also create segmented lists and send targeted campaigns to specific segments of your audience to maximize your conversion rate.  

4. Improve your reach with paid advertising

If you want to maximize your profit potential with affiliate marketing, don’t skimp on paid advertising. If you rely solely on organic traffic for affiliate product sales, it can take months or even years before you generate revenue from your content because it takes time to rank well in search engines. However, if you run paid advertising campaigns like Google ads or Facebook ads, you can start generating revenue right away. Paid advertising is used to push your content in front of a relevant audience and can help you both build your audience and make sales.

Bonus tips for affiliate marketing success

Tip #1: Use affiliate marketing software

Managing an affiliate marketing business can be extremely hectic, as you have to track and manage multiple campaigns and revenue streams. Fortunately, there are many affiliate marketing softwares on the market you can employ to assist in keeping your affiliate marketing business well organized and easy to analyze. Beyond tracking analytics, you can also find affiliate marketing software for things like:

  • Managing discount codes
  • Anti-fraud toolsets
  • Managing partners
  • A/B testing and campaign optimization
  • Keyword research 

Tip #2: Learn from an affiliate marketing course

Successful affiliate marketers have both a high level knowledge of the industry and an assortment of valuable digital skills like SEO, copywriting, and graphic design. Good luck competing against all the other affiliates if you go into affiliate marketing with no knowledge or skills. To give yourself the best possible start in affiliate marketing, learn from a focused affiliate marketing courses like Wealthy Affiliate or Affiliate Lab to set yourself on the right track. You can check out our Wealthy Affiliate review and Affiliate Lab review for more information on those courses, but there are many options out there to explore and you can even find tons of great free information on YouTube and blogs. 

Conclusion

The best online business opportunity for you definitely isn’t a pyramid scheme, but it could certainly be affiliate marketing. There are many opportunities in the world of online business, so do the necessary research and make an informed decision about which direction to take. Once you make a decision, the most important thing is to give it everything you’ve got if you want to make that business successful. If you do that, there’s a good chance you’ll attain what you’re aiming for, or you’ll at least come away with some valuable lesson and skills to get it right the next time around.

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  1. Affiliate marketing beats pyramid schemes hands down. I lost alot of money with pyramid schemes during college, but then I discovered Clickbank and never looked back since. I've gone on to create my own products, but I still promote affiliate products also.

    1. Hey Hakeem-glad you enjoyed the article and found some value. Thanks for reading, and feel free to come back anytime, as I regularly publish new content on my blog.

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