Affiliate programs often get incorrectly categorized with multi-level-marketing (MLM) companies, or even worse, pyramid schemes — but they are far from similar. This FAQ will explain the differences.
Let's start with what all three have in common.
Affiliate programs, MLMs, and pyramid schemes all pay salespeople (ie: affiliates) for generating leads or sales for your company on a performance basis. Rather than directly hiring salespeople as employees, paying them a salary, and giving them sales goals, these type of models allow companies to build armies of salespeople who only get paid when they make sales.
Affiliate marketing is a very cost effective sales channel because your customer acquisition costs are incremental. Other than the expense of building and running an affiliate program, which can often be run by a single affiliate manager, you only pay commissions when your salespeople make sales. It's the ultimate commission only salesforce, and you can see why it's a popular sales channel for businesses.
Beyond that one similarity of paying salespeople on a performance basis, affiliate programs, MLMs, and pyramid schemes are very different.
Before reading any further, you should know that I'm very biased towards affiliate marketing — it's my favorite type of marketing. I feel that a properly run affiliate program is a win-win-win for companies, affiliates, and customers. And I say that after being on all sides of the coin — from running my own affiliate programs for my own businesses, managing affiliate programs for other companies, and being an affiliate myself for hundreds of companies.
However I hate MLM programs, which I'll get into more on why later, and I obviously hate pyramid schemes because they're completely illegal and designed to rip people off.
So as long as you're okay with the idea that the information you're about to read was written by a guy who hates MLMs, then please continue. I'll do my best to keep this post objective, but there's definite intrinsic bias behind it.
What are affiliate programs?
Affiliate programs have only 1 tier of affiliates who work directly under the company. A “tier” in this context signifies levels of commissions. 1 tier means there's just the Company and Level 1 Affiliates who earn commissions on their sales.
If an affiliate refers a customer, who loves the company and later becomes an affiliate themselves, then the original referring affiliate receives no additional benefit. Both the new affiliate and the original referring affiliate are now Level 1 Affiliates just like the other.
Sometimes I've seen affiliate programs offer a 2nd tier, or a bonus for recruiting new affiliates, but typically it's just Company + Affiliates.
Affiliate programs are like having your own sales team, who work directly for your company. They have one “boss” or “team leader” who is typically called the “affiliate manager”. This can be a salaried person who works in-house with you, or you can hire a third party affiliate management company who manages the program on your behalf.
The reason I mention having an affiliate manager is to show that there is a single point of contact that's responsible for all of your affiliates, and all of your affiliates are on the same level. None of your affiliates are responsible for training other affiliates, and affiliates don't benefit from recruiting other affiliates.
In fact, the opposite is actually true. The more affiliates there are, the more competition there is on search engines, PPC, social media, etc, so as an affiliate, I prefer smaller programs with less competing affiliates in them.
Since there's only one level of affiliates, they all apply to join the program directly with your company, and you can “hire and fire” them as you please. It's all just one big team and you're the boss.
Curious why you would not hire (or even fire) an affiliate? Read my other post Should I let anyone join my affiliate program?
What are Multi Level Marketing programs (MLMs)?
MLM programs are when affiliates get rewarded for recruiting other affiliates (called sub-affiliates) underneath them by earning a piece of the commission on all the sales that they generate. This commission is in addition to the sales they make directly.
Usually affiliates earn the most from selling products themselves, and a smaller amount from the sales of their sub-affiliates, and it can stretch across several tiers. For example, an affiliate might earn 15% of all their direct sales (Tier 1), 10% of all their sub-affiliates (Tier 2), 5% of all their sub-affiliates (Tier 3), and 3% of all their sub-affiliates (Tier 4).
Traditionally MLM commission incentives are based on sales performance, just like affiliate programs. The crucial difference is that affiliate programs only have one level of affiliates, whereas MLM programs have multiple levels (hence the name).
However, nonetheless, the income is performanced based on their sales. So for example, as an affiliate, you might recruit 30 sub-affiliates underneath you, but if they don't sell anything, you don't make anything off them.
MLM programs are like having multiple sales teams, who recruit and train new salespeople, and then teach them how to build their own sales teams, and so on. Rather than one affiliate manager who leads all the affiliates in an affiliate program, there is oftentimes more of a hierarchy to the leadership and training involved with MLM programs.
With an MLM, the team leaders are responsible for recruiting and training new affiliates, and the in-house MLM manager (aka: the guy on top) may only communicate with team leaders instead, who trickle the information downward.
What are pyramid schemes?
Pyramid schemes function like MLMs, except one crucial difference, which is that there is MORE incentive to recruit new sub-affiliates than there is incentive to sell the actual product.
If I sold t-shirts and offered a 10% commission on t-shirt sales, but it cost $50/month to become a t-shirt reseller of mine, and you earned $25/month per sub-affiliate you recruited…. which became a more profitable scenario for you? Earning 10% one time on $20 t-shirts? Or recruiting 100 sub-affiliates and earning $2500/month regardless of how many t-shirts they sell?
Usually pyramid schemes require salespeople to buy starter kits, pay a monthly subscription to be a reseller, or order a minimum amount of product each month to stay a member. Some MLM companies blur the line here by not necessarily “requiring” any of those things, but making it all but impossible to hit your commission goals without ordering the products yourself, or by offering “paid training” to be a better salesperson.
At some point, pyramid schemes collapse, because inevitably, you can't have a business that exists completely from the income of resellers paying each other. Companies need to make money from selling products and services, not from a team of sales people who pay for the privilege of recruiting other salespeople. At some point, each of those resellers will hit their breaking point and realize that they aren't making any money, and the system collapses. The only people that make money in a pyramid scheme are the ones on top who made money on the backs of everyone below them.
So obviously starting a pyramid scheme is out of the question and you're not going to do that. I just wanted to explain the difference between MLM programs and pyramid schemes so that you never blur the line with your program.
Should I start an affiliate program or an MLM program for my business?
100% of the time, if choosing between those two options, my answer will be that you should start an affiliate program. MLM is never the right answer for legitimate companies with long term aspirations and products/services that can stand on their own two legs.
However, even though I'm pro-affiliate marketing in general, I've learned that it's not the right fit for every company. Sometimes it's not the right fit in general, and other times the timing is wrong and I recommend waiting until your company hits certain milestones before launching an affiliate program.
If you're on the fence about whether you should start an affiliate program, contact me for a free 30 minute telephone consultation. Even though I offer affiliate setup & management services, I'm never going to steer a company towards affiliate marketing if it's not the right fit. I learn a lot from the consultations and enjoy doing them, even when they don't lead to immediate business.
Why are affiliate programs better than MLM programs?
I hate MLM programs, and I've never been introduced to one that changed my mind. Rather than further tackle my reasons why in this post, check out my other post Why do I hate MLM programs?