Pyramid Schemes
and
Network Marketing:
What's The Difference?



If there is any industry where the phrase pyramid schemes is used most often, it is the network marketing industry. What, if any, is the difference between a legal pyramid-shaped organisational structure and an illegal pyramid scam?

Many people, looking for an opportunity to earn a residual or passive income, will ask when shown a network marketing plan...

    "Is it a not a pyramid scam?"

And if, in response, you ask that person what a pyramid scheme is, the answer will almost always be of a general type. Something like...

    "Well, I mean, is it not one of these schemes where I will ultimately be ripped-off?"

The truth is, there is a fine line between legitimate network marketing and the so-called pyramid schemes.

As a network marketer you will be faced with questions similar to this more often than you want in your career. It becomes important then to be prepared.

A pyramid scheme or scam is a fraudulent business scheme or swindle. Almost always, the process involves collecting money from other people and paying it over to those who joined earlier.

I list here what I consider to be the major characteristics of pyramid scheme:

  1. People at the top make most or all of the money: A pyramid scheme's compensation plan is based on the amount of money made from new recruits, not one's productive efforts.

    Your position in the organisation also determines how much money you can make. Those who join early and are positioned at the top make most of the money. Participants at the bottom have to wait for others to join before they can make any money.

  2. People who get in at the beginning make most or all of the money: Timing is important with pyramid schemes. Those who join early occupy top positions...and it is from these top positions that they will earn most of the money.
  3. No product or service of value is involved: Pyramid schemes are based primarily on the recruiting of other people. They do not offer any value to participants. Even if a product or service was involved, this would be merely to give the scam some form of legitimacy. The product or the service would be of no value to the participant.
  4. The promise of quick, short-term profits: Now, don't get me wrong here. I see nothing wrong with getting richer quicker. The problem comes in when the getting rich quick is the hallmark of the scheme.
  5. Returns are linked to how much you invest: The returns in a pyramid scheme are usually linked to the amount of money you invest. Bring in a thousand bucks and collect ten thousand in 8 weeks. Two thousand will give you twenty thousand in the same period.

    The question to ask here is, where does all this money come from? If nobody joins the scheme after you, would you still get value from your participation?

With the above points in mind...

    Where does network marketing fit in?

    Is network marketing one of the pyramid schemes merely because its structure looks like a pyramid to many?

    Who makes most of the money in MLM?

Let's take the points one at a time and apply them to multi-level marketing.

People at the Top Make Most or All of the Money

Yes, in network marketing, people at the top make most or all the money. The quesion is, how did these people make it to the top?

In MLM, like any other legitimate business you may think of, you work your way to the top. You start at the bottom, and through hard work, work your way to the top. Realise that in network marketing you are rewarded for work well done. No work, no pay, regardless of your position in the organisation.

In a typical pyramid scheme, you don't make it the top. You are "born" into the top by joining in at the beginning. Your position is determined more by your arrival time than by any work on your part.

So, it would be unfair to regard network marketing to be a pyramid scam merely because people at the top make most of the money. They deserve to earn this much because they worked for it.

People Who Get in at the Beginning Make Most or All of the Money

Anyone who starts up a business do so with the sole purpose of making money, and a lot of it at that. Business owners in all types of businesses make more money than anyone else in that organisation. There is no reason why this should not to be the case.

Contrast this with distributors in network marketing. Do people who come in early make most of the money? By all means no. Not necessarily. Why? Because in network marketing it is not how soon you join that counts. It is what you do once you are in that counts.

I have yet to find a network marketing company where the first distributor to sign up makes more money than all the distributors in that company.

No Product or Service of Value is Involved

If the product or service the company offers does not offer fair value for money to every consumer, it is more than likely that it is a scam. MLM companies offer products or services which provide value for consumers in exchange for money.

It may be helpful to ask yourself this question...

    "Would I buy this product or service if it was not for the business opportunity?"

The promise of quick, short-term profits

Yes, there are cases of distributors who made quick, short-term gains in network marketing. Within six months some distributors made it to beyond six figure incomes. But these are not the norm. They are rare.

An average distributor would take three to five years to start making any real income from the business.

Realise that not all distributors who sign up will do any work. Here is why...

  • Some people will sign up to reap the benefits of buying products at discounted prices. They see and like the value the products provides them, but have no interest in running a network marketing business.
  • Others were conned into signing up, and as soon they realise this, they quit.

  • Others came in because of the promise of get rich quick. And when the promised money does not show up, they quit.

I mentioned earlier that in network marketing you make money from the sale of products or services to the consumer. This selling is made by you personally or members of your downline. Your income is therefore directly related to the sales activities of your downline.

Returns are Linked to How Much You Invest

Many network marketing companies require a minimal investment to start. This usually goes towards the purchase of marketing literature and sample products. That's about all you will have to pay for upfront.

From here onwards any payment you make will be optional. This includes such things as telephone costs, marketing or advertising costs, as well as training costs.

Making money in MLM has nothing to do with whether you pay these costs or not. It has everything to do with selling. Selling your products to end users and selling your business opportunity to potential distributors.

It is unfortunate that network marketing seems to be the only business concept associated with pyramid schemes. This is understandable considering many distributors can't tell the difference.

Do your due diligence before judging any opportunity. Look out for the characteristics mentioned here, and you will stand a better chance of telling a pyramid scheme from a true network marketing opportunity.

Related article:

How To Tell A Network Marketing Company From A Pyramid Selling Scheme