Pyramid selling schemes are fraudulent programs that masquerade as legitimate network marketing business opportunities.
These programs are so well disguised that even people who aspire to become network marketers fall prey to them and lose their valuable time and money.
Two questions appear relevant here. The first is...
Pyramid selling schemes usually pay you for bringing in referrals. The referrals you bring in will have to bring in referrals of their own. Every time a new member enters the structure, the person above him gets paid a commission.
As long as people keep joining at the base, members at the upper levels will get paid. The program, however, collapses when it reaches a saturation point – when recruiting more people becomes mathematically impossible.
The next question then is...
One of the best ways to spot a pyramid selling program is to look for products or services with inherent value.
Legitimate network marketing companies always have products with inherent value, which you can sell to customers and make money. While you might get paid a commission for bringing in referrals, it will not be your main source of income. It will be a minimal once-off payment.
Fraudulent programs, on the other hand, do not have any products or services. Your only source of income will be the commission you get when you bring in referrals. Some schemes do offer products or services that have no value to the end-user.
Pyramid schemes usually ask for a hefty membership fee just for joining the program. The fee you pay is used to pay the people above you. When you bring in new referrals, the fee they pay is used to pay you.
The whole setup is structured in such a manner that an unending number of new members need to join at the bottom of the pyramid for the existing members to get paid.
Legitimate multi-level marketing business opportunities are mostly free to join. Some programs do charge a small signup fee. The money you pay, however, is not used to pay someone else. It is, instead, returned to you in the form of a sales kit and promotional materials.
Pyramid selling programs often require you to buy a huge amount of inventory, more than what you can realistically use or sell. This practice is called frontloading. Some programs even take it one step further by asking you to buy inventory each month.
This is a sure sign that you are being ripped off. Legitimate online marketing businesses would never ask you to buy a truckload of products that you cannot possibly use yourself or sell to others within a reasonable amount of time.
Fraudulent companies do not buy back unused, unopened products from their members. What this means is that if you accidentally end up buying more products than what you can use or sell or if you want to quit the company, you have to keep the products yourself and bear the loss.
Legitimate companies, on the contrary, have a buyback policy wherein they buy back their products and refund the amount to you.
Pyramid schemes blur the line between making money and getting rich. While you can make good money with network marketing, it is certainly not a get-rich-overnight scheme.
So, read the company’s claims and promises carefully and see if what they say makes any sense. Remember the age-old axiom – If it sounds too good to be true, it probably is.
In pyramid selling schemes your position on the pyramid determines how much you can earn. You make more money if you are at a higher position on the structure. Your position is usually determined by how early you join the scheme. Those who arrive early will occupy higher positions.
What the above implies is that the earlier you join the more profit you will make. This cannot be true of a legitimate network marketing business.
In a genuine network marketing business, your income is directly linked to the quality of service you offer to your downline, specifically those you personally sponsored, and not your position in the organisation.
The idea of earnings being linked to position in the company has led many would be network marketers to having their fingers burned. They join hoping they will just recruit a few people and let the system do the work. It does not work that way. The larger the sales volume in your organisation, the larger will be your earnings.
It is of utmost importance to note that in network marketing you make money when you are making a sale, and when your downline also makes a sale. It is the size of your organisation's group sales volume that makes you the money.
The connection between pyramid selling and network marketing has been the subject of discussion for many decades. The central question seems to be whether or not network marketing or multi-level marketing (MLM) is a pyramid scheme disguised as a business opportunity. The truth is...
Pyramid selling schemes only try to copy network marketing practices to legitimize themselves. So, be on the lookout for them. Lookout for the characteristics of pyramid selling schemes listed above and you are more than likely to avoid them.