When running a network marketing business, one of the most common reactions I’ve gotten is, “What??? You’re running one of ‘those’ things?… a pyramid scheme?!! Isn’t that illegal?”
Okay, that is a bit overly-dramatic, but if you have been running a network marketing business for any length of time, I’m sure you have encountered people who have questioned the legality or even just the ethics of your enterprise. The simple truth is that the hierarchical structure of a network marketing business is no different than any other company.
But just what is the difference between a multi-level marketing company and a pyramid scheme?
In network marketing, everyone receives value. It doesn’t matter how many levels there are to the organization, everyone is gaining some income or value. This is because there is a real product and real customers. In a pyramid scheme, only the people at the top receive any benefit, and there are no products and no customers.
Every company is set up in a hierarchical structure that could be described as a “pyramid.” There is nothing inherently wrong with pyramids. The Egyptians were quite fond of them as a matter of fact.
Most organizations utilize some hierarchical or pyramid-type management structure. The branches of the U.S government each have a pyramid structure. The executive branch has the president at the top. The education system is a pyramid, with the college President or Principle being at the top, and on down through the staff chain to teachers and then students. All businesses are pyramids. Chick-Fil-A, Apple, Wal-Mart, Ford Motor Company, and Chase Bank: they’re all pyramids with a hierarchical structure. Even small “Mom and Pop” businesses, like a family lawn care service, are run the same way, with the business owner at the top of the “pyramid.” No one has a problem with this system because it just makes sense practically speaking, but it’s analogous to the system a network marketing business also follows.
In a network marketing business, as with every other legitimate business, the people at the bottom still get paid, and customers still receive a product.
However, in a “pyramid scheme,” not everyone receives value. There is no product, and money is only made by getting people to sign up under you.
Only those at the top make money, and not through selling a product, but merely by having those below you pay an enrollment fee or ongoing monthly fee. According to the U.S. Securities and Exchange Commission,
“In the classic ‘pyramid’ scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.” – http://www.sec.gov/answers/pyramid.htm
Legitimate network marketing businesses actually have a valuable product to sell, and customers, outside of the company, who are buying. You actually have to work to maintain your business, through selling products to new and existing customers, whereas illegal pyramids have no real products or customers outside of the “pyramid.” See the difference?
Pyramid schemes cannot endure for very long since the only money inflow is arriving from those in the lower levels who are tricked into signing up. The people at the top will make their money, but only at the expense of the lower levels when they run out of gullible friends and family. There is no product of value that is being sold to bring in a healthy revenue.
Legal doesn’t equal legit
So why are multi-level marketing companies frequently associated with illegal pyramid schemes? There are basically two factors that contribute to this confusion.
First, unlike other businesses that employ workers and pay a wage or salary, network marketing companies rely on “independent consultants” or “distributors” for their sales force. Compensation plans include commission incentives and bonuses to encourage consultants to grow a sales organization with a hierarchical structure. Therefore, the idea that you would “enroll” other consultants to “build a team” strikes people as a similarity with illegal pyramid schemes.
The second factor, however, is the real problem that causes many people to confuse multi-level marketing companies with “pyramid schemes.” Unfortunately, many network marketing companies while legal, are not sound business models. Here are a few red flags to look out for. If a direct sales or network marketing business has one of these red flags, you might want to think twice before signing up.
Red flag #1: High Enrollment Cost
Beware of direct sales companies which have a large enrollment fee. While the company might be legal, it may be dangerously close to a “pyramid scheme” since it is likely the majority of your money will be made through signing up other people, rather than through a good product that gives value to the customer.
Red flag #2: You Only Make Income Through Signing-up Others
Similarly, even if the enrollment cost is not exorbitant, you will want to stay away from network marketing companies where your income is only generated through signing up others. You should be able to make a good profit by selling product alone, without having to enroll a single person. Enrolling others should be icing on the cake; a nice bonus if you are wanting to make a higher income (and many times quite a bit higher!), but certainly not necessary for making a decent profit.
Red flag #3: No Outside Customers
If you are mostly going to be selling your product to yourself or other distributors in a particular model, you may want to reconsider. There must be third party customers buying the product for the direct sales company to be sound.
Red flag #4: High Quotas
If there is a high quota or a minimum amount that you are required to purchase yourself, you may want to rethink, as you could lose a lot of money. If the company thinks their consultants have to be the ones making most of the purchases, odds are, the product or company isn’t that great.
Red flag #5: The Compensation Plan is Unrealistic
Closely check out the compensation plan. Is the pay-out realistic? Is it sustainable? For example, if the enrollment fee is $300, and you make $100, not only on each person you enroll, but also for each person your team enrolls, where is that commission coming from?
Red flag #6: Product Is Not Unique and/or Overpriced
Beware of direct sales companies selling over-priced and unoriginal products. If the product is something you could get for less at Walmart, it will be very difficult to convince customers that they should buy from you.
In a healthy direct sales company, you can be successful!
The mere fact that you have distributors enrolled under you in no way means you’re running a pyramid scheme.
Find a healthy direct sales company and you really can be successful. Find one with a low enrollment fee, which generates income by selling to third party customers without signing up a single consultant, and no mandatory quotas. Above all, find a unique product you love! I found mine, and it has been an incredible experience. Go find yours!