Ah yes, the age old “is it a pyramid scam?” question.  Is MLM or Network marketing just a pyramid scam or is it a viable business model?  In this article we will explore the pros and cons of network marketing / MLM in an attempt to shed some light on and answer this and other question.

There are many delusions about network marketing floating about in both the real world and here in cyberspace.  To answer our question we must first examine and seek to understand exactly what network marketing is. 

Throughout history the sales and marketing of goods and services has traditionally been performed in a fashion whereby the sales person receives direct commissions on their sales only.  Of course the office manager or sales manager frequently gets an override on the sales of everyone in the office or under their direct supervision.  On top of that any regional or district managers usually get compensated or rewarded based on sales volume as well.  All network marketing is; is a means to pay direct sales people a commission for getting other direct sales people involved and trained to sell a product and service.  Overrides or production bonuses in MLM are tied to the sales force that an individual participant is responsible for creating, both directly and indirectly, to a specified number of levels within the sales force structure.  It is not inherently good or bad.  It’s done all the time in cyberspace and it’s done both on and offline by many of the largest companies in the world.  So in and of itself the means by which a company pays its sales force is neither good nor bad.  This applies to network marketing / MLM compensation plans as well.

To understand exactly what MLM is we may be best suited using examples.  For our first example we can use a simple night out to dinner.  Often one may eat at a great new restaurant and rave about it to friends.  The friend goes and spends money at the restaurant and the referrer does not get compensated for bringing that customer in.  In the case of MLM the meal may cost $20 and the MLM company may pay 5% to every referrer and their referrer through a specified number of levels / referrers.  That is the simple explanation as of course there are many compensation plans and they too should be carefully scrutinized and evaluated.  However, overall it’s a simple business model, it works when done properly and legally, and it is a means of marketing in order to generate sales.

The fundamental differences between Direct Sales and Network Marketing are really quite simple: Direct Sales is a few people doing a lot; Network Marketing is a lot of people doing a little.

As an example let’s imagine you have a product or service and you would like to do $1,000,000 in sales during the course of the year. Using the conventional method of direct selling, you might hire 100 people, imposing a sales quota of $10,000 per sales person.

100 sales persons x $10,000 = $1,000,000

With Network Marketing you reverse the numbers to achieve the same results.

10,000 sales persons x $100 = $1,000,000

Well, you're saying to yourself, "Self, I'm no good at selling, so this isn't for me." Wait a minute! You're already doing it. The problem is you're not getting paid for it! "What?" you say. "How can I already be doing it? I haven't joined anything. I don't even have my own business."  While that may be true you almost certainly do some form of network marketing.

You probably sell something every day.  Yes, you.  Every time you have a conversation with someone - suggest a book, movie, restaurant, etc… you're selling, whether it’s your ideas or opinions on someone elses product or service is irrelevant, it’s still word of mouth marketing.  Traditional businesses count on you doing this for free.  In fact they love it when you do.  Again, this is called word-of-mouth marketing and is exactly what MLM is all about.  Only with MLM you get paid when you do it.  Can you imagine using this same concept through the Internet? Word-of-mouth now takes on a more poignant and broader meaning. Why not get paid for something you're already an expert at?

"Expert?" you ask. Yes, you are an expert. You paid to see the movie, use a product or service, try a restaurant, etc…. If you have done that and others have not then obviously you are much more of an expert than they.  Anyway, back to the point, the people you recommended the movie to also paid to see it, right? And the people they recommended it to... and so on. Now, did you get paid for referring this movie? No. Did anyone you recommended it to get paid for recommending this movie to others? No.  The only person who got paid was the person who owned the theater and those involved with the production of the movie.  Further, they get paid over and over again on nearly every single sale (each time someone watches the movie in the theatre, on VHS, DVD, Pay-Per-View, etc….) while you, the person who began the whole referral chain get nothing.

Wouldn't it be better if you got paid too? After all it was you who were instrumental by virtue of your referral for a whole slew of folks seeing that movie.  That's why Network Marketing is so popular and lucrative. You and everyone you refer and everyone they refer gets paid, down to a specified number of referral levels and per the companies compensation plan.  But isn't that an illegal pyramid?

Network Marketing is a method of distribution and compensation that has been utilized in the United States for over 50 years. The Direct Selling Association (DSA), based in Washington, DC, represents the Network Marketing industry. The DSA has existed for more than 100 years.

Over 1,000 Network Marketing firms distribute well over $50 billion dollars a year in goods and services. An estimated 8 to 10 million Americans are either part-time or full-time distributors.  The industry has created more millionaires than any other industry, and millions of people are customers of network marketing / MLM companies.

The common myth about Network Marketing is that the Top Guys make all the money off the little guys.  The people who circulate this myth are usually those who define fairness in terms of everyone receiving the same benefits regardless of their efforts and contributions.  Or they may frequently be folks who tried and failed in a network marketing business.  Many times they are the folks who believe that those who sit around and do nothing to earn their share should be paid the same as those who have been working and effectively promoting and contributing to the organization.  This is not what network marketing is.  A viable network marketing /MLM organization is one of the fairest compensation mechanisms in the world because it will reward based on “Deserve” not on “Want or Need”.

Network Marketing actually does work, and work well. Those who train, refer and motivate the most people earn the most money.  A viable network marketing compensation plan will allow someone that comes in on the bottom level to go on to be a top earner while the very first person enrolled in the organization may make nothing. 

If you sell or consume $50 worth of product a month, and you have referred 50 people who do the same, you will earn 50 times more than the person who only sells or consumes $50 of product a month regardless of where you are within the organizational structure. That is a viable MLM compensation plan.  Is that not more fair than most? Why should you do all the work only to receive the same income as someone else who did nothing?

Pyramids

Pyramids - A Pyramid is a structure where those at the top make more money than those below? This describes nearly every traditional company in existence! The problem here is that the CEO is the recipient of the efforts and hard work of each person below and these people do not have the opportunity to earn as much as or more than the CEO. Does a Vice President earn more than the CEO? Does the factory worker earn more than the plant manager? No, almost never.

No matter what effort the factory worker exerts, they still maintain the same level of income and status. They will almost never have a higher income than those in upper management. This is how a Pyramid works.  Those at the top make all the money while many others earn little and do the bulk of the work.

According to the Direct Selling Education Foundation, a pyramid scheme is an illegal scam "in which large numbers of people at the bottom of the pyramid pay money to a few people at the top. Each new participant pays for a chance to advance to the top and profit from payments of others who might join later."   Now there is no real hard and steadfast rule for identifying an illegal pyramid but below you will find some very good guidelines.

Both MLM and pyramids have multilevel payment systems, but that is where the similarity ends. Network marketing is a legal, ethical manner of doing business. Pyramids are illegal, fraudulent con games. In MLM, you are a legitimate seller of a product or service and business opportunity. In a pyramid, you are a crook.

But exactly how do you tell them apart? Jeffrey Babener, a network-marketing legal expert and attorney based in Portland, Oregon, states that there is no single authority on the subject; state and federal authorities have different ways of looking at the issue. However, in his book The Network Marketer's Guide to Success (written with David Stewart: Legaline Publications, 1990), Babener and Stewart have identified red flags that may cause law enforcement agencies to investigate a business:

• Promotions where the business opportunity is the "Product". If there is no legitimate product or service being sold, but only the opportunity itself, chances are, the promotion is a pyramid scheme.
• Products that are sold at inflated prices. Sometimes pyramid promoters try to mask their true intent by selling a product. Often, the product will be vastly overpriced and thus unlikely to generate much retail activity, thereby indicating that the real item being sold is the compensation plan.
• Programs that require inventory "loading". A legitimate MLM opportunity doesn't require you to buy unreasonable amounts of inventory to begin your business.
• Programs that require substantial initial cash investments.  According to Babener, many states consider a required up-front investment of $500 or more to be "substantial" and thus likely to attract the attention of law enforcement.
• Programs that require mandatory purchase of peripheral or accessory products or services. Some pyramids seek to hide their true face by allowing a minimum price for a "start-up" kit and then compelling the investor to buy more expensive items such as training or demonstration materials. Babener believes that business-start-up kits and selling aids should be sold at company cost.
• Companies that don't "buy back".  According to Babener, "Any plan that does not agree in writing to repurchase a reasonable percentage of unsold inventory or unused sales materials for a stated time after purchase should be avoided."
• Programs that pay fees for recruiting. "A legitimate MLM opportunity will have compensation based on product sales and not on recruiting," Babener states. If money is paid for signing up new distributors rather than for product sales, the business is likely to be a pyramid scheme.
• Recruiters who misrepresent potential earnings. If the opportunity is sold as a "get-rich-quick" scheme, beware. The only people who do well are those who can sucker others into buying into a criminal confidence game.

With Network Marketing, you are building an income from the production of everyone in your organization, whether you sponsor them or not.  If each person in your own personal organization duplicates what you do, you have a situation where everyone has the same amount to gain. It's the fairest structure because everyone has the same opportunity to create the same situation. They can even surpass you! But, their efforts benefit you too. So it's a win-win situation.

The viability of the business model for MLM can again best be described by example.  However, before we get into the example please ask yourself a sincere question. What do realtors do when they become successful?  Yes I said realtors, folks who sell houses.

Let me tell you what the successful realtors do.  They go off and become their own real estate brokers and hire other realtor’s. Right?  Yes that’s exactly what they do when they become successful. 

So what happens to the broker who got them started and paid for them to get trained, shared his call ins, walk ins, advertising, leads, etc... with them?  Tell me what happens to that broker with that investment in that realtor when that realtor walks out and becomes their own broker?  When that realtor decides to leave and start their own brokerage does the broker who helped them get started in the business get anything for that?  Silly right?  Of course the broker doesn’t.  In fact that broker has effectively trained his/her COMPETITION hasn't he/she?  Is that what you call a good business model?  Of course not.  Would you want to take on all the overhead of an office, advertising and marketing, phones, computer systems, mailings, etc… and help realtors get trained and started only to have them go off on their own and become your competition after you trained them?  Foolish question right?  Of course you wouldn’t.  This is not a business model that I as a businessman prefer to become involved with.

But wait!  Why not have incentives for the realtor to succeed and become their own broker and then start their own office and at the same time have incentives for the broker to encourage that?  Why not compensate the original broker for helping a realtor become successful so that the original broker gets a small percentage from the business when a realtor they have trained becomes their own broker.  What if the original broker received an ongoing override (albeit a much smaller percentage) when that realtor becomes a broker?  Wouldn’t that be a true win-win situation?  It sure would.  Isn't that a much better business model?  You bet because it is one where everyone benefits and has a vested interest in helping others succeed? THAT’S MLM!

Network Marketing is the fairest system by far because the success or non-success you attain correlates directly to the contribution and effort you've applied, personally.  It's not based upon your position within the organization.  Best of all it creates a residual income stream.

What is Residual Income?

Residual income is income that you receive, month after month, due to an initial and sometimes one-time effort.

If you were going to do a one-time job, and you had two choices for getting paid, which of the following would you choose?

A) $500 one time paid up front

B) $20 per month for the rest of your life

Obviously, "B" is a much, much better deal. This, in essence, is a residual income.  In MLM if you are a qualified (most programs have their own qualification prerequisites), you can refer someone one time, then earn commissions on that referral every month they use the companies products or services, indefinitely! Network Marketing Works!

One fact that very few know or expect is the "stall" mode. As your organization grows, you will experience what many call a "slow-down". In fact, it can actually stop and go backwards for a while! All marketers experience it. It is crucial that you persist in your marketing efforts because once you've moved through this "slow down" you will experience the true value of the Network Marketing paradigm.  As you continue your efforts you are continuing to learn - which is also very crucial for any business. After all, knowledge is power.

Have you ever tried to push a stalled car? It takes a lot of continuous effort to get it moving, but not nearly as much to keep it moving. Network Marketing is very similar. Once you've pushed it over the crest, it starts to gain momentum on its own, so much so, it's very difficult to stop, if not impossible. It is possible to move your group through this period and into a sustained growth phase such that your sales organization continues to grow, regardless of what you do.

To accomplish this you have to hit the ground running once you've made your decision to take advantage of the opportunity Network Marketing has to offer. You have to push, give it all you've got until you crest that hill and your group starts to experience sustained growth on its own. It requires selling your products and referring as many people as possible until you find the ones who will duplicate your efforts and become leaders. Network Marketing is all about leadership. Once you find those who will inspire and lead in your organization, the momentum will become impossible to stop.

Now you should have a good grasp MLM / Network Marketing and the power of Residual income.  Good Luck!