For those of us in the Network Marketing business or MLM, we hear this question all too often…
Is that a Pyramid Scheme?
Wikipedia defines a pyramid scheme as follows: “A pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products or services. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal.”
Now let’s look at the definition of Multi-Level Marketing, also as found on Wikipedia.com…
“Multi-level marketing (MLM), also called pyramid selling, network marketing, and referral marketing, is a controversial, pyramid-shaped marketing strategy where profit is theoretically derived from two revenue streams: from direct sales to customers and from commission based on the sales of recruited team members, also known as down line distributors, MLM salespeople are expected to sell products directly to consumers by means of relationship referrals and word of mouth marketing. They are also incentivized to recruit others to join the company as distributors.”
Two of the key differences between a pyramid scheme and a legitimate company that uses multi-level marketing is the absence of any real product or service, and clearly the absence of customers.
While some have a negative perception of multi-level marketing, I have a much different MLM Perspective…
In my opinion, MLM is one of the most brilliant marketing methods used today. Essentially, the company is using a force of eager sales people that are compensated based on their own efforts. The greater the effort, the greater the compensation. It is also important to remember that most companies that use an MLM model do not advertise by other methods. Therefore, the money saved on advertising, which can be substantial, is used to compensate the massive sales force of independent distributors.
So how do you explain the concept of MLM to potential customers or distributors? I have been thinking a lot about this and have come up with what I think is a valid comparison that everyone can understand. You first must accept the argument that many companies employ MLM concepts even though they are not considered multi-level marketing organizations.
The Automotive Industry
Let’s consider the organizational structure of a new car dealership. Most dealerships have an owner, a sales manager and one or more salesmen as shown in the image below. I suppose it’s a matter of personal interpretation, but this looks a little bit like a pyramid to me. (I said a pyramid, not a pyramid scheme.)
In How Car Salesmen Get Paid | Sales Commissions by Carlton Wolf, “commission only” is a typical arrangement for compensating car salesmen. If this is the structure, the salesmen only get paid when they sell a car. At that time, they get paid a percentage of either the selling price or the profit. Guess who else often gets paid in the form of a bonus, commission or profit sharing? You guessed it, the Sales Manager. According to Sales Manager (Automotive) Salary, “The supervisor helps set the tone for the salespersons working the showroom and lot, and they may be called in to try to resolve disputes and negotiate deals to ensure customers have a high-quality sales experience.” In other words, the supervisor or sales manager must help the salesmen on their team to sell cars and be successful in order achieve a higher level of success for themselves. Of course, the owner of the dealership get’s his share of the profits from the efforts of everyone on his team (below him.) Finally, did you know that a salesmen is able to offer his customers a fixed fee for referring business to him? Crazy right, as a customer you can actually make money by letting your friends know what a great job the dealership did for you.
Do you see the similarities between a common car dealership that we all are familiar with and an MLM organization?
In the example of a car dealership, as you move higher up in the organization, each level benefits from those beneath them in the corporate structure. If the lower levels do not succeed, no one succeeds.
The car dealership may look like a pyramid, but is not a pyramid scheme, and neither is a legitimate MLM company.
Another concept employed by some MLM companies is to offer a commission for referring new members. Some people call these companies a “scheme” because of this.
I know of at least one local company in my region that offers a commission to existing employees for referring qualified workers into the company.
I have never heard anyone mention the idea of this being an illegal practice or scheme.
Ultimately, you will need to spend time and effort evaluating any company you choose to be involved with prior to making any sort of investment.
- Understand the difference between a Pyramid Scheme and legitimate Multi-Level Marketing
- Multi-Level Marketing can be a powerful business model
- Many “regular” companies employ MLM concepts
- Not all organizations that look like a pyramid are “pyramid schemes”
- Referring others to a good thing can be a good thing
- Always do your research before joining any organization
If you currently work with or are considering an MLM organization, I truly hope this helps you to make a more informed decision.
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To Your Success,