Is it a pyramid scheme? All network marketers bump into this question at some point when introducing people to their opportunity. What is the reason behind people asking this? What is one? This page aims to help network marketers understand where this myth came from and how to respond to it when it rears its ugly head.
Pyramid Scheme (scam which is illegal)
This type of scheme can be described as a fraudulent money-making system that is based on a non-sustainable business model that involves the exchange of money for enrolling other people into the scheme without a legit product or service being provided. What happens eventually is the number of new recruits fail to sustain the payment structure and the system collapses with most people losing their money.
Probably the easiest way to identify a pyramid scheme is if there is no legitimate product or service involved. The second way to identify pyramid schemes is that you do not get financial returns unless you have successfully introduced many new recruits into the scheme. Basically, pyramid schemes concentrate on the money that you could earn by recruiting new people into the pyramid and generally ignore the marketing and selling of any products or services.
Network Marketing (legal business model)
The concept behind network marketing is a distribution model that allows a company to sell their products directly to the consumer. Choosing to use a word of mouth approach (networking) instead of advertising through traditional streams (eg media). Therefore instead of paying the media for advertising, network marketing companies are structured to reward distributors through commission in return for selling their products and finding new customers.
Therefore the main focus of a network marketing company is product distribution. In fact, in a legitimate network marketing company, distributors are not required to recruit new distributors in order to earn a commission, they can earn money purely by selling the company’s product.
Although distributors can choose to sell the company’s products to earn their commissions, not everybody wants to be a sales person and therefore choose to recruit more distributors into their organisation as a means to build their referral base. Not only does this create a group of loyal customers, it also allows you to leverage the efforts of others to create a residual income.
“I would rather earn 1% of 100 people’s efforts than 100% of my own efforts” - John Paul Getty (American Billionaire)
Therefore the recruiting element of a network marketing business is merely a way of distributing more products and helping to build a leveraged income.
Why do distributors in network marketing normally receive a commission when a new recruit joins their organisation?
To join a network marketing company you have to purchase an initial start up kit. This kit usually includes training, some sales and management tools to assist you to build your business, and a certain amount of product. Because there is a certain amount of product included in the start up kit, the sponsoring distributor is now entitled to a commission. The amount of product you receive in the package, that is the more you spend up front, the more product you receive as part of your initial package and the greater the commission the sponsoring distributor is now entitled to.
In summary, when trying to understand network marketing, distributors are paid a commission - not for recruiting new members, but for the amount of product that is sold through their organisation. Therefore recruiting new members into a network marketing company is purely a way of expanding the distributor’s network and customer base. Any commission made through recruiting new members is a result of the product sold in the start up package and not for the recruiting itself.
To prevent network marketing companies from falling over like pyramid schemes, there are restrictions placed in the network marketing company’s compensation plan that limit the number of people who can earn a commission off any given sale. Network marketing commissions only travel so far. This not only makes the business model sustainable but also makes it fair in the sense that it doesn't matter if you got in first or last, you have the same opportunity as everyone else.
Below is the structure of a network marketing business, you will see it is exactly the same to look at as many other legitimate organisations out there, although the structure does look like a pyramid, the way a network marketing business works is so far from a pyramid its laughable.
So if you get the objection or question "its not a pyramid scheme is it?" you can formulate your answer form what you have read above to ease peoples minds.
So in summary, network marketing and pyramid schemes do share a few similarities (the pyramid shaped business model shown in the above figure, and the fact that in both you can recruit new members) network marketing is a legitimate business opportunity and one where you can earn a fantastic legal income. Don' just take my word for it, network marketing is now being endorsed by a number of leading businessmen worldwide.
“If I lost everything and had to start again, I would find myself a great network marketing company and get to work!”
- Donald Trump (David Letterman Show)
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