It is guaranteed that whenever the terms MLM or network marketing is mentioned, the term “pyramid scheme” or “scam”, or even “Ponzi scheme” could also be thrown in almost every time. The association amongst these terms seem very hard wired amongst the individuals who truly believe that every network marketing company is guaranteed to be a pyramid scheme.

Network marketing is not the only business model that can fall into a pyramid scheme; Gifting groups and investment clubs can also fall into the category. It is all down to how the business model operates at its core.

 

What is a pyramid scheme? How can I recognise one?

In simpler terms, a pyramid scheme is when you get paid for recruitments of other people into a scheme, rather than being paid for the sales of products or services. For example Vemma, formerly a Multi-level Marketing company, was shut down in 2015 by the FTC for engaging in deceptive practises and operating a pyramid scheme. Vemma affiliates were able to make an income without selling a single product; they were able to profit from recruiting alone. This is understandably an unrealistic business model which would need global involvement. It is also immoral as it means using other people and deceiving them as to how money is made.

Hence there is a clear distinction between network marketing and a pyramid scheme; how the money is made. If the money is made from sales of a product, it is a legitimate business model, hence network marketing is a legitimate and fair business model. Can a pyramid scheme be disguised as a network marketing company? Absolutely. As it was explained with Vemma, which made it possible to be paid from recruitment rather than sales. You will know you are dealing with a legitimate network marketing company if you are not being paid for recruitment at all, but rather by product customers and the customers of the team that may be built.

 

It is mostly the concept of recruitment that ticks many off

It gives people the impression that recruitment is for the sole purpose of using another individual for their own gain, and for the upline (the one who had recruited them) would get all their money and leave the recruitee with nothing. That is not how a network marketing company should work.
Recruitment is a normal aspect of every company and necessary for every company to flourish. Only a manager decides when it is necessary to recruit. Network marketers all have access to recruitment. Recruitment is not necessary, but it can help to build a distribution if the network marketer has trouble acquiring customers of their own. Normally, a network marketer should not be able to receive any commission for their team’s efforts if they do not have a limited number of customers of their own. If a person was able to make an income from their team without customers of their own, then a lot of people would feel too comfortable recruiting without customers and those who they recruit may do the same and that could leave with little to no customer production at all.

 

The compensation structure ticks people off too

The upline receiving commissions from their down downlines is another point that rubs people the wrong way. It seems as if somebody else’s efforts are awarding someone else.

For every network marketer, their upline only receives a small % of commissions from their customers as the person who had acquired the customer gets the higher % of the customer. Again, if that is not the case, then it is not a legitimate network marketing business. Same way as a salesperson receives their commission for their sale, their manager and their director would benefit from their sales. Of course the logistics work out differently in that context, but the concept does not differ.

 

The sign up fee too

Every network marketing company pretty much has a sign up fee which normally ranges from $90-$499. That can be very dissuasive as it may be expensive to some, and there is also the assumption that the money is all for the company to keep. The sign up fee is normally just to provide a license to distribute, but some network marketing companies require their representatives to also buy their products. When comparing that to how much it normally costs to invest in a business, network marketing is relatively cheap to invest in. According to US Small Business Administration, most home based businesses cost $2,000-$5-000 to start. And of course there will have to be more costs involved in order to keep the business running. Again, that is just a start up and there will need to be more costs for maintenance.

 

So why did I title this “the problem with network marketing?

The problem within network marketing is not that it is a scam. The issue is that just about anyone over the age of 18 is able to join. Most people do not have prior business or sales experience, hence it is likely that they can behave in an unprofessional manner. Although per company, there should always be some regulation, there is no direct monitoring how their reps are actually presenting the opportunity to other people. This can lead to miss-selling the opportunity and giving people unrealistic expectations. For that reason, network marketers can also come across desperate, which can lead to being deceptive or inapprotiately discussing the opportunities in social situations.