The term pyramid schemes is used a lot. It is often referred to when talking about MLM, which may be a reason why you are here right now. You may be looking at an MLM opportunity and you want to know, “Is it a pyramid scheme?”
Congratulations on taking the time to educate yourself and do your due diligence. Being informed is the only way that you can protect yourself. That, of course, is the intention of the information contained here on this page, and that is to inform you about MLM or network marketing, more specifically to answer the question is it a pyramid scheme?
Network Marketing and Pyramid Schemes
So what is it that almost immediately makes people think of pyramid schemes when they look at MLM opportunities? Before answering that one must understand where MLM gets its earning power from. Without going into the history of network marketing, the basic principle is this; have a large network or sales personnel selling small amounts of product. In return for these efforts, commissions will be paid to the sales personnel. In addition to this the larger an individual’s team is, the larger their income is based on the compensation plan.
Based on how an MLM company works with individuals building teams of sales personnel and how they fit into the compensation plan a shape takes form. The shape that is seen, essentially when the compensation plan is being described is that of a pyramid shape . . . the large surface area on the bottom and small on top. Or another way to put it, many people on the bottom and one person on top.
It is the fact that people who are new to MLM see this one individual on the top and everyone below them, they automatically envision a pyramid scheme and shut their minds and ears to hear the whole story. The whole story starting with the fact that the individual on top is them, and a large number of people below them is their team working to make them money!
To further the explanation and show that MLM is not a pyramid scheme, we shall use a comparison. A simple comparison that will use the same principles of explanation of the structures of two different business models. The intention is that you will see the similarities between the two business models more than you will see the similarities to a pyramid scheme.
Standard Business Model Pyramid Schemes
The standard business model is one that most people are familiar with. The familiarity generates a comfort level with how they exist. While not everyone likes the standard business model, they understand the structure and see it for what it is and accept it.
Let’s look at the image below:
Regardless if this is a multi-billion dollar corporation or a small local shop, this structure will be common. At the top you will have one individual who oversees the entire organization. They will then have their managers who will be responsible for certain areas of the business. An area such as Accounting, Engineering, Purchasing, etc. Then under them, you will have the employee workforce, who are the ones completing the work.
Is Network Marketing a Pyramid Scheme?
Next we will look at a typical network marketing business model. Unlike the standard business model, when people first see how a Network Marketing compensation plan is defined, they do not know and understand how it works. These unknowns instigate feelings of fear and uncertainty, coupled with the shape of the organization and thus we are thinking pyramid schemes. So let’s compare the image below to the standard business model:
For this we start with the most important person, you. Do not think about who is above you or how they will factor into your business at this moment. We are going to keep this very simple and focus on how the network marketing business model effects you.
Below you will be your frontline distributors / associates. These will be the individuals that you personally sponsor. They in turn will start to sponsor individuals just as you have. However when they sponsor a new distributor / associate it is their frontline distributor / associate and your downline. As there are more people below you this will benefit you from leverage and duplication.
As you progress down each level there will be more people in each level. Similar to that of the standard business model, the lower levels with the larger amounts of people will generate income for the upper levels. The key is, that anyone can be at the upper level. There is no restrictions and no limitations to your income.
When thinking of a network marketing business model, you must eliminate the thoughts of promotions to progress up the levels of the organization. When an individual wants to earn more money, they simply sponsor more people and build depth into their group. Harnessing the efforts of others means that you can accomplish more and therefore earn more.
Shape of the Organization
The example that was shown above was just that of a standard business model compared to a network marketing business model. Almost every organization that exists today, has this similar shape.
Everything from governments, to corporations, to churches even to sports franchises have this pyramid shape. There is always one position at the top and with more people below. If the simple shape to the organization makes this illegal, this would make every organization on the planet illegal. When said in those terms it makes the question of “Is Network Marketing a Pyramid Scheme?”; seem ridiculous.
For more information on the definition of a Pyramid Scheme and how to spot one, you can read about it here.
*Examples in these materials are not to be interpreted as a promise or guarantee of earnings. Earning potential is entirely dependant on the person using the products, ideas, techniques and efforts put forth on Engineered Lifestyles. For our full earnings disclaimer click here.