Recognizing Pyramid Schemes?

The term pyramid schemes are 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 are they pyramid schemes?

Money Pyramid Scheme

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 it’s earning power. 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 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 are not pyramid schemes, 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 pyramid schemes.

Standard Business Model

Standard Business Model Structure

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:

Regardless if this is a multi-billion dollar corporation or a small local run shoppe, 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. Areas such as Accounting, Engineering, Purchasing, etc. Then under them, you will have the employee workforce, who are the ones completing the work.

While you may have many more levels of the organization between the CEO/President and the employee working on the assembly line or in the storefront, you can see the shape that this organization is taking. One of a pyramid.

In this structure, the efforts of the Employee Base generates the income for the business. As you progress up the organizational level, income usually increases due to additional responsibilities, not necessarily capabilities. Also as you progress up the levels of the organization, there are fewer and fewer opportunities for individuals in the lower levels of the organization. Thus there are fewer opportunities to earn more money.

The MLM (Network Marketing) Business Model

MLM (Network Marketing) Business Model

Next, we will look at a typical MLM business model. Unlike the standard business model, when people first see how an MLM 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 MLM business model affects you.

Below you will be your frontline distributors/associates. These will be the individuals that you 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 at 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 are no restrictions and no limitations to your income.

When thinking of an MLM 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 in 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 an MLM 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 of 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.

For more information on MLM, you can select one the following: The History of MLMWhat is Network MarketingWhy Network Marketing.

*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.