Is Network Marketing a Pyramid Scheme?
The term pyramid scheme is used a lot. It is often referred to when talking about network marketing, which may be a reason why you are here right now. You may be looking at a network marketing 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 network marketing, more specifically to answer the question is it a pyramid scheme?
So what is it that almost immediately makes people think of pyramid schemes when they look at network marketing opportunities? Before answering that one must understand where network marketing 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 a network marketing 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.
To further the explanation and show that network marketing 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
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 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.
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 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.