Multi-level marketing (MLM or network marketing) is a marketing strategy where direct sales companies push their existing distributors to build teams of new distributors to drive the sale of goods and services.
Okay, so what the heck does that mean?
It means the distributor primarily earns from the sales he or she generates through their sales force.
This means a portion of sales revenue generated by the team they recruit, train, and retain can become income for them, regardless of the size of the team. 10, 100, 1,000, 10,000 or beyond).
In the MLM organizational hierarchy, the participants recruited under someone are called down line distributors.
This marketing idea is also called referral marketing, network marketing, relational marketing, pyramid selling, and direct sales.
Direct sales is not quite the same, but it’s usually seen as the same thing by those outside the industry.
Multi-level marketing salespeople are supposed to sell products by word of mouth and relationship referrals, but perhaps most importantly, as their organization grows, they earn a little piece of all the product sold in that organization.
This makes the income ceiling and profit potential astronomical when compared to a traditional business.
Is MLM a Pyramid- Why the Bad Press?
For some reason, the mlm business model is often compared to a pyramid and it gets a lot of bad press.
If you take a moment to stop and think though, every traditional business that exists has a structure like a pyramid.
Corporate World – CEO is at the top
Educational World – Superintendent is at the top
Small Business – Owner/Operator is at the top
Country or Nation– President/Leader at the top
Non-Profit Organization– President/Founder at the top
Do you see where we’re going here?
That particular structure is not uncommon because it’s what works and it’s what creates leverage.
In fact, other sales industries follow a similar structure.
Insurance Industry- Salesman often get paid residuals and/or a portion of commission from the salespeople they recruit.
Franchising- Owner sells (i.e. recruits) other salespeople to sell their goods or services and then keeps a portion of the income.
Real Estate Industry- This one is probably one of the most similar industries. There is a real estate broker, who signs (i.e. recruits) and supports agents. Sometimes these agents can also have a team (hmm… sounds familiar).
So if the structure is similar to other industries, then why is mlm commonly referred to as a pyramid?
I would argue that it’s because of the leverage and infinite depth of the model. Typically, most of those other models only pay 1 or 2 levels down.
For example, in a franchise, the owner sells to franchisee… and it stops there.
MLM also has different Guidelines
(FTC Rules and Regulations)
Unfortunately, with multi-level marketing, the industry has it’s hands tied in many ways by the FTC.
Love ’em or hate ’em, some of the rules are good.
Some of the rules are ridiculous.
I know people who sell annuities and they like to post the top salesman of the week on social media holding an oversized check of their commissions for the week.
Last week I saw one and the salesperson was holding a check for about $12,000 and some change.
Now, I’m sure that makes for good recruiting. But you can’t do that in network marketing.
Just let a triple diamond grand poo-bah from any reputable mlm company start posting their $117,000+ weekly check online and the FTC would be all over them.
Different rules. But why?
The argument is that it protects the consumer, but I would argue that if that was really the case the rules would need to be the same for each industry.
Legal Rules Surrounding MLM
So what are some of the rules that the mlm industry has to follow that others don’t?
I’ve mentioned one already.
Network Marketers can’t really directly share how much they are making.
They can share income disclosures and can share the rank/level they have achieved (then people can kind of figure it out), but they can’t share actual income or post their checks on social media.
The idea (I suppose) is to stop potential recruits from thinking that they could make the same amount… (which, by the way, they could).
There are a few problems I have with this rule.
First, it breeds dishonesty. People hit a rank for a week and then claim to be at that rank so people think they are making more money than they are.
Secondly, average earners break the rule all the time. But once a person reaches a certain income, they start to be a little more selective in what they say out of fear of the FTC shutting them down.
Thirdly, it perpetuates the idea that nobody makes money in this industry.
The reason is, once people start making money, they can’t share it like other sales industries can.
So the only thing people see online is claims that you can make lots of money… but the people actually doing it are often not in the limelight.
Bonuses Paid Must be for Product or Merchandise Sold- Not for Recruiting
I happen to agree with this regulation 100%.
I’ll get into this more in depth later, but a company that is paying big money simply for recruiting is crossing the line between a legitimate network marketing company and a pyramid or ponzi scheme.
Returns and Refunds
Most network marketing and mlm companies have a very customer friendly return policy.
If you order something and change your mind, you can return it. Usually for up to a year.
I’m not sure what the law is on this but I’m pretty sure it’s regulated.
I don’t have a problem with this regulation in practice. But in theory it kinda urks me. Why don’t other industries have to follow these same guidelines?
Especially industries known for slick salespeople who take advantage of their consumers?
Can you imagine calling up a furniture or car company (or God forbid… an insurance company) up to a year after the sale and saying, “look, I don’t like the product. I want to return it and get all my money back.”
That will never happen, but it happens in the mlm industry even though the investment is much lower.
As long as distributors are front loading product or other shady tactics, the cost of an mlm business is just a few hundred a month at most.
What is a Pyramid or Ponzi Scheme?
Here’s a general overview.
In a pyramid or ponzi scheme, somebody takes money from people who are “getting in” and gives it to people at the top.
In Ponzi schemes, such as the case of Bernie Madoff, money isn’t even returned because it’s gone. The madoff scandal defrauded investors out of 65 billion dollars over many years and was the biggest fraud in US History.
For example, Madoff took peoples money and then sent them fabricated statements showing their returns. It was all made up or as he described to his kids, “one big lie”.
He used the money coming in from investors to fund his lifestyle and for creating the illusion of success.
Usually, in a ponzi scheme people start putting in more money because they believe they are making money. In the beginning, some people even get returns (paid out by new people coming in).
But easy money means it’s easy to start putting more money in.
Let’s say you give $5,000 to what looks like a legit company. You earn back $10,000 the next month.
What’s the next illogical step?
Cash out all your assets and put them in so you can double $500,000 (or more). This is the slippery slope that is a ponzi or pyramid scheme.
If it’s too good to be true… it probably is.
That’s another reason network marketing and mlm is misunderstood. People tout it as being easy and show the potential of big checks.
Well, it seems too good to be true on the surface.
The reason it’s not is because yes, there are massive checks… but it’s not easy.
It’s simple… but not easy. If it was easy, everybody would get massive checks.
It’s still one of the most lucrative business models available. You just have to go into it thinking it’s going to take work.
MLM vs. Pyramid or Ponzi Scheme?
So what makes something a legitimate mlm as opposed to a pyramid or ponzi scheme?
The biggest factor is that commissions from customers and within your organization are tied to products.
Usually, this is in some form of points and it’s reasonable.
My recommendation would be that if you’re unsure, if your intuition is telling you something is wrong, or if you can’t afford to lose the money, then don’t do it.
There are so many companies out there that are legitimate geared toward different income levels. I’ve see companies that are free to join and have very marginal prices.
If you’re on a tight budget, maybe something like that would be good to learn the ropes.
Personally, I like the high end, high quality products. I’ve always enjoyed quality and with quality comes a little bit of a higher price.
To me, the quality of the products (especially when it comes to health), is super important. You can’t put a price tag on your overall health. If you lose your health, you’ve lost everything.
Concluding the MLM Pyramid Debate
There you have it, some of the top reasons why direct sales, mlm, network marketing, etc. is sometimes seen as a pyramid scheme.
We’ve also covered what the difference is between a pyramid (or ponzi) scheme and network marketing.
If you want to dive deeper into this topic, a good place to start is by reading our article about the evolution of this entire industry. I
t’s really a fascinating industry and much like the world of technology, it’s changing rapidly.
I highly recommend that article.
I hope this post was beneficial, I know it’s not as long as my regular posts but I think I covered the topic. That’s all you need.
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Jason & Daniele