MLM vs. Pyramid Schemes: Unraveling the Truth and Staying Mindful
In recent years, network marketing and multi-level marketing (MLM) have gained both popularity and controversy. While some people view these business models as legitimate opportunities, others argue that they are nothing more than pyramid schemes in disguise. In this blog, we will explore the key differences between network marketing and pyramid schemes and provide you with some essential tips to stay mindful when considering joining such ventures.
Network Marketing: Network marketing, also known as MLM, is a model that relies on independent distributors to promote and sell products or services. These distributors earn commissions based on their sales and the sales of their recruited team members. The core principle of network marketing is building a network of customers and distributors, it’s claimed that “everyone has the potential to earn income based on their efforts” but most Income Disclosure Statements (IDS) will show only around 1% make a livable wage - check out an IDS collection here.
Pyramid Schemes: Pyramid schemes are illegal and deceptive business models that primarily focus on recruiting participants rather than selling actual products or services. In a pyramid scheme, participants are promised high returns for recruiting others into the scheme, with little or no emphasis on product sales. As the pyramid grows, only those at the top benefit while the majority of participants at the bottom end up losing their investments. Checking the IDS and Compensation Plan will help you identify if the company is legitimate or essentially a product based pyramid scheme.
Key Differences
1. Emphasis on Product Sales: Genuine network marketing companies place a strong emphasis on selling products or services to customers outside of the network. In contrast, pyramid schemes prioritise recruitment over product sales. However, “An MLM can sell real, even high-quality, products or services and still be a pyramid scheme. Similarly, having some or even many product or service sales to retail customers does not necessarily mean an MLM is not a pyramid scheme.”
2. Sustainable Income Potential: In network marketing, distributors can generate an income by consistently selling products and building a team. In pyramid schemes, income is mostly dependent on recruiting new members, making it unsustainable in the long run.
3. Legality and Compliance: Network marketing companies are required to operate within legal boundaries, adhering to government regulations and guidelines. The FTC (ACCC equivalent) released a report this year stating “The FTC staff report documents an analysis of 70 publicly available income disclosure statements from a wide range of MLMs — big and well-known to smaller companies. The report found that these income disclosure statements showed most participants made $1,000 or less per year — that’s less than $84 dollars per month. And that may not account for expenses. In at least 17 MLMs, most participants didn’t make any money at all.”
Staying Mindful
1. Research the Company: Before joining any network marketing venture, thoroughly research the company's reputation, track record, and product line. Look for transparency, a strong product base, and a fair compensation plan.
2. Evaluate the Compensation Structure: Understand the compensation plan and ensure that it rewards both product sales and team building. Be cautious if the primary focus is on recruitment or if the earning potential seems too good to be true.
3. Avoid High Start-up Costs: Pyramid schemes often require significant upfront investments or mandatory purchases of inventory. Legitimate network marketing companies typically have low start-up costs and do not force or manipulate distributors to buy excessive inventory.
4. Seek Independent Advice: Consult with experienced professionals or seek advice from trusted individuals who have experience in business. They can provide insights and help you make an informed decision.
While network marketing and pyramid schemes may share some similarities, it is important to understand the key differences between the two. By staying mindful, conducting thorough research, checking the IDS, and evaluating the compensation structure, you can protect yourself from falling into the trap of a pyramid scheme. Network marketing opportunities can provide a platform for personal growth and community, but you can find this elsewhere too.
Further Reading:
Tupperware, Amway, Avon calling: the ins and outs of multi-level marketing
The marketing schemes tricking women out of their life savings - The Australian Women's Weekly
Disclaimer
This blog is intended purely to communicate information in accordance with the right of free speech. Any advice given is a suggestion and anyone seeking such advice should consult a competent professional, e.g. Accountant, Doctor etc. All statements made in this blog are my own opinion and they do not represent any other person or body. As such, sharing matters covered in this blog is in the public interest. This content is covered by fair use and fair dealing as the purpose is to provide consumer education and commentary.