04/07/2009

Network Marketing Versus Pyramid Schemes


One of the biggest fears of the prospective network marketer starting their first home based business is that it will be percieved as a Pyramid Scheme. This is entirely understandable, when we consider that Pyramid Schemes have been around for over a century.

Let's have a look at the two models:

Pyramid Schemes - Now illegal in most countries, A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, often without any product or service being delivered. Essentially one person, 'Mr. X' makes one payment only and in order to earn money, has to recruit others who will also make one payment each. Mr. X gets paid out of receipts from those new recruits, who then go on to recruit others. As each new recruit makes a payment, Mr. X gets a cut. He is thus promised exponential benefits as the "business" expands.

The flaw with pyramid schemes is that there is no end benefit. The money simply travels up the chain. Only the originator (sometimes called the "pharaoh") and a very few at the top levels of the pyramid make significant amounts of money. The amounts dwindle steeply down the pyramid slopes. Of course, the worst off are at the bottom of the pyramid: those who subscribed to the plan, but were not able to recruit any followers themselves.

One such scheme was the 'Women Empowering Women' plan. Thought to have been brought to Britain from the US by an Isle of Wight businesswoman, it invited female investors to hand over £3,000 into the pyramid kitty and then try to find 8 other recruits to join. If they succeeded, the woman at the top got a one-off payment of £24,000, but the scheme collapsed when the recruits dried up.

Network Marketing - This is another name for 'social networking' since it is the term used for marketing performed by an individual to create an independent network rather than a company network; the most common marketing tactic used by network marketers being 'word of mouth', or 'social networking'. Compensation plans within network marketing usually follow the MLM or multi-level marketing structure, and for this reason the two terms are often used interchangeably.

In the MLM model, independent distributors will receive commission for their own personal sales of the company's products or services, as well as for the sales of any other distributors they introduce to the company, creating an incentive to enrol distributors as well as sell products & services, thus creating a hierarchy of levels.

The nature of the commission and the levels of payment often means that the independent distributor will create a 'residual' or ongoing commission that will grow as the numbers of distributors and customers grows.

The key difference is that pyramid schemes are simply a transferrence of money with rarely a product to show for it; whereas network marketing (or mlm) involves a product or service. Who hasn't heard of Tupperware, Avon, Usborne books at home, MonaVie, Telecom Plus (Utility Warehouse), Herbalife, Amway, Goji Juice, Betterware, or literally hundreds of other schemes available to individuals looking for a way to start a home based business in network marketing?

Are all network marketing businesses successful? Can anyone guarantee massive profits and 'get rich quick'? Of course not. It is, after all, simply a business. One that you run yourself from home and, like all businesses, it can succeed or fail. But at least you are in control of your own success or failure. It's up to you how much effort you put in and that will, ultimately, reflect on how well you will do in your own business.





3 comments:

  1. An excellent article that clearly explains the difference between Network Marketing and Pyramid Schemes. In my experience when you present your home based business oportunity the people who say to you it sounds like a pyramid or that's a pyramid scam have no idea how a home based business works or even what a pyramid scheme is. Also some people will say its a pyramid to justify saying no.

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  2. Thanks for your feedback. You're right that many people's initial reaction is that network marketing is a pyramid scheme, but perhaps don't realise that the 'well-known' brand names like Avon etc are network marketing businesses until it's explained to them.
    Gloria

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  3. Look likable article! I agree your authentic post of network marketing. With your post I can analyze great difference between network marketing and pyramid scheme. Your innovative ideas are possible earn much money from mlm business.

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