MLM vs. Pyramid Schemes

It never fails. Sometimes you get to talking to someone about Multi-level Marketing and there it is.

The Question.

"Isn't that a pyramid scheme?" (Somewhere in your mind some dramatic music is playing.)

Well, try not to roll your eyes or give a sigh. I know it's tiring trying to explain to someone why your plan is not a pyramid scheme, but you also have to be careful not to insult the intelligence of the person asking The Question. (more dramatic music)

They have legitimate reasons to be fearful about pyramid schemes. Let's face it, there are a lot of great companies out there, and a lot of great people earning a living in MLM, but the world is also a place where some people try to take advantage of others when they see an opportunity. Just search the internet, and you will find many people saying things like, "I made $1,000 on my first day!", or "Make $100,000 a year watching paint dry!" or something to that effect.

Now, I am positive of 2 things.

1. Some of these claims are absolutely true. (Well, maybe not the paint drying thing.) There are people out there that will make $1,000 on their first day. It is not unheard of from legitimate MLM companies. And can you make $100,000 a year in MLM with no previous experience? Yes. It's a lofty goal, but it has been done, even by first-time MLM'ers. But, it doesn't mean that they didn't have to work to accomplish that task. Network marketing can pay off, but it does take work. And if you want to make it big in MLM, you will have to work your tail off, no doubt!

2. Some of these claims are definitely scams! These are the kind of criminals that give network marketing an unfair bad rap, and why we have laws against pyramid schemes. And if you get involved with these companies, you will definitely lose money!

So how do you tell the difference? With today's technology, the scam artists are finding some unique ways to disguise their pyramid schemes as MLM companies, but there are some core ideas that can distinguish one from another, and help you explain it to others.

Product

This one should be obvious, but sometimes isn't. Does the company have a product? Some pyramid schemes don't even have a product. The infamous chain letters of the 70's still rear their ugly heads today. You remember the ones. Send a dollar to the person on the top of the list, then add your name to the bottom, and send the list to ten of your friends, blah, blah, blah. Yep, still making it's rounds. Sure, they disguise it now. Call it their "cash gifting program", or the "everyone gets paid" initiative. It's all bunk!

OK, so your business has a product. Now we need to ask whether it is a legitimate product. What makes it legit? Mainly, it's whether you can sell it, by itself, without recruiting someone into your opportunity. Does it have value on it's own. In other words, retail sales! If your product is legitimate, you should be able to make a profit by selling it to anyone you choose. The next section will tell you why this is important.

Compensation Plan

The second way to show that your business is legitimate is through the compensation plan. Show the skeptic all of the different ways that you can get paid, because a sure-fire way to identify a fraud is if the only way to get paid is by recruiting more distributors.

Now, don't get me wrong. It is OK to make money by recruiting distributors, that just can't be the only way to get paid. Because what do you have once there are no more recruits? A tumbling house of cards.

I will use Xango as an example, since I am a distributor. They have 4 different ways to get paid.

Retail Sales - Simple enough. You can buy the products at wholesale, and sell them at retail. This creates a solid base of not only business-builders, but product users.

Power-Start - Other companies might call this something like quick-start or initial bonus, and it is a key component in helping people get off the ground with a short-term gain. This is the money that you make for new distributors. Xango pays 30% from initial orders of new distributors, and 15% on second-level distributors, if you meet requirements. Note that commissions are paid based on the orders of new distributors, and not on recruiting.

Unilevel Bonus - Again, other companies may call this something different, but in essence, this is your monthly paycheck based on the volume of sales within your organization i.e. your long-term pay. Every company has their own structure, but typically, it pays in levels based on how far you have moved up in ranks within the company. The more qualifications you earn, the more levels you get paid. Be sure to study your pay plan to make sure that there are no gaps, and that you are getting paid fairly. Xango, for instance, pays 50% commission on every case sold. If a company only pays 10% commissions on product sold, or has no long-term pay plan at all, it is probably a scam. Also, like I said, make sure that the long-term pay is based on sales volumes, and not just recruiting.

Global Bonus Pool - Xango also pays qualified reps an additional commission on the global sales of product. Other companies may or may not do this, but this is an additional way to legitimize the business.

Now here is where the skeptic always asks the dreaded Question #2. (Cue the weird music again.)

"Ahah!", they say, and then this gem: "The people at the top make more than the people at the bottom. Isn't that what a pyramid is?"

Please don't hurt the skeptic at this point, for not paying attention. It is not his fault. This is truly what some people think about network marketing. Simply explain to him that the people at the top earned what they have gotten. Of course they make more money! You can't expect to go directly to the top of an organization if you haven't done anything. It works the same as the rest of society. That brings me to my next litmus test.

Opportunity

Can you imagine what kind of answer you would get in a job interview if you said, "I don't want to work here unless I get paid as much as the owner."?

Or let's say you would like to play baseball, but you're not going to play unless you get a contract with the New York Yankees. Oh, and you demand to be the starting pitcher on opening day. Ridiculous, right?

Well some people actually think that if you aren't getting the same pay as the top earners in an MLM company, that it's a scam.

The question shouldn't be about how much you make to start, but on whether or not you have the same opportunity as everyone else, including the top earners. And in every legitimate network marketing company you most certainly do. But you have to earn it. Just like the gurus did.

Well, that is my opinion on the topic of MLM versus Pyramid Schemes. Be aware that this is my opinion, and you will find some that will agree with me and some will disagree with me. And the subject will probably be debated until the end of time. There are many more less-obvious reasons. I am not an expert on the laws of MLM. There are resources that give much more detail on exactly what legally constitutes a business to be declared a legitimate MLM.

Just know this. Yes, there plenty of great MLM companies to work for, but there are also pyramid schemes still out there, too, so if any of the bad practices mentioned here are a part of your company, the skeptic could be right!

Visit the following websites for more information:

The National Consumers League
www.nclnet.org
www.fraud.org

Federal Trade Commission
www.ftc.gov

Direct Selling Association
www.dsa.org