By Nathan, on April 25th, 2009
No. MLM (Multi Level Marketing) does share some similarities with pyramid schemes, but there are key differences:
- An MLM is focused on selling a marketable product. This means that you are selling the product, not the opportunity. It also means like any standard distributor, the company will buy back inventory for at least 80% of the purchase price. Your commissions come directly from the sale of the product not recruitment.
- No Large Investment Requirement. Pyramids ask for money to participate in the scheme. Classic get rich quick hype. Legitimate MLMs will never ask for a large investment to get started. You can participate just by signing up. It will also be pointed out that having some product on hand would make your job a little easier. Mary Kay, for example, will sell to you a kit for your shows, so your clients can sample products, but they also will buy back unused products. Also be wary of programs that ask you to buy large amounts of merchandise upfront, these are Pyramids disguising themselves as MLM.
- Down lines, where most people get confused. This is where I initially became confused. Pyramids are only about the recruiting. MLM does have some recruiting, but it isn’t the focus. Think of it this way: your local shoe store sells shoes and hires a sales force to accomplish this; a company develops a service/product and decides that hiring a sales force is counterproductive and decides the best way to market their service/product is to offer the product to independent salespeople to sell, who then offer the same opportunity to others. A pyramid scheme sells a placement and has you sell a placement for enormous (and ever inflating) investment. So as an MLM marketer you are a part of a sales force but you don’t have a boss, you have an up line. They don’t supply you with your product; the people producing the product do that. They are there in case you need help and they told you about the service and products that piqued your interest. So you have 5 people that you got involved with the company, you make a little percentage on what those along your line sell. Not on whom they “recruit”. For example, if V, W, X, Y, Z are your “down lines” and W, Y and Z are actively selling product, you will receive a commission from W, Y and Z. If V and X aren’t selling but are recruiting you only make any money on sales of product by any that they “recruit”, but that line is doomed to collapse because it’s based only on recruitment not sales of product. No money is being made.
- Watch out for unrealistic earnings statements. MLM, just like the traditional retail model, is based on creating a market for the product or service. This takes work and time. If there are earnings statements that are unrealistic and unfounded, it’s a Pyramid Scheme.
We hope this has cleared up some of the confusion. If you have any comments and questions…