Have you wondered what’s the difference between a pyramid scheme vs. network marketing?
Maybe you saw an interesting offer, but wondered if it’s too good to be true.
Or, you simply ignore anything that even vaguely resembles a pyramid scheme because – you “ain’t about to lose your hard-earned money over some scam!”
I get it. And, you’re right to be cautious.
So in this article, I’ll be diving into how to tell the difference between a pyramid scheme and network marketing.
We’ll look at what network marketing is and isn’t, why it’s often thought of as part of pyramid schemes, and whether or not it is something you should consider.
Let’s start with some definitions:
What is a Pyramid Scheme?
A pyramid scheme is a business model where people are required to join as members and pay a fee. They then recruit other people and earn a percentage from their joining fee.
In its most basic form, a pyramid scheme has no product or service it sells. You’d just be asked to contribute some cash to join it and get a cut out of the ‘joining fee’ for anyone you recruit and their recruits.
The higher you are in the pyramid scheme, the more you make out of those underneath you, with the highest benefactors being the ones at the top of the scheme.
If you come in late, when the pyramid is about to collapse, you would lose out on all your ‘investment.’
What is Network Marketing?
Network marketing is a marketing strategy where a business commissions individual distributors to sell the products or services to their networks of family, friends, and colleagues.
The institution or business would therefore be relying on multiple distributors who sell to their networks. These distributors are also able to recruit others to expand their networks and their reach.
Primerica, for instance, is one of the enterprises that use network marketing. They sell financial products through a network of distributors who can use them, sell them to clients, and recruit others to join the distribution team.
Now, you might be thinking, isn’t that what most businesses do? They get distributors to sell their products, and the distributors sell to others, either wholesalers or retailers.
So how is network marketing different?
Isn’t Network Marketing like Direct Selling?
Network marketing is similar to direct selling only, where in both, a distributor would be selling to the client directly.
But, in direct selling, the main goal is to make sales. The salesperson here would therefore be paid for their personal sales and not for the sales of the rest of the team.
On the other hand, network marketing encourages sales persons to expand their teams by recruiting more salespeople. They would then earn a commission from the sales made by their teams, creating a passive income in the long term.
The main goal for network marketing, in this case, would be to grow the organization.
And, as it grows, with people getting recruited and recruiting other people, it does start to look a lot like a pyramid scheme.
Let’s see some similarities and differences between network marketing and pyramid schemes.
Network Marketing vs. Pyramid Schemes
- Both Include Recruiting People
You can recruit new members to join for both network marketing and pyramid schemes, forming a downline from yourself.
A downline in network marketing refers to the partners that join the program after getting training from you.
- In Both, One can Earn from Recruits
With pyramid schemes, you would also earn from the registration fee of your recruits and their downlines. With pyramid schemes, registration of recruits may be the #1 way of making an income.
In Network marketing companies, on the other hand, there is a commission basis where you can earn a commission from sales made by people in your downline. And, you can also make money from product sales. You don’t solely make money from growing a team; that’s simply an option to scale the business (similar to any other business model).
- The Product or Service
In network marketing, there is a quality product or service that one can sell and make a profit from.
That could be a financial product like insurance or a physical product like hair care products. The company and those working under it should be able to run smoothly from sales of the products or services offered.
For a pyramid, you, or the person that chooses to join the organization, are the product. Without recruiting more people, you would not be able to make any money.
Some pyramid schemes also have products they sell, but they are often not valuable or of good quality. The products act as a placeholder to blind people from seeing the pyramid scheme for what it is.
You may also be asked to purchase an unusually large amount of product, more than you can use by yourself or even sell to people.
Now, remember, you can choose to buy the product for yourself or buy it to sell. If this isn’t an option, it might be time to reconsider joining the company, as it could be a pyramid scheme.
- The Model: Business Vs. Marketing
Network marketing is a marketing strategy that companies use to widen their reach.
Similar to how companies use social media or post ads on billboards and print media, some choose network marketing to capitalize on people’s immediate networks.
Pyramid schemes, on the other hand, are an illegal business model.
With pyramid schemes, recruiting other people to get their fees is the main source of income for the business.
Can You Make Money Through Network Marketing?
Yes, you can. And, unlike pyramid schemes, you would not just be ripping people off.
You can make sustainable income through network marketing by selling the products to clients and earning a percentage of the income your recruits make from their direct sales.
However, you need to put in the work to make money.
Pyramid schemes tend to sell the idea of making a large amount of money fast.
This promise of fast cash lures people into the trap.
And some people in network marketing will also tell you that it’s a way to make quick money.
Don’t fall for that narrative.
Once you start network marketing, you will need to seek clients to sell to actively. Whether you do that online or in person depends on you. But remember to treat it like any other business so you can grow and earn a good income.
Network Marketing vs. Other Business Strategies
There are a few other key points about network marketing that would help you understand what it is and why it works the way it does.
- The Recruitment Process is Different
Network marketing takes a different approach to recruitment. For many enterprises, you would find that the HR department does recruitment.
The department would not be involved in selling the company’s products. They would only work on internal operations that involve employees within the enterprise.
However, network marketing enterprises do things differently.
They enable distributors to recruit new team members. That includes sourcing the members, training them, and helping them set up.
- The Quality Varies
Another interesting fact about network marketing is the variances in quality.
While distributors can recruit people, they may not recruit them the same way across the board.
That means that you may find one person that really knows their stuff, while another doesn’t know much, despite both having gone through training.
Therefore, the person that trains you matters. You would need a strong foundation from which to build your income. Plus, it’s easier to sell to people when you have adequate knowledge about the product or service and how it works.
- Easy to Duplicate
Network marketing allows you to work with an established product and a proven process.
It is quite similar to a franchise.
Consider Subway, for instance: If you wanted to open up a Subway, you would get access to their branding, their promotional material and get training on the way they conduct their operations.
You can do the same with network marketing.
But, with Subway and other franchises, you would not be able to share the material with another person and have them start their franchise. They would need to work with the enterprise.
Network marketing does allow you to share your knowledge and resources gained from the enterprise with others for them to start their own branch, making it even more duplicable.
- Low Entry Cost
Network marketing doesn’t require a large upfront fee as compared to a franchise, for instance.
You may be required to buy a certain amount of product per month and maybe pay a monthly fee for training, and that is it.
The cost is also made lower by receiving a done-for-you business model. For instance, you don’t need to start figuring out production costs, as the firm would do this on its end.
It is possible to scale with network marketing. For a salesperson in a company, you may have limited ways to increase your income or grow a team. You can become a sales manager to lead a team and earn some commission from direct sales, but the earning power ends here.
Network marketing encourages one to build a team.
You can start your own small business out of it by partnering with a team of people within your networks to increase your earnings.
With more people added to your team, you can grow your passive income while actively pursuing direct clients to sell the product or service to.
Bottom Line: Pyramid Scheme Vs. Network Marketing
You can build a legitimate business out of network marketing, while pyramid schemes tend to rip people out of their money by preying on their need to make money fast. You can consider network marketing if you’re looking for a way to make an income. Book a consultation to learn more about our #1 recommended network marketing opportunity, and how you can leverage network marketing in a positive way. Get to hear from someone that has actively participated in network marketing and get her help getting started.