Network Marketing, Pyramid Schemes, and Business, Part 2

In my last article, I wrote about conventional business – using a pyramid structure (again, lowercase ‘p’) in its construction – and Ponzi schemes.

 

As a quick recap, businesses typically build in a pyramid structure, with higher levels in the structure carrying more responsibility in the company, and typically receiving better remuneration.  This is usually done in branches, and if you place them all together on paper, it ends up looking like a pyramid.  As a general rule, businesses would collapse if they were not run this way, and so the structure remains.

 

Ponzi schemes generally rely on a single “investor” or “investment firm” of some kind promising large returns to any who will invest with them, and pay the original investors with money from the new investors, with the core “investor” taking a small cut each time.  This can go on until they are being required to pay out more than the new investors are paying in, at which point the whole scheme collapses.

 

Now, with that out of the way, let’s move on to Pyramid (capital ‘P’) structures.  What makes this different from a business with a pyramid structure or Ponzi scheme?

 

Contrary to a Ponzi scheme where a single party acts as the hub for the whole thing, a Pyramid scheme relies on “investors” signing new people up below them in the structure, being told that their return will come from this.  The way this form perpetuates is that the initial “investor” will recruit other people to “invest” with them, charging a fee for this privilege.  Each new “investor” is now invited to repeat the process with more people, while sharing a portion of their profits with the level above them, all the way to the top.  These new invitees are then are invited to find more people who… well, you get the idea.  No product or service is genuinely produced, and this is the key issue.  As nothing is produced, this can only perpetuate as long as new people are found, after which point profits dry up, and the perpetuator(s) either disappear or are arrested.

 

This usually has a shorter lifespan than a Ponzi scheme as it requires an exponentially growing base of members, while a Ponzi scheme more often will rely on repeat investors, keeping the required number of victims at a relative minimum.

 

Another way that a Pyramid scheme can operate is by “selling” a product or service with extremely little or no monetary value (examples include mailing lists, or some kind of report), typically only to members of the structure (i.e. it is nearly or completely impossible to charge money for these products or services outside the Pyramid organization as few people – or none – would pay for them).  This version closely resembles the operational approach of MLMs, often including similar approaches to how money is distributed (“those that do the work get the pay”, or you only get a percentage of the group volume below you by some calculation or other, etc.), except that again the vast majority of the money comes from new sign-ups, and very little or no money comes from outside the structure, as the product or service is essentially bereft of monetary value.  This last part is the primary, most important difference between a Pyramid scheme and an MLM.

 

Finally, MLMs.  Many have called MLMs Pyramid schemes… and in some cases, they’re right (see the above paragraph).  One of the key differences an MLM carries is that it’s possible to earn a reasonable income through product sales outside the structure.  Essentially, being a salesman of whatever goods or services the MLM offers, which therefor must have some monetary value to the target market (examples include various health products, makeup, hygiene products, leadership training, and so on).  Typically, the profits will be a mix between sales profits (either through markup of products sold to individuals or companies that are not members of the MLM or from commission from such sales, or both) and a profit sharing structure that often gives people the impression that they are being suckered into a Pyramid scheme (e.g. once one “team” reaches a certain size, you begin gaining a certain percentage of the total profits or revenue from it).

 

If it is properly set up, however, an MLM can be completely legitimate, and many such do exist.  One difficulty with them, however, is that to see it fully, one must stop thinking in terms of employment (as a great many of us think) because there is no employment occurring.  Joining an MLM is not employment, at least not in the same way that getting hired as a salesman is; it is a form of business ownership, and thus carries some of the same risks as starting any business does, only usually the start-up cost and operating cost are orders of magnitude smaller than a conventional business, and the business model is presented to you instead of created by you.  This is another part of why many consider these to be scams, yet would not consider a 100% commission job as one.

 

Regardless of which of these led you here, look well into the opportunity presented to you.  On the one hand, it may look like “one of those things”, a Pyramid scheme that will disappear with hundreds or thousands of your dollars, or it may be completely legitimate, and you could be missing out on something massive by refusing it!

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