Last week, I gave a general view of network marketing or multi-level marketing (MLM), and showed why it was a legitimate, and even brilliant, business model. Yet it has also gained an unsavory reputation because of two reasons, one of which I will discuss in this article.
There have been many instances where unscrupulous people have used the MLM method to perpetuate illegal schemes — the most famous of which is called the pyramid scheme. Until today, many people still interchange the terms “MLM” with “pyramid”, as if the two were one and the same. But one is a legal way of doing business while the other is not.
Anatomy of a Pyramid
In the late 1990’s, a friend of mine approached me with a piece of paper that had some colored diagrams on it. He then explained that if I invested a certain amount, I think around P10,000, then I can recruit some more people who will also pay P10,000 and I will earn some commission from these recruits. “Just invite 3 and you will have earned back the P10,000 you invested,” was the promise. And then, if these new recruits of mine go recruit more of their friends, and their friends recruit their friends, and so on until the 5th or 6th generation, then I will hit the jackpot and earn something like a million pesos.
At that time, I was fresh out of college, a neophyte high school teacher, and almost a complete idiot regarding finances and business. Also, this concept was pretty new to me so I consulted a friend about it. He didn’t know what to make of it then but said it sounded fishy so he told me to be on the safe side and not jump into it. I followed his advice and I’m glad I did because that was the perfect example of a pyramid scheme.
The FBI website warns against pyramid schemes in this manner: “The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses.”
In other words, if a company’s marketing plan puts much of its emphasis on recruitment bonuses and how much you can earn when new downlines come in, be very wary and on your guard. Pyramids used to be very blatant, demanding that you put money up front for no product at all, simply an “investment.” However, because of the many scams that have hit the news time and again, more people have become aware of these schemes. So the schemers have created token products to avoid people saying they have no product. Yet, if their emphasis is still on earning via recruitment bonuses, then it is still running on a pyramid model and will eventually collapse.
In a legitimate MLM, the goal is not simply to make money off new recruits (in fact, some MLMs do away with this “joining commission” altogether) — the goal is to create a large network of satisfied users and sellers of your company’s products. For example, if you have a large organization of around 10,000 users and you earn an average of P10 for products that they buy from the company, then you have just earned P100,000. Of course, it takes a lot of time, effort and skills to build an organization of 10,000 distributors, but so does earning P100,000 in any other venture.
With this in mind, it makes perfect sense that a lot of the most successful MLM companies in the world sell products which are consumable, or have a wide range of products, where income is not dependent only on the purchase of a “Starter package” but on subsequent, regular and repeated purchases and sales of goods.
Be wary when a company promises “no selling.” That is almost a sure sign that it’s a scam of some sort. A legitimate company will never promise that you don’t have to sell. You will, in fact, have to learn how to sell and you will have to come to love to sell if you want to be successful in MLM, and a good company will provide the appropriate trainings and seminars in order to equip you to do well in it.
So I hope you have now learned to differentiate between a legitimate MLM and a pyramid scheme.
Next week, we’ll discuss some questionable and unethical practices of MLM distributors.
Originally published in Sunstar Davao.