Multi-level marketing and pyramid schemes are two money-making avenues, one renowned and the other fraudulent.
A well-known financial counselor named Robert Kiyosaki recently suggested to his audience that they consider adopting multi-level marketing, often known as MLM, as a means to earn money. Multi-level marketing has garnered a reputation throughout the years.
The term “network marketing” more commonly refers to multi-level marketing. On the other side, pyramid schemes are notorious for using deceptive practices and breaking the law.
The difference between multi-level marketing and pyramid schemes will be covered in today’s topic.
Multi-Level Marketing
Direct selling takes the form of multi-level marketing, in which participants earn money from their sales and the sales of others they recruit. Referrals and direct sales are essential to its success.
Quality products are distributed by established businesses that also operate multi-level marketing companies. Its objective is to acquire as many clients as possible while keeping advertising expenses to a minimum.
Business innovation of this kind was pioneered by California Vitamins, the company that would eventually become Amway. This company has a product and a vast coverage area, and the firm’s growth depends on the number of sales agents. This type of business model makes use of people to reach other people.
People are like water; they flow to new locations and travel great distances. The idea promotes the adoption of adaptable financial strategies among individuals. Subscribers don’t need to be employed full-time to generate income from their membership.
Because a subscriber can earn commissions on both their sales and the sales of others they bring into the network marketing scheme, this type of marketing makes it simple for anyone to start their own business.
The subscribers have a product to trade with one another. The vast majority of products are pharmaceuticals and dietary supplements. Successful network marketing companies have made improving product quality a primary focus. If the product’s quality is low, it will not be successful in the marketplace.
For example, GNLD has been producing and marketing food supplements since 1958. It is still making its subscribers wealthy and able to support themselves financially.
Everyone in the network is a salesman. These network companies teach their subscribers how to sell a product to maximize profits. Working with these network companies helps subscribers develop their abilities in sales and communication.
MLM companies frequently host regular seminars geared toward developing such skills. It is a connection that benefits both parties: subscribers profit from making money and expanding their skill sets, while the network company benefits from reduced advertising expenses and increased product sales.
Pyramid Scheme
A pyramid scheme is a short-lived business model. It is a bubble that is certain to burst. The State of North Carolina, USA, defines it as any plan in which (1) one pays money, (2) for the chance to receive money (3) upon the introduction of new participants into the program.
It begins with one person or a small team recruiting participants to join a new business venture where the recruits are required to pay a deposit or purchase a product (which is not necessarily the attention), but compulsorily the participants have to keep recruiting. The recruitment deposits are used to settle older participants until the scheme collapses.
The mathematical paradigm of exponential development is followed by the pyramid scheme, which rises, reaches its pinnacle, and then declines. For a pyramid scheme to reliably generate profits for all participants, it must keep growing forever when no new recruits are coming in, the collapse process begin. Because the plan is not connected to actual sales, it starts to fail.
The subscribers at the highest levels of the pyramid make the most money, but those at the lowest levels are the ones that lose out when the plan fails.
Differences Between MLM and the Pyramid scheme
- Start-up Cost: In MLM, start-up costs are lower and affordable. Anyone can own an MLM business, whereas a pyramid scheme requires a huge membership fee to settle older participants.
- Products Sales or Service Offering: Goods that can be sold through multi-level marketing include dietary supplements, clothing, spices, and, more recently, energy products (electricity). The pyramid scheme does not provide any goods or services to its participants. In a pyramid scheme, the distribution of products is secondary to the primary goal of recruiting new members who will pay a fee to join. In a pyramid scheme, the charge is what drives everything, not the sales.
- Support System: It is available in MLM; it thrives on this system to establish members and enable them to answer public questions. Training sessions are organized regularly to help members build selling skills and provide product knowledge. In the pyramid scheme, the emphasis is on recruiting members, and they are uneasy about getting support and answers to questions.
- Profits: MLM is not a “wonder bank.” Subscribers must work to sell products. The name says it is multi-level or network marketing. Subscribers are salesman but operate in a unique model. MLM earns profits through product sales. In a pyramid scheme, profit is from membership fees, which eventually begin to dwindle, and the scheme fades.
- Opting Out: It is easy to opt-out of MLM. It’s an established company, whereas pyramid schemes use high-pressure tactics to retain members.
- Business Focus: MLM focuses on sales of products and services, whereas a pyramid scheme focuses on recruiting members.
- Legality: MLM is legal, while pyramid schemes are illegal.
Similarities Between MLM and Pyramid Scheme
- They both involve new participants joining as downlines
- They are both network model
- Both charge membership fees
- Both share a pyramid-shape structure as the downline increases
Summary
It is not uncommon for multi-level marketing and pyramid schemes to be confused with one another. According to the rule of 70%, for multi-level marketing to be successful, 70% of products must be sold to the public (i.e., non-participants). In contrast to pyramid schemes, multi-level marketing businesses that have been around for a while and are involved in the sale of consumer goods have done quite well throughout the years.