When people first get exposed to network marketing, many are concerned about whether it's a scam. They hear this thing about a "pyramid scheme" and get all sorts of incorrect ideas about this distribution model. So here, I'd like to lay it out in a way that anyone can understand. After reading this article, you should be able to spot a scam, and hopefully will have an appreciation for what network marketing really is.
Network marketing is a method of marketing, plain and simple. Just like any professional marketing company, network marketers are paid for their work of sharing a message about products or services they represent. But there are a couple of major differences:
1) Professional marketing companies are paid for their services regardless of whether any product is sold. Of course they are only retained over long periods if they succeed, but nevertheless, they're not at risk of working for nothing.
2) Network marketers are paid only if they can move product. This means they're sharing RISK with the company, and any time you increase risk, you should be increasing your potential income. As a result, companies offer lucrative payment plans just as you would expect them to given the risk involved of working and not getting paid.
The company can afford to offer this plan because they don't have to invest in marketing unless they have made a profit from product sold. This substantially LOWERS the company's risk, as they can build their marketing costs precisely into the cost of their product.
The company can and SHOULD be able to pay their marketers from funds that would typically be spent on marketing AND on wholesale discounts. When you don't have to offer 40% off to stores, or even more than that to other middlemen, those savings should be available to marketers without raising your prices above comparable retail products.
That last sentence is extremely important in understanding the "scam" factor of network marketing. And this is where we can talk about pyramids and schemes.
MLM and Pyramids
In MLM or network marketing, people are concerned about being part of a "pyramid." For some reason, they're not concerned about that when they're involved in corporate America, even though every corporation -- and really, any business at all -- is built as a pyramid.
CEOs are all alone at the top, followed by a few VPs, followed by any number of management levels, followed by the blue collar masses at the bottom. And pay scales generally follow, don't they? The higher you are in the pyramid, the more you are paid on the efforts of other people.
Even a small business works in this way. The owner hires employees in the hopes of making more money from them than they cost him. Plain and simple.
Sometimes people are happy being at the bottom of the pyramid receiving some small payment for their many hours of work. This may offer them a perception of security, but we know that this is an illusion -- that it may be more stable than setting off on your own, but the risk of being laid off and/or replaced with foreign workers is very real. And then what happens when you've been living paycheck to paycheck?
Network marketing models are set up in a similar way. Just like in any business, those who get involved earlier OR who succeed -- and this might be through sheer hard work or from connections/experience gained in a lifetime -- grow their personal pyramid and move dramatically up the payscale.
No, a network marketer is not guaranteed a weekly paycheck. Depending on the program, he may or may NOT be required to make monthly purchases. BUT ... a network marketer can't be "fired" in the traditional sense; if he wants to keep working, wants to keep trying to improve his lot in life, he can. And he never has to ASK, BEG, or HOPE for a promotion. Pay increases with success.
So as you can see, there is NO ISSUE with the pyramid structure of MLM, and it's a shame that the industry has gotten a bad rap from this structure when every business uses it. In fact, the poor concept some people have of network marketing REALLY comes from two areas: zealots and scams.
MLM and Zealots
When a lot of people hear "MLM" or "network marketing," they instinctively think of Amway, which has since changed its name. Back in the day, Amway was one of the few MLM opportunities available (where there are thousands available today). It was one of the few "opportunities" that people felt they had to break from the chains of living paycheck to paycheck.
And unfortunately, many of them pursued the business a little like religious zealots. (And admittedly, I can understand -- freedom is a pretty noble idea to pursue.) But this meant alienating a lot of friends and family, as some distributors lives became all about talking "Amway."
I don't mean to pick on Amway, because people attempted to build other businesses in this way too. It's just that Amway succeeded to the point of people knowing the name and -- often -- having this negative association. I don't believe the newer incarnation of the company has that same reputation. And it doesn't need to, because those methods of trying to build a customer and distributor base are old and dying. Today, there are easier, non-intrusive means of growing a business without ever talking to friends and family if that's someone's preference. (As taught in the Opportunity Course.)
In short, the old method of talking to everyone you know and bothering them with your opportunity should be kept in the past. But until it totally dies, MLM will have a bit of that taste in the mouth for some people. Just know that MLM does NOT have to be this.
MLM and Scams
The other issue with MLM is, frankly, that some companies OVER CHARGE for their products in order to attract distributors with larger payouts -- to entice them with the opportunity. "Who cares if you're paying too much," they seem to say. "You can make a lot of money with us."
But the litmus test is this: if you got in and NEVER SOLD ANY PRODUCT, would you be happy paying what you're paying? If the answer is no, then by definition, you're paying money into the company for the opportunity. So let's do a little magic trick here:
Monthly cost of 4 bottles of juice in MLM: $100
Cost of 4 bottles of similar quality juice sold through retail: $60
Monthly cost of OPPORTUNITY: $40 ($100-$60)
Here you are paying $40 a month just to be in an opportunity. You are paying money to your upline in hopes of having others join the team and pay money up to you. And this is called a ponzi scheme. Take away the real value of the product, and you can see how much money you're paying into the ponzi scheme.
Of course there is always some debate on the real value of something. There are colas that taste almost identical to Coke, yet Coke is more expensive. Does that make Coke a scam? Brand names usually cost more, yet people are willing to pay more for them. Sometimes this is due to real value, sometimes to perceived value. And there's no reason why MLM companies wouldn't do the same thing -- especially those products that are first to market and establish a new niche, as Coke did.
This leaves a bit of a grey area in determining an MLM scam. But the bottom line question is: would I be happy paying this price if I never sold anything? If you WOULD be happy paying this amount, then you can feel that you're involved in something legitimate when joining that opportunity -- that your pay is coming from traditional marketing budgets and wholesale discounts. A good indicator is if a company has a high percentage of customers who take no part in the business opportunity.
[On that point: many people may join as members to get the best possible price, but in fact they are just there to get product. I would count this as legitimate customers, not as business opportunity members.]
Non-MLM businesses can't as easily get away with overcharging for products unless their product is unique in the marketplace. (If it's not, they try to create this perception with marketing, as with Coke and Pepsi.) And this is because of competition. This is GOOD NEWS if you're looking into MLM, because with the advent of the Internet, there are now many more MLM business opportunities available. Competition is already starting to drive more realistic product pricing -- prices that are comparable to retail -- as well as other positive steps within the industry.
In the end, MLM or network marketing -- as a business model -- has NOTHING TO DO with scams. And while this model DOES look like a pyramid, so does every business. The "pushiness" some people think of in relation to MLM is really personal rudeness -- it is not necessary, nor do I recommend it. And hopefully it's starting to fall away as we have new marketing options available.
Like any business in the world, an MLM business can scam you. But that is a business by business thing, and is NOT part of the network marketing model. You can get involved in this industry and fully maintain your good name ... while potentially building additional streams of income, which is important regardless of how stable you think your current job is.
Will everyone make money in network marketing? No. But once again, that is the nature of business and of any risk that has potentially large rewards. And that is the topic for another article. But if you're happy with your product at the price you're paying, then there's really no downside to the arrangement.