Is Network Marketing A Pyramid Scheme?

If you’ve been pitched an exciting new home business opportunity, then you’re probably going to spend some time trying to figure out: is network marketing a pyramid scheme?

It’s a good question. And my hat’s off to you for not just blindly trusting and jumping into something that sounds too good to be true.

I’ll cut right to the chase:

Network marketing is NOT a pyramid scheme.

It’s a legitimate, legal, ethical, and potentially very profitable business model that gives anyone the opportunity to make a life changing income. Without being tied to a boss or those bothersome 8-5 hours.

According to the Federal Trade Commission website:

The difference between a pyramid scheme and a lawful MLM program is that there is no real product that is sold in a pyramid scheme. Participants attempt to make money solely by recruiting new participants into the program.

So look…

The full answer to this question requires digging into some more nuance.

So let’s dive in.

MLM vs Pyramid Schemes

There are some very valid reasons for concern.

The truth is, there are widespread misconceptions about the network marketing business (also called multi level marketing, MLM, or direct selling).

There have been many illegal pyramids and Ponzi schemes over the years who have masqueraded as legitimate MLM companies.

They cleverly disguised themselves as legal business opportunities in order to take advantage of middle or lower class people and entice them to part with their hard earned money.

When the illegal and dangerous pyramids inevitably collapsed, the mainstream media (rightfully) reported on them. After all, thousands of innocent and unsuspecting people have been badly hurt by these predatory organizations over the last few decades.

The pyramid schemes have to be called out and stopped.

The problem is, the media just doesn’t do a good job of thoroughly educating the public on what to look out for.

Instead, they frame the situations as though ALL network marketing companies are dangerous pyramids, operating in plain sight with the blessing of government regulators.

Because fear and sensationalism sells. It’s how mainstream news organizations make money, right?

So how is network marketing NOT a pyramid scheme?

Before we get into that, let’s discuss what heck a pyramid scheme actually is.

What Is A Pyramid Scheme?

A pyramid scheme is a “business model” that earns it’s money from placing people into a pyramid shaped organization. Pyramid schemes do not make money by providing valuable products or services.

When you join a pyramid scheme you will be required to pay a fee in order to get a spot in the organization. This fee will go to the folks who joined before you and are positioned higher up in the pyramid.

You will earn money every time you add someone onto your “team”. And when one of your team mates adds someone new, you will also earn a cut.

And since the “business” isn’t providing value into the marketplace, the whole thing is destined for collapse right from the start.

The economy will not sustain a business model that doesn’t produce satisfied customers. The global economy (when working properly) is simply billions of people interacting with each other, exchanging value for value.

Money (value) is traded for a good or service (value) that a customer needs or wants.

So, What’s Network Marketing Then?

Network marketing is somewhat similar, at least on the surface.

But…

There is a major distinction. A fundamental difference that makes network marketing fair and ethical.

And legal.

When you join a network marketing company, you may be required to pay a small registration fee to cover administration costs. But nobody will earn any type of commission from you joining the team.

Instead, you will be tasked with selling products or services. Every time you make a sale, you will earn a commission. But so will the folks who have joined your organization before you.

And that’s the big difference. Money is only generated when something of value is sold to an end consumer.

It’s really not that different from any other type of business model. Revenue is generated when products are sold.

Period.

You may be interested in checking out our deep dive on MLM here.

The only difference is the marketing and distribution methods used. Instead of spending millions on advertising campaigns and distribution, a network marketing company instead passes those profits down to their own customers and distributors,.

In order for you to make truly life changing income, you will also need to learn how to recruit people into the business and build your own sales organization. You’re tasked with building a network of people who will generate sales and revenue for the business.

The bigger your network grows, the larger your income will become… IF your team effectively builds their own teams and most importantly, generates sale volume.

Check out our guide to succeeding with network marketing here.

The video below is a clip from Eric Worre‘s documentary The Rise Of The Entrepreneurs where the “pyramid scheme” question is addressed.

So Why All The Confusion?

As we’ve talked about already, one of the reasons for the widespread misunderstanding of network marketing is due to a few bad actors.

Over the last few decades, dangerous pyramid schemes have been cleverly disguised as legitimate network marketing. They’ve fooled many intelligent but unsuspecting people into parting with their hard earned money.

When the pyramid collapses, a few people at the top get rich while all the poor suckers at the bottom lose everything.

But some of the blame lies within the network marketing industry too.

There are some folks within MLM who do a terrible job of representing the business model.

They tell people that they’re going to get filthy rich without doing any hard work. Or they’ll convince them to buy thousands of dollars worth of product themselves in order to qualify for bonuses.

Look, if we’re going to uplift the reputation of this powerful business model, then we as network marketers need to do a better job of representing the industry.

Let your people know that this is going to be a difficult journey. It takes hard work. Dedication. Patience.

And you will have to develop some new skills in order to do well.

It’s not gonna be easy.

If you bring someone into the business under the false premise that they’re going to get rich quickly and easily, they’re going to be disenchanted very quickly. When they realize that they joined something completely different than they were led to believe, they are going to assume that they’ve been roped into a pyramid scheme.

And this is one of the major ways in which the negativity and misinformation is perpetuated.

So if you’re building an MLM organization that will stand the test of time, then you need to tell it like it is. Focus on teaching, and prepare to put in a few years of hard work and dedication.

Because again, it will NOT be easy.

Pyramid Scheme Examples

One example of a pyramid scheme that masqueraded as network marketing is CKB. The company claimed that it made money by selling educational resources for children.

Well it turned out that the vast majority of it’s revenue was generated from “investors” who were recruited into the organization and very little products were ever sold.

The company was eventually shut down by the SEC, and you can read about it here.

The Ponzi Scheme

Even more common than the classic pyramid scheme is the Ponzi scheme.

This type of scam has been named after Charles Ponzi, who orchestrated one of the most famous financial scams of the last few centuries.

It started out as a legitimate venture in the late 1800s. Ponzi was selling postage coupons and taking advantage of differing postal rates from country to country.

He started the business and started looking for investors. He promised that they would be able to double their money in only a few months.

Investment started pouring in. But instead of getting their profits paid out, investors chose to reinvest their profits.

As it turned out, Ponzi’s original business plan simply wasn’t profitable due to shipping costs. But he kept silent.

And when any one of his investors wanted some of their money paid out, Ponzi would simply take money from another investor and use it to pay the one who needed his funds.

All of the returns of investors are simply coming from new investors being brought in.

That is a simple one sentence definition of a Ponzi scheme.

If word gets out that the scheme may not be legitimate and most of the investors demand their money back, there wouldn’t be enough to pay everyone back.

Which is exactly what happened to Charles Ponzi’s business. His scheme got so big that when a plurality of investors demanded their money back, it even caused the collapse several large American banks.

Bernie Madoff ran a very similar scheme which collapsed in 2008 and left thousands of people financially devastated.

The documentary is available on Netflix if you want to learn more.

Crypto Schemes

Many of the cryptocurrency schemes out there today are also Ponzi schemes and should be treated with extreme caution.

I personally believe Bitcoin is revolutionary technology and is here to stay. I recommend reading this article by investment strategist Lyn Alden to learn more about it.

But any “crypto” (other than Bitcoin) remains highly speculative, unproven, and is more than likely a Ponzi scheme.

The collapse of the Terra Blockchain in 2022 is the perfect example of a Ponzi scheme disguised as a crypto project collapsing in spectacular fashion.

The video below from Kahn Academy does a great job of explaining how the Ponzi scheme works and why it has to collapse in the end.

Now that you have an understanding of what a pyramid or Ponzi scheme is, let’s talk about how you can avoid them.

Avoiding Scams

So how do you tell if a company is a pyramid?

One of the main things that regulators look for is how much revenue is coming from customers who are not at all involved in the business. Regulators want to see that at least 50% of product sales are coming from customers only.

So this is an important metric for you to look at as well when you’re evaluating a company too see if it might be a fit for you.

There has to be a product or service being sold to people that only intend to consume the products, not sell them. This tells you that there is real demand for it in the marketplace, making it a real sustainable business.

Here’s a few other things to look for in a real network marketing company:

• More focus on sales than recruiting
• Commissions paid out on sales, not recruiting
• Will buy back excess inventory
• Not forced to carry inventory
• Real demand exists for the products
• Realistic expectations being set
• Listed on Better Business Bureau
• Listed on Direct Selling Association

Is Network Marketing A Good Business?

I am a big fan of the network marketing business model. It allows you to start a business that can one day produce 6, 7, or even 8 figures of annual income.

But unlike any other business model, you don’t need to invest tens or hundreds of thousands of dollars up front. In fact, depending on the company, it’s often less than $100 that you need to get started.

You can start a business like this part time. There’s no need to quit your day job and put yourself in a scary or risky financial position.

The video below features Dave Ramsey talking about network marketing to a caller on his radio show.

You may want to check out our full list of reasons why we recommend network marketing.

Let’s Wrap This Up

One of the things that may still be holding you back is the pyramid shape that a network marketing organization takes on as it grows.

It’s a very reasonable question to ask…

But I would ask you to have a look at the organizational shape of a traditional corporate business.

Looks suspiciously like a pyramid, doesn’t it?

Look, any human organization will inevitably take on a pyramid-like structure. It’s completely unavoidable.

You’ll see it in:

• Friend circles
• Families
• Small business
• Corporate business
• Churches
• Governments

Any human organization will develop a hierarchical structure. It’s what has allowed us to work together and develop the amazing society we enjoy today.

And it’s a good thing.

But if you compare a network marketing hierarchy to that of the corporate business model, network marketing is inherently more fair and just.

In network marketing, you can certainly out-earn the person who recruited you into the business. They will remain your upline and be positioned higher up than you. But if they don’t produce as much sales volume as you, then they will earn less money.

But in the corporate structure, you will never earn more money than the CEO… unless you can claw your way up the corporate ladder, displacing people all along the way, and take that CEO’s job for yourself.

In network marketing, you will simply get paid for results.

No workplace politics or butt kissing necessary.