Is network marketing a pyramid scheme?


Last week, we explained the definition of network marketing, an industry sometimes dismissed as a giant pyramid scheme. Whether this is true or not, depends on the specific business, of course, as each company has its own set of policies.

So how did the network marketing industry get such a bad rep? First let’s understand what is the general definition of a pyramid scheme.

A pyramid scheme is an illegal scam in which lots of people at the bottom of the pyramid pay money to a few people at the top. Each person pays to move up to the top in order to profit from payments of new recruits.

For example, Promoter X is at the top of the pyramid. He gets you to pay $1,000 for a position in a box on the bottom level of the pyramid.

Half of your money goes to him and the other half goes to someone in the box on the level above you.

A pyramid or Ponzi scheme
A pyramid or Ponzi scheme is impossible to sustain.

Once Promoter X has been paid off, the second level advances to the top as the new payoff level. This is when the two people on the second level begin to profit.

Charles Ponzi
Charles Ponzi.

Every time a level rises to the top, a new level must be added to the bottom, each twice as large as before.

For everyone in a pyramid scheme to profit, there must be a never-ending supply of new recruits.

In reality, this supply is limited. Plus you would have to wait a long time. Or worse, the pyramid may collapse long before you reach the top.

This type of fraudulent investment is named after Charles Ponzi, who was notorious for using this technique in the 1920s.

But a network marketing model looks like a pyramid! Doesn’t that mean it’s a scam?

Take a look at the organisation structure of a random company. For example, the company that you work for. What shape is it?

Now let’s examine the shape of other organisation structures.

Pyramid shapes

In reality, just about every profitable and sustainable business model adopts a pyramid structure. The question is not what the shape of the business model is; it is how it is created and sustained.

Still unclear or in doubt? Our next post discusses the differences between network marketing and a pyramid scheme, and why people insist network marketing is a scam. Plus, we’ll show you how to tell if a network marketing business is legit or not.

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