Network marketing vs. pyramid schemes: The differences

While it is true that the network marketing model is often shaped like a pyramid, it is not the same as a pyramid scheme.

Pathman Senithirajah's "Even a Moron with a Dream"
Networker Pathman Senithirajah tries to explain simply what network marketing is.

As explained previously, in a pyramid scheme, only the people at the top profit from contributions of the people at the bottom. To make a profit, those at the bottom need to wait for those at the top to be paid off first. And to pay off those at the top, more and more people are needed.

In a legitimate network marketing business, people do not profit solely from recruitment. Yes, it helps to have a network to grow the business, but the profits come mainly from sales of products or services.

In terms of sustainability, a legitimate network marketing business would not collapse. This is because profits earned by a sales representative depend on the amount of effort put in. Want more money? Sell more, or grow a bigger team to sell more.

A genuine network marketing company is not very different from any other company that sells its own products or services. Not only are the products and services legitimate, it provides a legitimate business model for people to work independently, whether from home or by setting up their own business.

Why do people insist it’s a scam then?

Many factors contribute to the confusion and negative perceptions about network marketing. Some of these include:

  • Dishonest businesses — In a typical example of “one bad apple spoils the whole bunch”, when direct selling grew more popular, dishonest companies and individuals tried to disguise slick pyramid schemes as legitimate businesses. As a result, thousands lost their hard-earned money and the reputation of the industry was tainted.
  • Lack of awareness — Not only amongst the public, but also amongst network marketers. When millions of people promote a business that they do not understand, this gives rise to millions of opportunities for misrepresentation.
  • Little to no regulation governing the industry — This is especially true in third-world economies where one can be imprisoned for participation in network marketing.

Whilst it is true that there are money-making scams out there, there are also successful, legitimate network marketing businesses. Here are what successful entrepreneurs Donald Trump and Robert Kiyosaki think about network marketing.

Donald Trump
Did you know Donald Trump has his own network marketing business?

Donald Trump, business magnate

“Marketing is a powerful tool, and network marketing can increase that power, provided you’re self-motivated.

Network marketing has proven itself to be a viable and rewarding source of income.

There have been some remarkable examples of success, and those successes have been earned through diligence, enthusiasm and the right product combined with timing.”

Robert T. Kiyosaki, author of Business of the 21st Century and Rich Dad, Poor Dad

“If I had to do it all over again, rather than build an old style type of business, I would have started building a network marketing business.

Network marketing is for people who want to win because network marketing is the business model for the future.”

How do you tell if a network marketing company is legit or a scam?

There are several differences between genuine direct selling companies, and the illegitimate businesses disguised as pyramid schemes.

Read about them in detail in our next blog post coming up in a few days.


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