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Ponzi/pyramid schemes and network marketing (MLM) – what´s the difference?
Since millions of people today are financially independent due to passive incomes from sales networks that they have created, I thought it would be a good idea to explain the confusion that many people have about network marketing. First of we need to figure out what is what.
What is a Ponzi scheme?
A Ponzi scheme is a scam investment system where the operator instead of creating any real returns on invested capital pays his investors from new money paid to the operator by new investors. The operator attracts investors with promises of abnormally high returns and unusually consistent payouts. From the outside a Ponzi scheme might look like a pyramid scheme but there are some big differences. In a pyramid scheme the “investors” are getting paid from recruiting other people into the scheme but in a ponzi scheme the operator offers return without recruiting anyone. Some ponzi schemes are disguised as hedge funds, high yield offshore accounts and financial institutions. Promoters also try to minimize withdrawals by offering new plans to investors, often where money is frozen for a longer period of time, in exchange for higher returns. Usually the investment amounts required are very high from 5000$ and up.
There are some similarities between most retirement systems and a ponzi scheme, the difference is that most people don’t have a choice of “investing” in the retirement system or not. The pension system is designed to have new investors all the time to keep it running, the problem is that the amount of people taking out the returns is increasing and the ones contributing to it is decreasing.
What is a pyramid scheme then?
A pyramid scheme is an unsustainable scam system where the operator recruits sellers that in turn recruit new sellers and so on. The system is often without any or with just have a few products or services and the fee to get into the scheme is usually very high. In a pyramid scheme the focus is not on the product (if there is any) or customers but always on recruiting new investors to the scheme. The money paid to enter the pyramid is used to pay the people higher up in the pyramid. So if you are introduced to a business that you think might be a pyramid scheme, ask what you can make money from. If the money comes from recruiting new people and what you get paid is only (or mainly) a share of the fee to enter the scheme there is a high chance that you are dealing with a pyramid scheme, run as quick as you can! Most pyramid schemes break down in a couple of years.
Both Ponzi and pyramid schemes are classified as fraud and are therefore illegal in most countries, participation is punished with prison and fines (and sometimes more).
Network marketing (MLM, Direct sales, Reference marketing etc.)
Network marketing is a marketing strategy proven to be one of the most effective ones out there, that’s why more and more companies are using it to market their products and services. There are no such things as a “MLM company” or a “network marketing company” even though a lot or people might think so. Network marketing is just a way for any company to market themselves and their products, just like telemarketing or putting up huge banners in airports and train stations.
Practically it works like this: You try a product or service that you really like, then like most of us (if not all) you will tell your friends about it. It doesn´t really matter what it is, for example I went to a really good restaurant the other day, since then I have already recommended it to 2 other people, chances are that in the coming week those people will try the restaurant based on my recommendation. Now if my recommendation would instead have been to try some new skin cream from for example Oriflame, then Oriflame would have given me a couple percent of the profits on that sale because I helped market their product.
Now this all makes sense to most people but here is when it gets a little bit trickier. If the person that I recommended the cream to in turn also likes the product and he tells another friend about it he would get a couple of percent of the profits and then since I made that sale possible in the first place I would get a small percentage of the profits as well.
This is where most people are lost in the “this is a pyramid scheme” thinking. This just doesn´t work right!? After a certain number of “levels”, there are no more money left and the whole thing will collapse!
This example was over simplified and of course there is a system for the commission payouts that has “holes” in it so that no one can make any money just by being in the system from an early stage. The commissions are paid out based on created sales volume so a person that is good at sales can easily earn more money in the first year than someone that has been in the system for ten years or more, it has nothing with position to do.
Most companies that use telemarketing usually have a similar system where you have regular sellers, team leaders and office manager. Since the office manager probably has the most impact on how the sales are going he´s the one getting the highest bonus.
Usually sales commissions that are paid out are between 15-30% of the total sales, and like with all other companies the marketing costs are already counted into the price of the products.
The oldest companies that have been using the network marketing strategy are closing up on a hundred years old so it´s safe to say that it´s not a scam and it´s not some pyramid. It´s only one of many ways a company can use to market its products.
To make a TV commercial and let it air on a good time when there is a lot of people watching costs hundreds of thousands of euros, or more. The company has to pay for everything in forehand and have no idea how much sales it will bring. With network marketing the sales are already made before the company pays for the marketing, no wonder more and more companies are using it to market their products.
How to find a legitimate good company that uses MLM
Now some companies focus more on the network than on the costumers and selling their products, you might not even be able to buy products without becoming a distributor (marketer, ambassador, seller etc.).
To me that seems a bit weird, of course people want to try out being a customer first and then decide if they like the products or not.
So I would recommend looking for companies that are easy with their products and don’t care if you just want to be a costumer. Try it out for a while and if you really like the products and company, you always have the choice of helping them with the marketing, but only if you want of course.
Look at the entrance fee, how big is it? Is there any?
Does the distributers get paid based on product sales or just enrolling new people into the system?
Remember that if there is a fee that is unexplainably high that you don’t get anything for, it might be a scam.
Passive income streams, business experience and personal development
It is true that most people don’t make a lot of money from network marketing. The reason for that is simple, and it shows once and for all that it´s not a scam. It comes down to sales, the people that create the most sales get paid the most, that’s the deal.
It´s like running your own business, if you don´t have any customers that buy your products or services you can´t get paid, right?
It´s all up to you, your business´s success is dependent on your ability to sell yourself, your product or your services. So if you want your business to go good and you don’t have any customers today you have to go out and find them.
Before you do that maybe it would be a good idea to know how to do. If you run your own business you have to work that part out on your own but if you want learn how to do network marketing you always have a mentor that will help you and show you how to do.
That person has done what you are about to do and have an interest in helping you increase your sales since that will increase his sales as well. You will learn things like leadership, sales, getting out of your comfort zone, peoples skills and how to communicate effectively.
Network marketing is not something for everyone as you can understand but with a company that you really like, a great mentor and a winning attitude you can go a long way.
If you and the company focus on sales and are committed to having satisfied customers, sales will come month after month making your network business a machine that produces passive income for you month in and month out. So this is really a good opportunity if you have limited money to start with and are ready to do the work.
- Ponzi and pyramid schemes are illegal scams punishable with prison (sometimes worse).
- Participants in pyramid schemes get money from enrolling new people not from sales. The entry fee is usually very high and you don’t get any value from it.
- Network marketing, MLM is nothing but a marketing strategy that gives happy customers the opportunity to create passive income rather than giving the marketing money to TV stations and big corporations.
- Good companies that market with MLM focus more on the products and customers than on the network.
I hope this clarifies some things for you guys, there are A LOT of misleading info on forums out there on the internet and my guess is that many people miss out on great opportunities because they take opinions of other people as facts. Educated people that know what they are talking about don’t write on forums behind a hidden IP addresses.
On the other hand I know that there are A LOT of pushy, over promising distributers out there that probably are the ones giving the companies that use MLM a bad reputation. That has nothing to do with the products, MLM or the company that they are marketing. It´s nothing but private individuals that aren´t following the rules.
Here are some publicly traded companies that use MLM as a marketing strategy:
Tupperware, Oriflame, Zinzino, Herbalife and Avon
Some that Warren Buffet is or has been holding in Berkshire Hathaway are:
Kirby, World book and Pampered Chef
Passive income together