Scheme or Scam: 7 Ways to Tell a Legit MLM from a Pyramid Scheme

Whip out a compensation plan that resembles a pyramid and you’ll immediately have people referring to your network marketing business as ‘another one of those scams’. In reality, every profitable and sustainable business model in the world utilises a pyramid structure. This simply shows that people should be less concerned with the shape of the pyramid and more with how it is created and sustained.

In this article, we’ll help you understand what sets legitimate network marketing models apart from the many fraudulent money-making schemes out there.

Searching for the Truth

In today’s world of information overload, Google returns 140 million search results for the search term ‘Network Marketing’ or ‘MLM‘. Each result offers yet another new perspective on this much misunderstood, much debated, much-maligned industry. About 50% of these millions of search results talk about scams, how network marketing has caused the downfall of various economies, how “victims” have lost millions, and how people promoting direct selling or network marketing should be shunned.

A Problem with Perception

One thing is certain. The network marketing industry is a highly perceptually challenged industry. In most developing economies where the industry has made a mark for itself —such as in India, which is a billion-dollar market— there is a lack of awareness fueled by misinterpretation and misinformation spread by the media and, most importantly, a lack of legislation to govern the industry. This gives rise to misconceptions, doubts and general wariness about it. Also, network marketing is word-of-mouth marketing, which means if there are four million people out there promoting this business; that is four million opportunities for misrepresentation, if not explained the right way! 

The Pareto Principle

Unequal wealth distribution is also a major fear that plays on the minds of many prospective network marketers, who are looking to explore the endless opportunities the industry has to offer. In 1906, Italian economist Vilfredo Pareto created a mathematical formula that described the disparity of wealth in his country, with a strong observation that 20 per cent of people owned 80 per cent of the wealth.

The ‘Pareto Principle’, or the 80/20 Rule as it was later called, points out that most things in life, be it effort, reward or output, are never distributed evenly, because there are always some people contributing more than others. And realising that the majority of results come from a minority of inputs can be useful so that we focus on the 20 per cent that makes a difference instead of exhausting our efforts on the 80 per cent that doesn’t count for much. For example, if 20 per cent of employees contribute to 80 per cent of the results, the focus should be on rewarding the employees. Similarly, if 20 per cent of customers contribute to 80 per cent of revenues, the emphasis should be on satisfying the customer.

In order to make the 80/20 Rule work for the network marketing business model, you will need a lot of people putting in a little, but consistent effort, and a lot of people receiving real value consistently. The business must provide a positive experience for both the ‘80 percenters’ as well as the ‘20 percenters’, so that you can develop a reliable, long-term leveraged income.

The Difference

What exactly sets legitimate direct selling companies apart from pyramid schemes and scams?

1 – Direct Selling is NOT a “get-rich-quick scheme”.

Direct selling may be very lucrative, but it is also a tough business. Right from the start, genuine businesses will tell you that the results happen only if you put in the time and effort. Any company that promises you an easy way to riches should be regarded with caution.

2- Legitimate Direct selling companies deliver quality products or services

Unlike pyramid schemes, where you get no legitimate products or services for your initial investment, legitimate companies spend millions on research and development to create exclusive, innovative and high-quality products that are tailored to meet the lifestyle needs of people across the globe.

3- Network Marketers for legitimate Direct Selling companies don’t earn commission through recruitment

Network marketers don’t need to recruit new members to earn a commission. Legitimate direct selling companies are structured to reward people for promoting its products. In a pyramid scheme, there is no financial return unless you have successfully enrolled others into the company.

4 – Direct selling companies have restrictions in their compensation plan

Legitimate direct selling companies apply fair and reasonable compensation plan restrictions in their distributor’s earnings to create equal income opportunities for all. In a pyramid scheme, those who came in first make all the money while new members lag hopelessly behind because they were recruited when the money pool had already been depleted.

5- Legitimate direct selling companies have a solid training system.

Legitimate companies place great emphasis on training their network marketers. They have qualified trainers equipped with the expertise and experience to help their members better understand the business and products. They also inculcate a culture of mentoring to help with the personal growth of individuals.

6- Legitimate direct selling companies provide their distributors with relevant business tools to grow their business.

A legitimate company helps you to keep track of purchases, commission earnings and the status of product deliveries, as well as full customer support. Other forms of support include regular product information releases, promotional offers, marketing materials and social media engagement to help distributors better understand the products and how to sell them.

7- Legitimate Direct selling companies have proper Policies and Procedures and ethical marketing codes.

You can tell a legitimate network marketing opportunity from a pyramid scheme based on the fact that their business policies and procedures are clearly stated in black and white, binding every network marketer to strict regulations and agreements. Any serious breach of the company’s ethical code or Policies and Procedures will result in action being taken against the involved. Most direct selling companies believe in achieving strong long-term growth and stability by creating a culture of ethical marketing.

******

Knowledge is power, as they say. So the next time someone gives you one reason why they think your network marketing business is a scam, perhaps you can give them seven reasons why it isn’t.