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When running a network marketing business, one of the most common reactions I've gotten is, “What??? You’re running one of 'those'  things?

A pyramid scheme?!! Isn't that illegal?"

Okay, that is a bit overly-dramatic, but if you have been running a network marketing business for any length of time, I’m sure you have encountered people who have questioned the legality or even just the ethics of your enterprise.

The simple truth is that the hierarchical structure of a network marketing business is no different than any other company.

What is the difference between MLM and a pyramid scheme?

But just what is the difference between a multi-level marketing company and a pyramid scheme?

 Short answer:

In network marketing, everyone receives value.

It doesn’t matter how many levels there are to the organization, everyone is gaining some income or value.

This is because there is a real product and real customers.  

In a pyramid scheme, only the people at the top receive any benefit, and there are no products and no customers.

Longer-ish answer:

Every company is set up in a hierarchical structure that could be described as a  "pyramid."  

There is nothing inherently wrong with pyramids. The Egyptians were quite fond of them as a matter of fact.

Chick-Fil-A,  Apple, Wal-Mart, Ford Motor Company, and Chase Bank: they’re all pyramids with a hierarchical structure.  

Even small "Mom and Pop" businesses, like a family lawn care service, are run the same way, with the business owner at the top of the "pyramid."  

Dare I say it...even churches are pyramids, with the pastor on top followed by elders, deacons, and then members. 

No one has a problem with this system because it just makes sense practically speaking, but it's analogous to the system a network marketing business also follows.

In a network marketing business, as with every other legitimate business, the people at the bottom still get paid, and customers still receive a product.

Only those at the top make money, and not through selling a product, but merely by having those below you pay an enrollment fee or ongoing monthly fee.

According to the U.S. Securities and Exchange Commission...

Legitimate network marketing businesses actually have a valuable product to sell, and customers, outside of the company, who are buying.

You actually have to work to maintain your business, through selling products to new and existing customers, whereas illegal pyramids have no real products or customers outside of the "pyramid."

See the difference?

Pyramid schemes cannot endure for very long since the only money inflow is arriving from those in the lower levels who are tricked into signing up.

The people at the top will make their money, but only at the expense of the lower levels when they run out of gullible friends and family.

There is no product of value that is being sold to bring in a healthy revenue.

Legal doesn't = legit

So why are multi-level marketing companies frequently associated with illegal pyramid schemes? 

There are basically two factors that contribute to this confusion.

First, unlike other businesses that employ workers and pay a wage or salary, network marketing companies rely on "independent consultants" or "distributors" for their sales force.  

Compensation plans include commission incentives and bonuses to encourage consultants to grow a sales organization with a hierarchical structure.  

Therefore, the idea that you would "enroll" other consultants to "build a team" strikes people as a similarity with illegal pyramid schemes, even when they are not. 

 The second factor, however,  is the real problem that causes many people to confuse multi-level marketing companies with "pyramid schemes."

A lot of network marketing distributors go about recruiting in dishonest ways, which, understandably, rubs people the wrong way.  

On top of this, there are some network marketing companies that while legal, are not sound business models. 

Here are a few red flags to look out for...

If a direct sales or network marketing business has one of these red flags, you might want to think twice before signing up.

Beware of direct sales companies which have a large enrollment fee.

You have to invest start a business, and if you wanted to start a traditional business (outside of network marketing), you're probably looking at $10,000+ in start-up costs, on the low end.

So while there is nothing inherently wrong with a network marketing business charging a couple thousand dollars for you to start your business...you may want to think twice. 

While the company might be legal, it may be dangerously close to a "pyramid scheme" since it is likely the majority of your money will be made through signing up other people, rather than through a good product that gives value to the customer.

Similarly, even if the enrollment cost is not exorbitant, you will want to stay away from network marketing companies where your income is only generated through signing up others.

You should be able to make a good profit by selling product alone, without having to enroll a single person.

Enrolling others should be icing on the cake; a nice bonus if you are wanting to make a higher income (and many times quite a bit higher!), but certainly not necessary for making a decent profit.

If you are mostly going to be selling your product to yourself or other distributors in a particular model, you may want to reconsider.

There must be third party customers buying the product for the direct sales company to be sound.

If there is a high quota or a minimum amount that you are required to purchase yourself, you may want to rethink, as you could lose a lot of money.

If the company thinks their consultants have to be the ones making most of the purchases, odds are, the product or company isn't that great.

The mere fact that you have distributors enrolled under you in no way means you're running a pyramid scheme.

Find a healthy direct sales company and you really can be successful.

Find one with a low enrollment fee,  which generates income by selling to third party customers without signing up a single consultant, and no mandatory quotas. 

Above all, find a unique product you love! I found mine, and it has been an incredible experience. Go find yours!

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