Network Marketing and Pyramid Schemes: What’s the Difference?

How many of us have been approached by someone who promises to make us rich? Miraculously we’re going to make millions of dollars, have plenty of free time, and work less. The only problem with this is they’ll ask you to invest a ton of your money upfront. Sounds familiar, right? You were probably pitched by a person involved in a pyramid scheme. Let’s clear up a common misconception that legitimate network marketing businesses are pyramid schemes.

First, let us define pyramid schemes. 

Pyramid schemes are a non-sustainable business model that involves exchange of money, primarily for enrolling or recruiting individuals. How can you identify a pyramid? Well the FCC or Federal Trade Commission states there’s always one common characteristic. They promise consumers or investors large profits based primarily on recruiting others to join the program.

Now you might be able to recognize a pyramid scheme by the following criteria. 

First, there is a very exciting sales pitch. This is usually how pyramid schemes draw people in, telling them they’re going to make millions of dollars and making them very excited to join right away without thinking through the decision. They will offer little to no information about the company upfront unless an investor purchases the product or becomes a participant. 

There are also big promises about income, no legitimate product or the product is overpriced in excess of fair market value or other comparable products. In addition, an income stream depends almost completely upon the enrollment of new members or recruiting, not the sale of legitimate products. The people who are at the bottom of the pyramid most definitely will lose.

So now that we’ve identified pyramid schemes, let’s distinguish them from network marketing. 

A true network marketing business is exactly the opposite of a traditional business model. It is designed to bring you to the top, not keep you at the bottom as an employee. The definition of network marketing is a business model that combines direct marketing with franchising. Network marketing is simply a distribution system or form of marketing which channels goods or services from the manufacturer to the consumer to a network of independent consultants.

The difference between traditional retail and network marketing is that products go in traditional retail from the manufacturer, and all the way down the line until they finally get to the consumer. 

Typically the price has been inflated to cover the cost of all of that progress that it went through to get to the consumer. In network marketing, the product goes directly from the manufacturer, to the independent consultant which distributes the product directly to the consumer. So it cuts out all those middlemen. What this does is not only a very efficient way to distribute products, but the money that’s saved can be spent on better development of product and also more money that’s paid to an independent consultant.

Robert Kiyosaki, author of Rich Dad, Poor Dad and the CashFlow Quadrant has been quoted to say, “We’re the only way for the average Joe to move from the B to the I quadrant which is big business or investors is through network marketing. If it would be easy, everyone would be doing it.” Now what he means by this is that the average person will never have enough money to buy a million dollar corporation unless they start small and work their way up. And network marketing provides an incredible vehicle for someone to do that.

The tools that you’ll need according to Kiyosaki are to be self motivated. 

Hard work and dedication. You have to be social. It’s essential to have a product you can believe in and possess leadership skills. It must also have a legitimate product at a fair price and the product should be consumable which means they should be used often, hopefully everyday so people buy them again. 

Start-up costs should be minimal. 

There should be free training, personal development, and support through an upline or a VP level for free. Pyramids often make money off of selling training. A legitimate company should offer training for free. Finally, there should be an updated copy of the compensation plan and average earnings of a consultant.

Running any business is difficult. 

That’s why over 50 percent of small business ventures fail. So why should network marketing be any different? Just as any other business, it takes time, effort, and commitment. Network marketing has a bad name because of a history of people that aim to profit from exploiting consumers by developing pyramids.

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