Is Network Marketing a Pyramid Scheme?

You've just been introduced to an opportunity selling product for a multi-level marketing (MLM), Network Marketing, or direct selling company. A friend or family member cautions you that this “opportunity” may be a “pyramid scheme”. Have you stumbled across a scam or a legitimate why to earn extra money? What is pyramid scheme?

The network marketing/MLM industry is, with few exceptions, both legitimate and legal. A legitimate network marketing or multi-level marketing (MLM) business is no more a “Pyramid Scheme” than the federal government or a fortune 500 corporation.

Almost all government, corporate, and non-profit organizations share a pyramid type structure with a single leader (CEO/President) at the top with multiple vice presidents or other officers one level down, followed by mid-level managers underneath, and then salaried and hourly employees at the lowest level of the pyramid. The “shape” or an organization does not make it legal or legitimate.

There is one giant give-away to determine if an organization is an illegal pyramid scheme. An illegal pyramid scheme exists when money is paid as a commission--not for selling products or services--but for bringing others into the organization for a fee. If you earn money by getting people to join the organization, it is a scam and you should run away! If you earn money by selling a legitimate product or service, it is not a pyramid scheme.

How does a typical pyramid scheme operate?

  • Each new member that joins a pyramid scheme pays a fee which is distributed to those who previously joined the scam organization.
  • When new members stop joining, the pyramid collapses.
  • There is no sale of legitimate products or services in an illegal pyramid scheme.

In a legitimate network marketing or multi-level marketing (MLM) organization, commissions are only earned when a product or service is sold.

Network Marketing Organizations

Successful network marketing organizations sell legitimate products and services.

Such as:

  • Personal care products
  • Health care and dietary products
  • Financial services (insurance, annuities, and securities)
  • Candles, children’s toys, kitchen products and almost every other imaginable product or service.

Does every one of the thousands of network marketing and MLM companies offer legitimate products and opportunities? Of course not! Is the network marketing industry by definition crooked or illegal? Again, of course not!

MLM or Network Marketing Opportunities

If you’re exploring a MLM or Network Marketing opportunity, do your homework and ask the following questions:

  • Does the company offer a valuable product or service at a fair price?
  • Have you or would you purchase the product or service offered by the company you are investigating?
  • Is the compensation plan based upon the sales of products and services and not on bringing others into the organization?

If the answer to these two questions is “yes” it is likely that the opportunity is legitimate. Another important issue to watch out for is a requirement that you purchase a large amount of inventory to sell at later date. Be cautious of any company where new associates must purchase inventory.

If you are willing to work hard and follow the system that has made others successful in the network marketing/MLM business and you use and believe in the product or service, you too can experience financial reward and recognition for your efforts either as a part-time opportunity or as your career. Don’t be afraid to give network marketing a serious look!

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