Network Marketing vs Pyramids

Many compare network marketing to financial pyramids, and at first glance, they do have similarities. Investment pyramids contain elements of multi-level marketing, but the essence of these concepts differs fundamentally.

Network marketing (also known as multi-level marketing, MLM) is a concept of selling goods and services where each sales agent, in addition to selling products, has the right to recruit partners. Participants in the distributor network earn income through commissions on product sales and various bonuses, which depend on the sales volume of their partner team.

The main principle of MLM is “do it yourself, and if you like it, share the information with a friend”.

Network marketing can be seen as a form of retail sales, direct sales, where company consultants establish personal contact with the buyer based on personal connections.

Multi-level marketing is successfully implemented in various directions of the product business. It is used by companies specializing in the sale of cosmetics (Oriflame, Avon, Mary Kay, Faberlic), household appliances and utensils (Kirby, Tupperware, Vorwerk, Zepter), non-pharmaceutical products (Vitamax, Nature's Sunshine Products, Infinitus). The MLM industry ranks among the top in the world in terms of development rates, with the annual turnover of the largest corporations reaching $9 billion.

When multi-level business demonstrated its effectiveness, scammers became more active, creating the phenomenon of financial pyramids and simply tarnishing the essence of MLM itself. With the development of the network marketing industry, investment pyramids increasingly disguise themselves under it.

The main characteristic of a financial pyramid lies in the source of income. Members of the structure earn income by constantly attracting new people: the initial investors receive a percentage of the funds that subsequent participants invest in the company. Earnings depend specifically on the number of people you invite to the company.

The founders of financial pyramids promise people a high level of income that cannot be sustained for a long time. In most cases, they disguise themselves as investment or charitable funds, businesses with goods of no real value, or simply promise to make money "out of thin air." Typically, such companies are champions of rapid development but exist for a short time (1-3 years). Pyramids are illegal in many countries worldwide, but there is no direct prohibition on their operation in the CIS. Usually, the activities of financial pyramids fall under articles on fraud and illegal entrepreneurship.

Article on the peculiarities of punishment for creating fraudulent schemes in the CIS countries and beyond

 

Let's remember the financial pyramid "MMM"  (early 90s), which ended in a loud collapse. Other major financial pyramids in the 90s and 2000s were "Vlastilina," "Russian House Selenga," "Tibet," "Khopor-Invest," and "Rubin" ("SAN"). The number of people affected by their activities reached millions, and the organizers received real prison sentences.

The main difference between network marketing and a pyramid scheme is that a network company is based on a real product that needs to be promoted and sold. The principle of a financial pyramid is based on constantly receiving money from its participants.

In the structure of marketing and the earning methods of a pyramid scheme, there are features that will help avoid falling into the trap of scammers. Let's consider the principles of financial pyramids:

- companies operate illegally, attract customers mainly through the internet, and keep funds in offshore zones.

- founders of financial pyramids evade questions about taxes, registration location, and legality;

- financial pyramids either have no product at all or its price does not correspond to its value.

- the only source of income for the pyramid is the constant contributions of participants;

- the task of pyramid participants is to bring in as many solvent clients as possible to the company.

Unlike MLM companies, which imply long-term partnership and stable structural development, any financial pyramid will sooner or later collapse. Pyramids collect deposits from participants and for a while pay them commissions. However, when the influx of new people decreases and the payments need to continue - the company ceases to exist, and all the invested money remains with the creators of the pyramid.

Fraudulent projects exist for a short time, while many MLM companies operate for decades and pose active competition to traditional businesses. This is confirmed by the example of international network companies (Amway founded in 1959, Mary Kay in 1963, Oriflame in 1967). Each year, they scale up and provide partners with real value. Let's consider the indicators of successful network business:

- the company is officially registered, licenses and all necessary documents in accordance with the legislation of a specific country have been obtained. The company's documentation is freely available on the website;

- the network company has its own high-quality real product that can be purchased at a favorable price only from its distributors;

- the turnover of goods in the network company occurs regardless of whether there is an influx of new consultants;

- there is a career growth perspective, and earnings depend on the volume of product sales;

- the network structure, developed over the years, can be passed on to heirs or sold as a share in the business.

Working in network marketing is based on supporting and training partners, which is the key to successful work. The goal of MLM is to promote products, increase sales turnover, and financial well-being of each distributor. To achieve this, networkers use the duplication method. It involves automating successful sequential actions leading to the goal - "do as I do and teach others to do the same." The sponsor is interested in developing each member of their team. By growing leaders, they will receive additional bonuses and the opportunity to scale the structure to unlimited sizes.

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Paul Getty, one of the wealthiest people in the USA, said: "I prefer to earn 1% of the efforts of 100 people, rather than 100% of my own efforts." This quote helps understand the perspective and power of duplication actively used by MLM leaders.

The effectiveness of basic network marketing principles is complemented and proportionally enhanced by new technologies. By combining modern web promotion methods and time-tested rules of working with a network structure, you will gain additional opportunities for rapid company development and attracting a wider audience's attention.

Unlike pyramids, network marketing is hard work to achieve the desired result, the success of which has always been based on product quality, effective training, and support for newcomers.

Sincerely, the team FlawlessMLM

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