Network Marketing vs Illegal pyramid

Direct Selling or Network Marketing

As you might expect, a business where a farmer’s wife, a minister or a retired school teacher can make a five- or six-figure monthly income is bound to raise a few eyebrows. And simply by the magnitude of the monetary potential,

opportunists and artists are drawn to the industry like moths to a flame. It’s important that you understand the difference between legitimate Network Marketing and phony pyramid schemes and money games. Let’s take a look.

You might have heard me say that Network Marketing is not a sales business. Now you’re probably thinking, “Wait a minute. Doesn’t somebody have to sell something?” Yes. And no. Products must move or nobody makes money. But networking is not really a sales business as much as it is a teaching and training one. In fact, non-sales types often have a natural advantage over sales types. It is not unheard of for a school teacher or housewife to earn more money than sales people in Network Marketing.

How is this possible?

Because this is a business of duplication. A sales type is able to go out and retail a lot of product personally, but oftentimes he or she is not able to teach and train others. The non sales types they approach fear selling, and are often put off by the sales techniques employed on them. As a result, they do not get involved. But here’s the reality . . .

Most sales in Network Marketing

Are accomplished without door-to-door or retail sales. Can you be your own best customer?

Yes. If somebody buys your products wholesale, could they still be a retail customer? Yes. If they buy your products below wholesale, could they still be a retail customer? Yes. You’ve probably bought something from Sears or J.C. Penney below wholesale at some time or another. Obviously, selling below wholesale wouldn’t be too profitable, but it demonstrates the rights you have as an independent businessperson. Very few people involved in Network Marketing are retailing the products in a large way. Usually the products are conversationally marketed to friends and or family members, and used personally. And, because of computer and delivery technologies, most network marketing companies will drop-ship orders anywhere. It’s just not necessary to stockpile large inventories and be delivering products all over town. You may be using the products personally, and sharing them with a few friends and neighbours, who order direct from the main company. Meanwhile, you may have introduced the business aspect to eight or ten people, who have duplicated the process and created an organization of 5,000 people below you. You might only be making $500 a month in retail profits, and earning $10,000 a month in override commissions! Even though you’re making a lot more from overrides than you are from selling — contrary to what some uninformed regulators would tell you — that doesn’t mean it isn’t legal.

What is Right or Wrong

It’s just a demonstration of what can happen when you employ the power of leverage. However, this doesn’t mean that every company that claims to be a legitimate network marketing program is one. They’re not. There are some tell tale things that can signal a program is not legitimate. Let’s look closer at some of these factors. As a practical matter, it’s impossible for regulators to predict and legislate all of the infinite variations of legal and illegal marketing programs. For that reason, multilevel and anti-pyramid laws are drafted and interpreted very broadly. This allows regulators to encompass all of the possible variations of illegal schemes and have a jurisdictional basis to close them down. The problem arises when the regulators themselves are not educated as to the differences between legitimate Network Marketing and illegal pyramids. More about that in a minute. For now, let’s look at the two major distinctions used by knowledgeable regulators to determine if a program is a legitimate multilevel opportunity.

The first focus is the conceptual design of the compensation plan. More specifically, does it compensate participants:

a) Merely for introducing others to the program?


b) For the sales of goods or services to the end consumer?

If the plan focuses on rewarding participants for recruiting — it is a pyramid. If the commission structure is geared on product/service sales to the end consumer — it passes the first phase of the test.

The second analysis is on the actual operation of the program. Regardless of how the compensation plan is designed, regulators look at what the distributors actually spend their time doing. If the emphasis of the program is on recruiting rather than product or service sales — it still can be determined to be a pyramid. Only a few sophisticated states have statutes that specifically define and regulate Multi-Level Marketing.

1 Most states do have anti-pyramid laws. There are no comprehensive defining laws on the national level in the United States, and many other countries. In the U.S., federal regulation comes primarily as the result of administrative and judicial decisions that have come as the result of lawsuits from private parties.

Piecing together these decisions along with the definitions created by the state legislators gives you the eight elements that define a Multi-Level Marketing program.