Pyramid Selling v Network Marketing

Occasionally when trying to explain MLM ( or Network marketing ) to a potential recruit you will hear the words “ah but isn’t that pyramid selling?

Some people confuse Pyramid Selling with MLM because of the structure of the compensation plan with its various levels, tiers or positions in the organisation. Before I try & explain why this confusion occurs lets first discuss what exactly Pyramid Selling is ( or was, since it’s been illegal for many years ).

A typical Pyramid Selling scheme would work like this; at the top of the pyramid would be the founder or founders of the scheme who would have a product that they wanted to get to market (or that’s what they would tell recruits) so they recruited other people to sell the products. These new recruits would be required to buy a certain amount of product at a “wholesale price”, its more than likely that the price would be determined by how much product they bought, therefore encouraging recruits to buy lots of product to get it cheaper. There would be a “retail price” for the product which was the price for the general public, however recruits would be encouraged, often through incentives, to recruit others & get them to buy product at the “wholesale price” plus a mark-up, these 2nd tier recruits would be encouraged to do the same i.e. recruit more people & get them to buy product at a further mark- up.

The major flaw in this type of organisation was that most of the product was bought by recruits & not customers & if a recruit was on a low tier they would be buying product at a wholesale price that was greater than the retail price, meaning that the only way they could get rid of product would be to try & get more recruits to buy from them. This is why lots of people ended up with garages full of product that they couldn’t get rid of. The only people who benefitted from this type of scheme were the founders of the organisation & possibly the top couple of tiers of recruits. As this system was mainly focused on recruiting reps & not customers, plus the way it was inherently unfair on most reps it was made illegal in most countries.

So why do people still confuse this illegal system with MLM? It’s because of the layers or tiers of reps or recruits that may spark a long distant memory of the bad publicity that surrounded Pyramid Selling. When these companies many years ago held recruitment events they would draw out the structure of the organisation in a Pyramid Shape showing the different levels or tiers that recruits would be placed upon depending, often on how much product they bought or how many people they had recruited. If you see someone explaining a MLM business structure today you will still see that it has levels or tiers in the shape of a Pyramid & so this is where sometimes – I have to say not very often – someone will confuse it with the old illegal Pyramid Selling. One thing to bear in mind is that if you draw out the structure of any company you will find it’s in the shape of a Pyramid!

MLM today is a much respected form of direct selling & has worldwide sales of $167 Billion, a far cry from the old days of Pyramid Selling. Exponents of Network Marking include Robert Kiyosaki, Donald Trump, Bill Gates, and Warren Buffet. Indeed Bill Gates is quoted as saying “If I would be given a chance to start all over again, I would choose Network Marketing.