What’s the Difference between Network Marketing and a Pyramid Scheme?

 by Katie Kapro

Marketing. Every successful business has to do it. But in this age of social media marketing, with consumers getting bombarded from all sides with advertisements and promotions, being fully informed about the subtleties of person-to-person marketing is of the utmost importance.

The best marketing strategies are simple. Yet it is valuable to infuse that simplicity with an understanding of the full scope of network marketing - including its shadow-side, the pyramid scheme - as a means of avoiding their pitfalls and protecting yourself and your business.

What is Network Marketing?

Amway, a network marketing company that's been around since the 1960s, has one of the most recognizable names in the marketing biz. Anyone over the age of 25 probably has a friend, relative, or coworker who has sold Amway at one point or another. It's that big. But in this situation, brand recognition comes with its own devils.

The kind of marketing that Amway uses - known as network marketing, direct marketing or multilevel marketing - is defined by the Better Business Bureau as: "A system of retailing in which consumer products are sold by independent salespeople (distributors). Earnings in MLM are based on effort and ability to sell consumer products supplied to the distributor by the company."

It essentially incentivizes people to invest in a product-line and share it with their friends. Of course, there is a lot of room for nuance there, and that's where the line gets blurred.

All in all, there are really three tiers in the field of people-oriented marketing:

1.    There are the legit network marketing companies that reward their salespeople and guarantee that unsold products will be bought back for a percentage of the original price.
2.    Then there are MLM scams that masquerade as real companies, taking advantage of the anonymity that network marketers are often obligated to use in initial job interviews.
3.    And finally, there are straight-up pyramid schemes. We'll dive into those next.

What is a Pyramid Scheme?

According to the BBB, "Pyramid schemes concentrate mainly on making quick profits earned by selling the right to recruit others. Pyramid schemes focus more on recruiting other participants than selling the product or service."

Essentially it is a campaign without a purpose. A bee hive without any honeycomb. Investors are required to pay hefty start-up fees (which is where all the money for the scheme comes from), and then they are pressured to sign up as many new investors as they can. If they do so, they're promised returns of thousands, even millions of dollars without putting in much work.

The biggest difference between network marketing and a pyramid scheme is that for the latter, income is generated by signing up other investors. There is no basis in selling a product, it's all about selling the idea of opportunity-a particularly snaky form of deception.

Another, rather important, difference is that while legit network marketing is legal, pyramid schemes are most definitely illegal.

What do They Have in Common?

If you're thinking these two marketing techniques must have some similarities, you're absolutely right. If they didn't, we would not be here discussing them together. The reality is that multi-level marketing campaigns are often viewed with skepticism and compared to pyramid schemes. But why?

From the consumer perspective, independent distributors are the most visible part of the process in both network marketing and pyramid schemes. In traditional salesmanship, the tendency is to highlight the products over the people selling them, but multi-level marketing uses the exact opposite approach. It encourages people to use their personal relationships to sell and promote products.

In short, from the consumer perspective, both tactics can be really really annoying because they target consumers in spheres where they don't usually have to have their guard up for ad-inundation. Of course, skilled network marketers, like any good salespeople, can navigate the waters of promotion without being annoying. But not everyone is skilled, and not everyone cares if their product promotion plasters your social media channels. The result is that consumers end up purchasing a product or buying into a campaign, whether it's legitimate or not, simply as a way to support their friends. It's a weird twist on capitalism, for sure.

How to Avoid Scams and Schemes

Avoiding pyramid schemes and marketing scams is all about knowing your weaknesses and honing your instincts. If an opportunity seems too good to be true, it likely is. (I know, I know. Thanks for the advice, Mom.)

Before jumping into a new opportunity online, in person, or even over the phone, ensure the company you're investing in is above-board by taking the following steps:

1.    Verify the company is real by researching and confirming the company name, address, phone number, website, and principals.
2.     Be clear on all start-up costs and what you should expect for return on investment.
3.    Carefully read all materials like marketing booklets and sales plans.
4.    Talk to people who work there currently and ask them how much money they make.
5.    Clarify company policies about contract cancellation and product buy-back.

Have you had personal experience with network marketing or pyramid schemes? Share your experience in the comments!

About the Author: Katie Kapro is a nonfiction writer and life long supporter of the women-run local movement. She's especially passionate about finding and supporting unique, crafts-based ventures that unite creativity with business. To read more of her ideas, follow her on Twitter [https://twitter.com/kapro101] and Facebook [https://www.facebook.com/kapro101]

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