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First we must define what a pyramid scheme is. A pyramid scheme is a way to sell goods where commissions are paid to recruit new sellers. The commission is dependent on the number of sellers recruited.
So the soul purpose is to build a sales organization and increase the number of sellers at lower and lower levels creating the pyramid. There is no focus on product. The product is used only as a device to rally around and give the illusion of a product based company.
How is that different from Multi-Level Marketing? From a business structure standpoint it's not. They have the same genes. You might even find that some people refer to them as a legal Pyramid.
This is how they are different.
Multi-Level Marketing (MLM) doesn't only care about recruiting. They normally have a high quality, reputable product their sales force sells.
In a pyramid a commission or bonus is provided to encourage sellers to recruit more and more people underneath them. Then the people beneath them are encouraged to recruit more and more people by enticing them with commissions or bonuses. This gives you the "pyramid". The end structure is a pyramid of sellers.
MLM does that, but it also has a training program around selling products. There is a system in place to reward their sales force. The more products they sell, the bigger their commissions.
So in order for a company to escape that title (Pyramid Scheme), they're primary focus must be the products not the growth of the sales force.
There are a lot of very good Multi-Level Marketing Companies on the scene. Amway, for instance, is one of the oldest Multi-Level Marketing companies on the planet. It has millions of distributors worldwide! Some consider them a Pyramid Scheme, but are they? Yes they encourage recruitment, but they also have a quality product and a good product focus.
My wife works for a company called Partylite. They have a very balanced system to encourage recruitment of new people into their sales force, but at the same time they provide good commissions on the products they sell and bonuses when they reach certain levels of sales.
It's not all about recruitment. The company grows because of recruitment, but they get people on board because they have one of the best candle related product lines in the industry.
The debate will continue. My personal perspective is MLM is an ingenious business model, but like any other business model it can be misused. It doesn't need to be illegal, just controlled. 90-95% of the seller's income should be from the products and the recruitment should only be factored in as a bonus.
Matt Levenhagen
Online Business Blog
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