Understanding MLMs vs Pyramid Schemes

In my experience, when people don’t understand something like mutli level marketing, they want to associate it with negativity and red flags. They will even go so far as to call it a scheme, not realizing a pyramid scheme has nothing to do with multi level marketing. My hope is to help break down some of the misinformation and empower whoever reads this with factual information and clarity around the confusion. I also want to give a perspective one isn’t necessarily born with and hardly gets passed down. This was the perspective that helped me go from a MLM hater to someone who not only gave it a shot, but became an advocate for the model.

Where did this idea originate?

Unfortunately some organizations tried to get creative by using a multi level marketing payout method for their actual scheme which has those who have not bothered to truly research those isolated situations generalizing mlm’s as pyramid schemes. Here is the difference. Pyramid schemes don’t actually move product, just money between people (think chain letters where one person sends $1 to the next 5, etc). That is a pyramid scheme, and there have been some impressive ones through the years, that found Multi Level Marketing the perfect cover up to carry out their plan. Sometimes there are companies that encourage their consultants to be the main customer. This is where the gray area lies. If a company requires someone to purchase themselves each month in order to get paid or to get bonuses then there is definitely more digging that needs to be done. Legitimate MLM’s actually have product that is loved and wanted, with actual repeat customers, outside of the sales field.

Let’s break down the pay model by comparing it to Affiliate Marketing.

Multi Level Marketing allows you to get paid on MORE than one level.  The easiest way I can explain this is by referring to the popular affiliate marketing payout plan to start. 

In affiliate marketing you get paid money, or credit, for recommending a product or service you love. The company may give you a discount code to give out to your network so that they will want to do just that. It is a win-win for everyone and the company has several people advertising their line vs taking out ads in magazines, etc.

In affiliate marketing you get one level of payment so it is not considered MULTI-level. People don’t seem to have a problem with this. It is when pay extends past the first level that people think it’s wrong. Usually it is a distrust of something different from the norm, so one goes to research and validate why they believe it is wrong…only to be met with countless articles on actual pyramid schemes disguised as MLM’s or articles that generalized it all together based on partial understanding. That argument is easy to adopt. I’m all about giving perspective so let’s dig deeper.

An annoyance and headache for an affiliate marketer is that they only get to make a sale for commission/credit for the first time before a new customer may decide to become an affiliate themselves. The original referrer no longer makes a commission as the once customer is now an affiliate as well and can purchase or earn through recommending their own link.

When that happens, the original referrer finds themselves continuously looking for new people to market to that hopefully won’t want to become an affiliate themself. This is also why you may see an affiliate marketer with several links to several things. One can not sustain a paycheck on one link alone when people can easily become an affiliate themselves. It becomes a space of scarcity where you may notice affiliates won’t share that their customers can too become affiliates themselves to save and make money or get credit. Why would they? They could lose out on catering to that person’s network and making a commission for themself.

Every so often a purchaser won’t care to get their own affiliate link, or never knew they could, so they remain a happy customer and the affiliate marketer keeps collecting commissions.

Here is the difference between that model and a Multi-Level pay structure.

In network marketing, that has an MLM structure, not only does the set commission or credit for any purchase go to you, BUT if the person you recommended decided to make commission from recommending the product as well you would ALSO get a small commission bonus on top of that. You can operate from a place of abundance in knowing that not only can you still get paid but so can everyone else who wants to do this without it working against you. The company uses this model as a “THANK YOU” for introducing and expanding the reach of those who will give their product a try.  Once someone decides to sign up they are not left to their own devices. They now have a partner and mentor in the person they chose to sign up with that will help them succeed. This is a way different climate and culture than keeping secrets, links, and commissions to one’s self. The more the new marketers succeed, the more the company will thank you for not only introducing them but with helping them with training on the skillsets, tools, resources, and encouragement needed for them to be able to succeed and help others do the same.

Let’s talk about this vision of “People at the top”.

People misspeak when they say “people at the top” make the money. The problem is that to someone who doesn’t know how this works that statement can be imagined as a few people making all of the money while others work hard to make nothing and hand it all over to them. What is not being said is the top of any multi level structure is literally anyone who decides to take on the responsibility of growing and leading a team. It is more like clusters of people ALL over the company, who have decided to help other people start businesses, may make more than someone who just chooses to sell. Remember, those who bring in others are not doing the work for them but are doing the work of training someone, being their encourager, coaching someone to the goals they set for themselves, and more. Do we not all agree this should be a job someone gets paid for? If you found yourself at your job being hired to man the desk and then got asked by the higher ups to train 5, 10, or hundreds of people to do what you were able to do, would you not feel slighted if still making the same wage for doing the extra work of helping others? Network marketing companies only feel it is fair to do that so they choose to pay out extra dollars on top of commissions being paid out to help with bonuses for those who commit to doing that work.

Does the bonus get taken from the new team mate to pay the enroller?

Leaders with teams are not getting paid OUT of their enrollee’s paycheck. The enrollee will always make what they signed up to make- the amount on the comp plan. It is illegal to take that away from them to give to another. Your commission from your sale is your commission on your sale- no matter what. Those terms are known up front and that will not change, ever.

The company pays money ON TOP OF what they pay to the person selling to the person training.
To put that in perspective. Company A in retail can make a profit and decide to put that into the business and reinvesting in marketing, magazine and social media agency advertising, commercials and more. In Network Marketing, they cut out all of those forms of advertising and put their extra profit BACK into the people who put their trust into recommending and growing their brand. When people hold tight to this argument I do start to wonder if the problem lies more in people not wanting others to be partially rewarded for their work, even when they helped them get there, which becomes more of a scarcity/abundance issue, not a network marketing issue.

Where red flags start popping up.

One red flag where a company can come under the microscope is when part of the pay structure includes getting cash bonuses from the act of signing people up. Our company used to have this, not knowing any better since we didn’t have a direct sales background, and we got rid of it when we realized that can be borderline pyramid scheme-y. That is where you get into that definition of making money primarily off of recruiting without having done any training or extra work to earn that bonus (except for convince someone to sign up).

People who get in early make all the money.

Yet another misconception is that this payment arrangement goes on FOREVER (leading to this pyramid idea). I know this because I hear people who say “You can only succeed if you get in early.”. There are people who got in early in many companies who are not at “the top” in pay because they didn’t look to grow or help train a team- because they had an option not to. I am mind boggled at how so many people make network marketing wrong because there are people who make hundreds of thousands and people who make hundreds each month. They never once seem to ask if that is what that person WANTED to do. The beautiful thing about this industry is that no one is hired. It is made up of a voluntary Army of solo entrepreneurs so that means there is freedom in choice of how someone decides to work the business. Just because not everyone is a millionaire does not mean that the choice wasn’t made to do all the work it takes to get to that point. Again, generalizations are dangerous and hurtful to the entire industry. I know I didn’t join to become a millionaire. In digging out my “Dream Career” plan back then I specifically said “I want to make enough to be able to have a little extra after I pay my bills (through my regular job).” I wanted extra money to bring my family to dinner. We need to stop assuming everyone wants to be at the top and then making them wrong for it when they are not.

Again, I can’t speak for other companies as I am only familiar with our compensation plan but I am the top paid consultant in the company. I was not the first or 100th that joined. I am not direct to corporate. I outranked my own enroller who is also a big leader in the company. I have team mates 9 levels down from me and who started years after me also at “the top”. There really is no clean shape of a triangle if the comp plan benefits and rewards you for your personal work. If I decide to stop putting my all into my work, go on a hiatus for 4 months, don’t service my customers, then that can all change. Someone can easily outrank and out make me. That is the beauty of this industry. You get what you put in and you don’t get a free ride.

Every company is different. I can only speak for mine.

This is why I believe team building shouldn’t be so much of a main focus that you don’t have your own real customers. No one in network marketing should ever put their eggs in other people’s baskets. The only pay you can guarantee is the main commission you are promised to make on your own sales. This should be upfront in every company and no confusion about how much you make with what you sell.

The bonuses are there IF you succeed at helping others be successful at this themselves. Many companies, including mine, have leadership tenants in place to ensure no one is sitting back collecting checks without being involved in their own business and actively helping others learn and grow. There are even rules about moving teams up past leaders that choose to not do anything in their business and who choose to help no one. This is why the idea of “people at the top sitting back and doing nothing make all the money.” is simply not true. It is so important to realize that someone doesn’t get paid indefinitely on everyone who ever enters the team. I think I have about 18 levels of consultants and get paid a small commission by the company on my first 4 executive lines (whom I am always providing training and support for). No one is sitting back collecting a check and if they are they eventually get turned in as their team understands how important it is to have a present leader.

Let’s talk saturation.

Another argument goes against saturation in network marketing not making it a viable long term option. I was watching a presumed to be scathing (surprisingly not so scathing) documentary on a network marketing company the other day and they made the case that if everyone were to bring in one team mate and duplicate that then you would run out of people in the world to sell to or have join by the 13th level. I found this humorous as there is a lot of assuming done in that graphic. Does everyone in the world want your product or want to start a business? Is everyone going to want to grow a team? I looked at my back office of 18 levels and only 20,000 people under my line and started to wonder if something was seriously wrong. At this point I should have at least the world and Saturn signed up to sell makeup. Where did I go wrong? Why doesn’t everyone even know about the line I sell already? These graphics are meant as hypothetical “perfect world” situations meant to scare you away from even trying. They want you to assume you are already out before you’ve begun. The beauty of this industry? Freedom of choice. Here is the truth.

In Network Marketing, you have options.

Again, you do not have to choose to step into leadership but that track is there and paid accordingly if you do decide to do so. We get options in this business! I have team mates that make full time salaries that would make people’s jaw drop concentrating on sales ALONE. The product and training is there, it is up to you what you decide to do with the opportunity. As long as you stand behind a product that is trusted, proven, loved, and in demand, you have the perfect ingredients to establishing a reputable business that doesn’t have to push something down people’s throats, so to speak.

Being open to changing opinions.

I have a number of makeup artists who join the company I am with due to the nature of the products being actual pro product they can use on the most demanding sets and lighting situations. The thing is that some of them swore they would never lead a team and then a customer or peer started to see what they were offering and became interested in doing this themselves. (Look at how this circles back to the affiliate marketing conundrum I was speaking about! Now one does not have to hide their resources and can invite others in.) At that point a retailer can make the conscious decision of helping someone grow or recommending them to another leader that can help them learn how to start up their own business.

Generalizations hurt a great industry and innovative way of thinking.

Generalizations have hurt our industry because of a few bad apples who tried to use our legitimate pay model as a way to cover their unlawful ways. Again, when something looks different than traditional models of work it can put red flags up. The first article someone finds on validating why they feel that way is what they cling on to and it is usually an article that does not pull apart how this actually works and generalizes all the good and bad together.

This is why I wanted to write this to help bring some perspective to how, and why, I choose AND love this industry. It gives me great pleasure to introduce people to this industry (regardless of whether or not they sell my stuff or something else). Once someone truly looks at a this as getting paid accordingly for what they are doing in their business the stigma can start to fall away and people have a real opportunity of making a change. I don’t say it because I read that it happens. I say it because it happened to me.

What you choose to look for you will find.

If you read this far it is because you are a stand up person truly looking to understand different perspectives or you are looking for how to punch holes and attack everything I am saying. I just please ask you read this to understand, not to reply. It’s a novel, I know. But we have learned these stigmas don’t go away with one to two sentence phrases that don’t truly dig through layers of context and perspective. If you have any more questions or would like me to write on anything else about the myths and confusions of this industry, please let me know. I can fight the fight for people to see things more clearly by being the loudest voice out there but I have learned education, perspective, and giving grace for those looking to understand is where my strong suit lies.