What Is A Pyramid Scheme? (MLM vs. Pyramid)
It is not at all what you have been taught by the many people who have gotten into a network marketing, multi-level marketing (MLM), or pyramid structured company. Most of the people that have talked to you and tried to steer you clear of these companies have either bought in to them and failed to sell anything. Most likely because of their lack of motivation and fear of selling. There are others that have never even looked at one of these companies and just call everything a pyramid scheme out of pure ignorance.
Well in this article I am going to explain in detail the difference and I want to reference a couple of charts to help you understand. Let’s say that Joe and Joanne Widget start the first ever electric widget corporation and they want a sales team that will cost them nothing in benefits, salary, and/or taxes etc. However, they will charge a fee to train them on how to sell the product and how to close deals. So, what do they do they seek out hungry individuals who will sell on pure commission and pay a nominal fee to be trained. Then they setup the commission structure so that both parties are doing very well after the cost of goods sold and other costs that I wont dive into detail on, other than to say the cost of keeping the factory going and the lights on.
Now they got the product cost down to science and they say “hey here is a good idea let’s give our sales team a chance to make a small commission on anybody that they bring on to the team and a bonus for creating their own sales force according to the amount of profit they bring to Widget Corp. every year”. OK great, so Joe and Joanne go out and they find Haven and LuLu two excellent salespeople who are great at closing deals and willing to pay 49$ dollars a month for the support of Widget Corp. They start selling for Widget Corp. At a commission rate of let’s say 20%. Joe and Joanne are getting the other 80% for them because they own the company and the widgets that are being sold. In other words, all the risk is on them, so they take the lion’s share which they are 100% entitled too. Now Haven and LuLu bring on George and Martha, George and Martha pay their $49/month support fee and get 20% of all their sales, and so on down the downline as more people are brought on board to grow the team. Now at the end of the year Joe and Joanne are making a killing at Widget Corp., however they are also providing tons of training and coaching to their team. Even with all that they still decide to give a bonus to their top earners. Now this bonus is going to be given to Haven and LuLu at 10% because they are making us $200,000/month in sales. However, George and Martha are bringing in around $450,000/month in sales, so they are going to get a performance bonus of 15%. So even though Martha and George are in Haven and Lulu’s downline they make more sales therefore they make more bonus.
Everyone you know in the world is going to call this a pyramid scheme! Why? Because they have been taught that this doesn’t work and that all these companies do is collect people’s money for training and then cut them loose with no support structure. However, Widget Corp provides ongoing sales training and a chance to get paid for selling widgets.
I would say that is better than paying $49 dollars a month for sales training and then having to find something to sell or manufacture your own product, right?
A True Pyramid Scheme!
pyramid scheme; plural noun: pyramid schemes
a form of investment (illegal in the US and elsewhere) in which each paying participant recruits two further participants, with returns being given to early participants using money contributed by later ones.
For example I come to you and say Hi my name is Josiah and I want you to pay me $10 dollars a month for absolutely nothing and then I want you to find two more people who will pay you ten dollars a month for nothing. However, I am going to take your ten dollars and then I am going to take 1 dollar from each of the two you recruited. Then when they recruit four more you will get a dollar from those four and I will get $10 from you a dollar from the two you recruited and a dollar from the 4 they recruited. Hers is the catch we are not going to sell anything or offer any goods or services for the money. This is a true pyramid scheme.
Let's Go One Step Further
You have graduated from Stanford and you have a brand-new MBA to hang on the wall. You are a business genius, well maybe you know a little about business and sales ha-ha! You get on with Widget Corp. they offer you a $1000/month salary. You also get 5% of the profits made on your sales which is compiled by Widget Corp. after they figure out their costs for the month. Now depending on what they had to spend on advertising and smooshing customers, this could affect your commissions. Remember I said they pay you 5% on profit after they figure all the added costs of goods sold. You will also have to find and pay for your ongoing education should you wish to pursue it. You also get to pay W-2 taxes on your salary because you don’t own a business. You do however get company provided benefits at a lower cost because of the large number of employees in the benefit program. After all your student loans and years of hard work you can retire and get taxed on your 401K which is at a higher tax rate now. You will also have Medicare and Social Security to fall back on. Well that’s if the government hasn’t totally bankrupted it by then. All because you didn’t want to but into that evil pyramid scheme.
Pyramid Schemes in the Billions with a B
I will say this, so I don’t seem like a complete jerk here. If you are happy working a job, then I celebrate and applaud you. The world needs workers and you should be proud of what you do. The whole world can’t be entrepreneurial, some just don’t have that talent. However, they have other talents that make them the glue that holds companies together. Just be smart with your wages and always plan for a rainy day. You may even want to get an MLM or network marketing side hustle like the one below to make a little change for very little cost and effort.
I digress, let me get back on track here.
Amway is one of the most famous network marketing companies on the planet. If anything is going to be labeled a Pyramid Scheme, it is Amway. Hell, even I failed with Amway and got a little pissy about it, but it was my fault laziness was my game and I played it well. However, Amway’s earnings for 2017 were $8.8B. Yes, with a B!
Scentsy is a new kid on the block but you have no doubt seen them around your house with wax melting in them. Scentsy is a company that specializes in scented wax pots that act as air freshener. I know that I am a fan for sure I love the citrus ones for sure. Estimated annual earnings $313.7M
Let’s go one more for good measure have you ever heard of Avon your Momma has or ever seen a pink Caddy parked in your neighbor’s driveway. The woman will most likely look like Tammy Faye Baker when she immerges from her humble abode. All jokes aside Avon and Mary Kay are two of the top earning make-up MLM companies in the US
Avon selling to the tune of $5.2B
Mary Kay is at $3B
Sounds like these companies are on to something!
Just To BE Clear on STRUCTURE
Widget Corp with an MLM structured setup “Pyramid Scheme”
Widget Corp. with a traditional corporate structure
Turned sideways to avoid being called a “Pyramid Scheme”
There is a lot of money being made in MLM and network marketing companies today. People just like you and me are making millions sitting in the comfort of our own home doing just that. The advantage of the beautiful interverse is now we don’t have to go out and shake hands and kiss babies anymore. Leave that to the politicians. All we have to do is start a blog, YouTube, Facebook, Instagram etc. and we are off to the races. The stigma that has plagued good businesses for so long because people didn’t truly understand what or how they work has hurt many marketers over time. I hope that this article has cleared up some of the misnomers that have been believed about MLM and network marketing. Get out there and start making money or get a side hustle if you just want to dabble a little. It won’t kill your wallet and who knows I may see you holding up a giant check at the next MLM conference.
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