What is Network Marketing?
Multi-level marketing (MLM), also known as Network Marketing, is a business-distribution model that allows a parent company to market its products directly to consumers by means of relationship referrals and direct selling.
Independent, unsalaried salespeople of multi-level marketing, referred to as distributors (or associates, independent business owners, dealers, franchise owners, sales consultants, consultants, independent agents, etc.), represent the parent company and are awarded a commission based upon the volume of product sold through each of their independent businesses (organizations).
Independent distributors develop their organizations by either building an active customer base, who buy direct from the parent company, or by recruiting a downline of independent distributors who also build a customer base, thereby expanding the overall organization. Additionally, distributors can also earn a profit by retailing products they purchased from the parent company at wholesale price.
Distributors earn a commission based on the sales efforts of their organization, which includes their independent sale efforts as well as the leveraged sales efforts of their downline. This arrangement is similar to franchise arrangements where royalties are paid from the sales of individual franchise operations to the franchisor as well as to an area or region manager. Commissions are paid to multi-level marketing distributors according to the company's compensation plan. There can be multiple levels of people receiving royalties from one person's sales.
What is a Pyramid Scheme?
Pyramid schemes exploit greed and gullibility. A successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula. The essential idea is that the mark, Mr. X, makes only one payment. To start earning, Mr. X has to recruit others like him who will also make one payment each. Mr. X gets paid out of receipts from those new recruits. They then go on to recruit others. As each new recruit makes a payment, Mr. X gets a cut. He is thus promised exponential benefits as the ''business'' expands.
Such ''businesses'' seldom involve sales of real products or services to which a money value might be easily attached. However, sometimes the ''payment'' itself may be a non-cash valuable. To enhance credibility, most such scams are well equipped with fake referrals, testimonials, and information. Clearly, the flaw is that there is no end benefit. The money simply travels up the chain. Only the originator and a very few at the top levels of the pyramid make significant amounts of money. The amounts dwindle steeply down the pyramid slopes. Of course, the worst off are at the bottom of the pyramid: those who subscribed to the plan, but were not able to recruit any followers themselves.
Some network or multi-level marketing businesses, which sell real products and rely on the price differentials between the manufacturer's dispatch ramp and the retail counter, may verge on the borderline between ''smart'' and ''scam''. When a pyramid does involve a real product, such as Holiday Magic cosmetics in the United States in the 1970s, new "dealers" who've paid enrolling fees are encouraged, in addition to selling their products, to become "managers" and recruit more new "dealers" who will also pay enrolling fees. As the number of layers of the pyramid increases, new recruits find it harder and harder to sell the product because there are so many competing salesmen. Those near or at the top of the pyramid make a lot of money on their percentage of the enrolling fees and on commissions for the supplied products, but those at the bottom are left with inventories of products they can't sell. However, most multi-level marketing businesses are not pyramid schemes.
One of the many differences between MLM and pyramid schemes is that pyramid schemes do not offer a genuine product.
-From Wikipedia
Ross Decker
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