Pyramid Selling vs MLM – Warning! All that glitters may not be gold – but it's not necessarily "fool's gold" either!
By John Counsel
It can be tempting to dismiss all network marketing opportunities as illegal pyramid schemes because of the sheer numbers of so-called network marketing businesses that do, in fact, cross the line.
Notice, however, that I refer to them as "so-called" network marketing. They're not REAL network marketing at all. It's common practice for shysters and frauds to pose as a legitimate business model in order to deflect scrutiny and deceive their prey. I call this familiar scenario "Barker's Egg Syndrome". (To view the linked explanation you need to disable pop-up blocking.)
For a more detailed exploration of why and how this happens so frequently in network marketing, visit our special web site at www.REALnetworkmarketing.com. It's an eye-opener — and it offers more than 50 free reports and white papers to help you avoid becoming a victim, even in a legitimate network marketing opportunity where unscrupulous or unthinking people distort and twist it into a scam.
In this example, I want to show you how jumping to premature conclusions can lead to serious errors in judgement. The key, always, is to find the accurate perspective that reveals the truth of the situation.
Here's a typical pyramid structure and operation that most people would consider to be a classic illegal pyramid selling scheme.
Pyramid features
- Each level of the pyramid has the right to buy products from the level above them at a discounted price and sell it at a higher price to the level below them.
- Each level in the pyramid pays for the right to sell the products and recruit sellers below them.
- No-one in the pyramid can by-pass any level above them. They're locked into their position in the pyramid.
- As prices increase at each level down the pyramid, the bottom level finds it almost impossible to sell the products at such high prices.
If you check the classic features of illegal pyramid selling schemes, you'll find most of them in this example. So is it reasonable to assume that this is an example of an illegal pyramid selling scheme?
Oops...
Not in this case. What we're looking at is the typical sales and distribution system used by the automotive industry for selling spare parts — in this instance, new panels, windscreens, etc for replacing those damaged in collisions.
- The manufacturer sells the right to distribute its panels, windscreens, etc to its regional distributors — usually major dealerships.
- The major dealerships on-sell the panels, etc, to smaller dealers at a profit.
- The smaller dealerships — who also pay the automotive company for the right to distribute its products — on-sell the parts to local panel beaters and accident repair shops at a profit.
- The accident repairers find it almost impossible to sell the panels, etc to automobile owners unless the owners have comprehensive insurance.
So why isn't this well-established system illegal? Almost all of the features of an illegal pyramid selling scheme are present. More than in most network marketing businesses, in fact. Is there some kind of double standard being applied here?
Only in the case of legitimate network marketing businesses.
The bottom line is quite simple: the pyramid structure has nothing whatever to do with whether or not a business is a pyramid selling scheme. EVERY legitimate organisation, from governments to schools, the military, churches, sports teams, essential services, charities, hospitals, hobby groups — you name it, it has a pyramid structure, for the simple reason that it's the ONLY organisation structure that works transparently and accountably!
If an organisation uses any other type of structure, such as cellular structures, it's almost always to avoid detection or sanction because their purpose is typically illegal, subversive, terrorist or similar.
Many people who've had bad experiences at the hands of counterfeit MLMers brand all network marketing as illegal pyramid selling. Understandable, but about as rational as branding all doctors as quacks or snake oil salesmen because of a bad experience with an incompetent or unuscrupulous medical practitioner or a real quack posing as a doctor. Learn more about this boobytrap, and the damage it can cause, at www.MLMrescue.com.
Be wary of jumping to hasty conclusions. Illegal pyramid selling is about motives, attitudes and practices, not organisational structure. Be sure to read the comments of the former head of Australia's Trade Practices Commission (now the Australian Consumer and Competition Commissions) on this difficult dilemma, linked below.
Check out these other articles on Pyramid Selling vs MLM:
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©1998 The Profit Clinic Pty Ltd. All rights reserved. This page updated 26 June 2005.
