Difference Between Pyramid Scheme And Network Marketing – You should. Also, the marketing world offers so many opportunities for those who have a large network of connections and want to leverage it.
Today we have two such opportunities – multi-level (MLM) and affiliate marketing. We’ll discuss what they’re all about, their benefits and how they differ to help you understand which one is best for you.
Difference Between Pyramid Scheme And Network Marketing
Multi-level marketing (aka network marketing) is a form of direct marketing where a company sells products through unpaid sales teams using a pyramid commission system.
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As a member of an MLM business model, you earn a commission by selling a product directly to a consumer or to other distributors you have hired as part of your sales network.
Let’s break down the process behind network marketing and the players involved to help you understand it better and easily differentiate it from affiliate marketing later on.
A sponsor is usually responsible for bringing in new recruits to sell a product. Essentially, they create a team of salespeople, who are not part of a company, so they don’t receive a salary, but can earn a commission.
Distributors are the sellers we talked about in the previous section. They can also become sponsors if they sign up enough new people and create their own team.
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Finally, recruits are the team members who work with distributors. They can also level up if they bring enough people to the team.
So theoretically any MLM participant can move up the pyramid if they bring in enough customers and create their own network of recruits.
Take a look at this graph representing the MLM pyramid with the hierarchy of the main players in it:
Imagine a business owner approaching you and saying, “Enlist five of your friends to sell our product.” You bring these friends in, who become independent distributors – they don’t work for a company or you, but both you and your friends earn a commission for product sales.
Mlm Vs Pyramid Scheme: What’s The Difference Between Them?
Then your friends bring six of their acquaintances, who become recruits and also earn sales commissions along with you and your six distributor friends. As these recruits bring their own recruits, the base of the pyramid grows, resulting in a multi-level sales process.
If you look closely at the pyramid, you can see the arrow on the right moving up and down. This arrow reflects the two directions that multi-level marketing can go:
The commission size will vary depending on the source, the number of products you sell and the number of new people you bring in.
No, with the main difference being that multi-level marketing is legal. However, there is more to these two than meets the eye.
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Pyramid schemes are an illegal form of MLM, where people have to pay to remain part of the system. Essentially, they have to pay for the membership and buy products they then have to distribute. Meanwhile, the founders earn a commission from the membership and the products sold to the members.
Unlike MLM, a pyramid scheme is a scam that primarily focuses on recruiting people rather than bringing in new customers. Thus, only people at the top of the pyramid can earn significant income; those at the bottom usually lose more money than they make.
With that out of the way, let’s now look at a few examples of businesses that use multi-level marketing to sell their products.
It operates as a multi-level marketing model, employing people daily to sell and market its products. The hiring process takes place at so-called Tupperware parties – marketing events held at the home of a distributor or sponsor.
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At these parties, the distributors demonstrate the products and sign up new recruits. These parties are now also held online since the pandemic broke out.
The 2017 Tupperware Income Disclosure stated that over 97% of active distributors earned around $700 a month, making it a good side income.
The company has been running the MLM program for 15 years. In its 2015 earnings report, Avon announced that the average representative earned $135 a month. It’s not too much, considering that you also have to pay a participation fee.
Based on what we have discussed so far, you may be asking yourself – is network marketing really worth a shot?
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You are right to hesitate; many do when they hear about sales models based on the pyramid hierarchy.
If we are talking about Avon, the initial payment can be as low as $5 (the amount depends on your chosen registration option).
Herbalife, another MLM example, charges members about $15 at the end of each year. But with this program, you also can’t make money by sponsoring or hiring someone – you have to sell products.
The most expensive membership fee we could find was with Amway, which sells beauty, health and home care products. Each member is charged a little less than $100 annually, but this amount is fully refundable if you decide to leave the program.
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First and foremost, you should have the qualities of a salesperson. In other words, you should be social and outgoing, persuasive and a good communicator.
However, it doesn’t matter if you don’t like the product you’re selling as part of a multi-level marketing company. Liking the product means you also know your way around it to a level that makes you a knowledgeable expert on it, able to convince others of its value.
Another important thing is to know the market well enough to understand when and where there is demand for the product you sell.
Finally, it is important to come to terms with the negative side of MLM as well. Many people cannot break even because they initially had very high expectations of the income they would earn, and that is also one of the reasons why only 25% of participants make a profit.
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So the bottom line is that you can make a good income from MLM, but you need to do your homework and research the program that interests you.
Many enter multi-level marketing as a side hustle to make extra money, and for some it turns out to be worth it.
However, some companies boast even higher earnings for their distributors. For example, Herbalife reps can earn $3000+ a month, with the lowest commission of $300, which isn’t bad either.
In the end, it all depends on the requirements of the MLM business and your efforts as a representative to market and sell products.
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Affiliate marketing is an advertising model where a brand hires people (affiliates) to promote and sell its product or service in exchange for a commission.
You can read more about these types in our detailed guide, but for now let’s briefly look at who is involved in affiliate marketing and how to start an affiliate program.
The seller can be a startup, a small business, a solo entrepreneur or a large company (eg Google AdSense).
We may also consider a dropshipping seller as a seller if they decide to engage affiliate sites to advertise their online e-commerce business. A B2B company can also do the same to market its services.
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An affiliate (publisher) is a person or company that does advertising activities to market the seller’s offer to the target group. For example, it could be a creator working in a very specific niche (many influencers monetize their YouTube channels this way), a blogger with a website that has good traffic, or an entrepreneur with his own business.
Finally, the consumer is the ideal target buyer who follows the publisher’s affiliate link to purchase a product if they find it beneficial.
Note that the publisher should always make the consumer aware that they are affiliated with the company whose product they are selling.
To implement affiliate marketing into the overall digital marketing strategy, a brand usually launches an affiliate program, which includes a list of products they expect affiliates to promote, chooses the payout model (we’ll show them later) and sets commission rates.
How To Distinguish Between A Pyramid Scheme And Multi‐level Marketing
The brand then attracts new affiliates to the program. Once they sign up, they can choose the product they want to promote and the program will generate a unique referral link for them. By tracking links, the brand can track which sales come from which affiliate.
Then, creators launch promotional efforts (make videos, write blog articles, or post on social media) to generate leads. They include the affiliate link in the content and must inform the target audience that the content is affiliated.
The end goal is for the consumer to buy a product via the affiliate link. If this transaction happens, the brand gains a new customer and the affiliate earns a commission.
There is also a pay-per-install option, where the referrer earns money when the consumer uses their affiliate link to visit the merchant’s website and download their product (software, app, etc.).
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Now let’s look at some sample affiliate programs to see what this strategy looks like in action.
Amazon has one of the most popular affiliate programs. Amazon Associates unite influencers, bloggers and publishers, who promote Amazon products and services on their channels and receive a commission in return (it can go up to 20%).
We are not exaggerating when we say that Amazon’s program is among the best – it has the highest market share of 44.68% and over 90,000 companies use it. So, Amazon earns a significant
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