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What is the difference between network marketing and pyramid selling?

Thursday, December 9, 2010 , Posted by Munib Shaukat at 9:35 AM


What is the difference between network marketing and pyramid selling?

The short answer is very simple : Network marketing is a legitimate business model, offering all participants the same opportunity to build a residual income in a flexible way. Pyramid selling is an illegal scam, where the people at the top benefit from the financial suffering of those they introduce into the organisation. Both utilize the power of exponential growth, but they use this principle in different ways and for very different ends.

When people talk about pyramid selling, they may be thinking of many different business models. Most people will not be able to precisely define an illegal pyramid if you ask them, regardless of how strongly they claim that network marketing is the same. In reality, the difference between the two is very
clear and well-defined, and it should become obvious why this distinction is so vitally important.

In the standard model of a pyramid scheme, people are rewarded purely for introducing new people to an organisation. They are often charged very large joining fees, and are told that this can be recovered easily by convincing others to do the same. Sadly, this is quite a common scheme and many people lose a lot of money through such false hopes. Fortunately, this is absolutely illegal under the laws of most developed countries.

In a pyramid scheme, no goods or services are offered for sale to people outside of the pyramid organisation - money simply flows from the bottom to the top. This is one of the most important differences between a pyramid scheme and a legitimate network marketing opportunity. The consequence of this is that there is no net cash flow into the pyramid organisation, and therefore the people at the top make a quick fortune by taking money from people lower down in the organisation. If people at the top get rich, then it follows that people at the bottom must lose out, because the net cash contained within a static organisation stays constant. People find themselves trying to recruit new people to bring new cash into the organisation, just so that they can cancel their debts. This is the only way that new money can enter the pyramid. As soon as recruiting stops, the entire organisation folds and those who got in too late lose everything.

In network marketing, goods or services are sold by distributors to those outside of the organisation. This means that there is a net cash flow from outside to inside. This may sound like a small distinction, but in reality it is vital. It means that nobody in a well-run network marketing organisation need lose out. The incoming cash is split between those in the organisation based on retail sales and group-building success. Even if no new distributors are introduced, everyone still makes money. The organisation could remain entirely static indefinitely because money is flowing in from outside.

Note - it is possible to develop a network marketing organisation where the distributors all buy their own products and nobody outside does. This is not in the spirit of network marketing, but is still stable because goods or services of intrinsic value are still passing into the business from outside. Of course, this is rather complicated, and assumes that the distributors buy the products voluntarily and that they gain a more-than compensatory value from that purchase. This is beginning to push the limits of the law, and any company which operates in this manner should probably be avoided.

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