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Pyramid Scheme Definition

Recognizing Pyramid Schemes

Is MLM a Pyramid Scheme?

What Brings a Pyramid Scheme to Mind?

The term pyramid scheme is used a lot. It is often referred to when talking about MLM, which may be a reason why you are here right now. You may be looking at a MLM opportunity and you want to know, "Is it a pyramid scheme?" Congratulations on taking the time to educate yourself and do your due diligence. Being informed is the only way that you can protect yourself. That of course is the intention of the information contained here on this page, and that is to inform you about MLM or network marketing, more specifically to answer the question is it a pyramid scheme?

MLM and Pyramid Schemes

So what is it that almost immediately makes people think of pyramid schemes when they look at MLM opportunities? Before answering that one must understand where MLM gets it's earning power from. Without going into the history of network marketing, the basic principle is this; have a large network or sales personnel selling small amounts of product. In return for these efforts, commissions will be paid to the sales personnel. In addition to this the larger an individuals team is, the larger their income is based on the compensation plan.

Based on how a MLM company works with individuals building teams of sales personnel and how they fit into the compensation plan a shape takes form. The shape that is seen, essentially when the compensation plan is being described is that of a pyramid shape . . . large surface area on the bottom and small on top. Or another way to put it, many people on the bottom and one person on top.

It is the fact that people who are new to MLM see this one individual on the top and everyone below them, they automatically envision a pyramid scheme and shut their minds and ears to hearing the whole story. The whole story starting with the fact that the individual on top is them, and the large number of people below them is their team working to make them money!

To further the explanation and show that MLM is not a pyramid scheme, we shall use a comparison. A simple comparison that will use the same principles of explanation of the structures of two different business models. The intention is that you will see the similarities between the two business models more than you will see the similarities to a pyramid scheme.

Standard Business Model
Standard Business Model Pyramid Scheme

The standard business model is one that most people are familiar with. The familiarity generates a comfort level with how they exist. While not everyone likes the standard business model, they understand the structure and see it for what it is and accept it. Lets look at the image below:

Regardless if this is a multi-billion dollar corporation, or a small local run shoppe, this structure will be common. At the top you will have one individual who oversees the entire organization. They will then have their managers who will be responsible for certain areas of the business. Area such as Accounting, Engineering, Purchasing, etc. Then under them, you will have the employee work force, who are the ones completing the work.

While you may have many more levels of the organization between the CEO / President and the employee working on the assembly line or in the store front, you can see the shape that this organization is taking. One of a pyramid.

In this structure, the efforts of the Employee Base generates the income for the business. As you progress up the organizational level, income usually increases due to additional responsibilities, not necessarily capabilities. Also as you progress up the levels of the organization, there are less and less opportunities for individuals in the lower levels of the organization. Thus there are less opportunities to earn more money.

To see more information on Pyramid Schemes and Network Marketing, go to . . . Page 2

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