The Entrepreneurial Experiment – Day 3
Yesterday, I had the opportunity to define Network Marketing and Multi-level Marketing. Today I will be going into a little more depth into the Pyramid Scheme and how it is different.
We determined yesterday that the main difference between Network Marketing/MLM and a Pyramid Scheme is the focus on product.
Wikipedia defines a Pyramid Scheme as, “a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered, and is highly illegal”.
In other words, Pyramid Schemes focus on a compensation plan that is primarily based on recruiting other members into the business and has little or no focus on any tangible product.
In an article by Reem Heakal at: http://www.investopedia.com/articles/04/042104.asp, Reem describes a Pyramid Scheme in its truest sense like this:
“It starts with one person - the initial recruiter - who is on top, at the apex of the pyramid. This person recruits a second person, who is required to "invest" $100 which is paid to the initial recruiter. In order to make his or her money back, the new recruit must recruit more people under him or her, each of whom will also have to invest $100. If the recruit gets 10 more people to invest, this person will make $900 with just a $100 investment.
The 10 new people become recruiters and each one is in turn required to enlist an additional 10 people, resulting in a total of 100 more people. Each of those 100 new recruits is also obligated to pay $100 to the person who recruited him or her; recruiters get a profit of all of the money received minus the initial $100 paid to the person who recruited them. The process continues until the base of the pyramid is no longer strong enough to support the upper structure (meaning there are no more recruits)”.
After taking a look at the differences between a Network Marketing/MLM company and a Pyramid Scheme, here is what I have come to conclude:
1. Product is extremely important.
a. Look for a company that focuses on a product or service and make sure that the product or service could stand on its own in another company environment in addition to the Network Marketing Environment.
b. If it can’t stand on its own then run for the hills!!
2. Look for a publicly traded company.
a. The SEC heavily scrutinizes companies before it allows them to trade on the stock exchange. If a company can sell stock then it is probably a good indication that it is not a Pyramid Scheme
3. If the compensation plan HEAVILY relies on you recruiting other people and doesn’t focus on a particular product or service, be very wary (my recommendation is to find another company).
4. Make sure the product or service can stand up to its claims.
a. The reason why Network Marketing/MLM companies have developed bad reputations and are often confused with Pyramid Schemes is that Pyramid Schemes often try to pass themselves off as Network Marketing companies.
b. By making sure that the product does what it claims to, you will reduce the risk of falling for a Pyramid Scheme.
Hopefully this was helpful in determining if you are looking at a valid Network Marketing/MLM company or are looking at a Pyramid Scheme. Tomorrow I will be examining how important it is to examine the corporate structure and make sure that you are dealing with a good company.
See you tomorrow!!
The Entrepreneurial Experimenter
EntrepreneurialExperiment@gmail.com