Sell, Earn or Run! What is your decisions?

Marketing is the life-line of every business. Without it a business can’t flourish to the heights its proprietor wants it to be. Marketing means the management of exchange and trade relations. Its aim is to identify, understand and satisfy customers’ needs. It studies the ways to attract and retain customers in the long run so that a business can grow leaps and bounds. Different type of marketing strategies are followed by businesses, like relationship marketing, paid marketing, word of mouth, internet marketing, transactional marketing, diversity marketing, etc.

Multi-level marketing (Network Marketing) and Pyramid Scheme can look very similar on the surface, but upon study one finds the true essence of both.

What is Multi-Level (Network marketing)

Network marketing is a marketing model which depends on business sale by individual representative working from home. It is an attractive business proposition to involve in a system for distributing products to customers. It is a ‘person-to-person’ sales model. It takes the help of a network of salespeople or business partners. It relies on word of mouth and deals with individuals selling products to the public. It works on the theory that more products will be sold by the business if the network of distributors is large.

What is Pyramid scheme

Pyramid scheme is a denounced form of network marketing. It is a form of illegal scam to steal general public’s money.

Multi-Level Marketing (Network Marketing) Vs. Pyramid Scheme

Terminology and types

There are various other names that can be used under the category of network marketing. They are multi-level marketing, cellular marketing, affiliate marketing, customer-direct marketing, referral marketing, home-based business franchising, etc.

Many names and forms are given to pyramid scheme. Gifting scheme is a popular kind of pyramid scheme. It has other names like: women empowering women, dinner party, dinner club, circle of friends, etc.

Affinity scheme is another type of pyramid scheme where a certain ethnicity is targeted. The scammer comes forward as a member of that group himself and presents pyramid scheme as a way of ‘return’ to the community by providing jobs to members of the community.

Another form is penny stock which promotes the company through spam e-mail messages. These e-mails offer incredible investment opportunities by making a shell company only with a name and stock symbol.

How multi-level marketing works?

A network marketing business can be run through a single-tier system where the businessman himself sells the products. Or it can be multi-tier also where salesmen are recruited for sales. Businesses following network marketing scheme appoint salespeople and further give them authority to recruit more salespeople under them.  These salespeople are called IBO- individual business owners. This helps the salesmen to reach the customers through a formal chain. Every tier of salesmen gets commission based on the output/sales they create, compensation for the sales made by recruits under them and customer relations they provide. The remuneration at each level is structured in such a way that commission is paid to salespeople at each level even if one sale is made. The commission depends on the total amount of sale done altogether.

How Pyramid scheme works?

This scheme is a disguised form of multi-level marketing and often fraudulent in operation. The main difference in both is that no actual/real product is sold in pyramid scheme.  Salesmen are referred to as participants and they earn money solely by recruiting new participants under the scheme. Pyramid scheme has a distinctive feature that it comes with a delusional promise of very high returns in a short period of time by investing directly and doing nothing in return. Best way to recognize this scheme is to test a company that offers more rewards to new recruiters than sale of actual products to the general public.

Purpose

The main idea of this marketing is to create maximum number of distributors of the products.

In pyramid model less emphasis is laid on sales to customers, rather focus is on earning revenue by recruiting new salespeople who will pay for expensive starter kits.

Examples

Network marketing is a task for the enthusiastic entrepreneurs who aim to build up a profit yielding business from small capital investment. For instance, the company Tupperware is one of the many successful companies to use network marketing technique.  Another example is ‘Amway’.

An example of pyramid scheme is the ‘Ponzi’ scheme of 1920 where Charles Ponzi scammed New Englanders a 50% rate of return in 45 days for high investment through mail coupons. He collected 10 million dollars of public money and hence served in Federal and State prisons for mail fraud.   

Legal view

Multi-level networking is legal as well as a source of good experience and income in most countries.

Participating in pyramid scheme is illegal. It is a criminal offence in some countries like Canada. Under the Criminal Code of Canada, the punishment for this offence is getting up to five years of imprisonment.

How to differ?

The real differentiation can be made by paying attention to the following points. Pyramid scheme asks for investment of large amount of money and offers excellent high returns without doing any work. Multi-level marketing does not require large investments. Its purpose is maximum sales. Network marketing offers buy-back for 80% of what the distributor has paid if the purchased inventory is not sold to the public. There are no real products in pyramid scheme. The main difference is on the point-‘What is the main focus? – sale of products OR monitory investment.’ To stay safe from the scandalous clutches of pyramid scheme, remember to gather information about company’s products, operations, sales literature and marketing plan. Try to have a talk with someone already working inside formally or informally.
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