Kosher Pyramids – An Oxymoron? Network Marketing and Pyramid Schemes

Many of us, with reasonable cause, associate network marketing programs with illegitimate pyramid schemes and the conversation stops there. Unfortunately, this has led to many a missed opportunity.

Yes, pyramids are by definition “multi-level” by design, but not all multi-level compensation structures are illegitimate schemes. We need to define our terms and then draw the distinctions between them.

Let’s start with some examples – the Life Insurance industry and Car Dealerships. Would anyone say that New York Life, Met and Prudential Insurance companies are illegitimate pyramid schemes? Would anyone say that Ford, Toyota and BMW dealerships are illegitimate pyramid schemes? But wait, how do the sales managers get paid? How do the sales managers in any major sales organization get paid? Having worked for one of those insurance companies as a manager, I can tell you from being on the inside. A sales manager/recruiter brings you into the business with true stories of “rags to riches” success. According to LIMRA, the industry’s research organization, only about 17% of new recruits survive the first three years. And, who have they sold to, primarily family and friends. Over 80% fail simply because they could not take the rejection and stop doing the necessary prospecting. It is a 10-3-1 game. Approaching 10 prospects for a meeting leads to 3 appointments which lead to one ultimate sale. Now, if you are a survivor and achieve a certain level of success, you are invited to join the management team and become a recruiter (no matter what nice title they give it). As a recruiter you do very little, if any direct selling, so how do you get paid? Well, if the selling agent makes about 50% commission that leaves another 50% to pay the corporate expenses and the SALES MANAGEMENT TEAM. The bigger and better the team you recruit, the more money you make. Senior managers/recruiters share in the revenue that their recruiters and agents generate and the General Manager lives off the whole agency’s revenues and he did not sell a thing in years. My General Manager made between $750,000 – $1,000,000 each year and was not allowed to sell personally. 160 selling agents, 8 managers and 1 general manager, not selling but making $1,000,000. Isn’t that a PYRAMID? Of course it is. Did they all start by selling to family and friends? Of course they did? Did the vast majority not succeed long term? Unfortunately, YES! Isn’t that the model of the vast majority of sales organization the world over? Of course it is! Now we can all agree that there are KOSHER PYRAMIDS!!!

Therefore, we now understand that many network marketing or multi-level marketing, pyramid-type sales forces are completely legitimate. So what is the difference?

On its website, the US Securities and Exchange Commission (SEC) states, “In the classic ‘pyramid’ scheme, participants attempt to make money solely by recruiting new participants into the program.”

1) Recruiting alone cannot be the sole source of revenue.

2) There has to be a legitimate product or service that is sold to the public at large.

3) The product or service should be for sale at a competitive price.

4) The compensation plan must be “open”, meaning that individuals can advance and prosper according to their effort and success and not be limited to when they entered the program.

All industries have bad apples and all opportunities must be fully investigated. A properly structured multi-level marketing company can be the entrepreneur’s ticket to the American Dream.