Network marketing, also known as multi-level marketing (MLM), is a system in which independent contractors sell products or services through a network of contacts. The industry began in the United States in the 1930s with companies such as Avon and Mary Kay, but it has since spread to many other countries around the world.
The basic idea behind network marketing is simple: instead of selling products directly to customers, manufacturers or distributors appoint independent contractors to do so. These contractors are compensated not only for their sales of products, but also for their efforts in recruiting new contractors (known as downline or recruits). In this way, network marketing can be thought of as a pyramid scheme: the more people you recruit, the more money you make.
The compensation structure of most network marketing programs incentivizes participants to recruit new members, known as downline or recruits, by offering commissions on their sales. In this way, network marketing can be thought of as a pyramid scheme: the more people you recruit, the more money you make. The problem with this model is that it relies on an ever-expanding pool of potential recruits to sustain itself. Eventually, the pool of potential recruits dries up, and the pyramid collapses.
The fact that network marketing programs often encourage recruitment of new participants in order to earn commissions has led some observers to label them as pyramid schemes. However, not all network marketing programs are pyramid schemes. Some programs are structured in a way that does not encourage recruitment (known as one-to-one marketing), and participants only earn commissions on the products they sell, not on the recruitment of new participants.
The Federal Trade Commission (FTC) defines a pyramid scheme as “an illegal business model that requires participants to recruit new members in order to receive benefits.” The FTC further warns that “pyramid schemes often masquerade as legitimate multi-level marketing (MLM) businesses.”
While it is true that some network marketing programs may have elements of a pyramid scheme, not all do. It is important to research any program before joining it to make sure that it is legitimate and does not operate like a pyramid scheme.
