Common Misconceptions About Network Marketing - Part 1

JD By JD, 29th Jul 2010 | Follow this author | RSS Feed
Posted in Wikinut>Business>Business Opportunities

MLM is a great vehicle for the average person to create passive income. Most people don't understand MLM. This article will address misconceptions about the legality of network marketing or MLM.

Pyramid and Ponzi schemes are illegal; MLM is not.

There is a huge difference between illegal schemes and network marketing. Pyramid and Ponzi schemes are “investment” schemes were you are either paid simply to recruit others into the scheme or Madoff like schemes where investors are offered an above average return, but there are no actual investments being made. The “investment” from new “investors” is being paid to the other “investors” to make it appears as though there is actually money being made. These schemes are unsustainable and will eventually fall apart when there aren’t enough new people buying into the scheme.

With a legitimate network marketing opportunity money is only paid when an actual product or service is sold. The network marketing company I am with requires a $249 investment. For that investment distributors receiving training materials, a website, marketing materials, etc. I receive no compensation when I recruit a new distributor who makes the $249 investment. Obviously that new distributor will purchase the service. If they don’t see the value in the service themselves they shouldn’t become a distributor anyway, right? I will receive a commission when they purchase the service. The amount of the commission is exactly the same amount I would receive if I sold the service to someone who didn’t become a distributor.

There are many pyramid schemes designed to look like legitimate network marketing opportunities. They are simply selling a business opportunity and throw in a product (usually overpriced, substandard can completely useless) to make it seem legal. As a general rule of thumb, any network marketing company that doesn’t generate at least half of it’s revenue from sales to non distributors probably won’t fare well if government regulators become aware of them.

Here is my simple test to determine whether or not you are looking at a real MLM or an illegal scheme designed as a legitimate network marketing opportunity.
1. Would I buy this product/service if there was no business opportunity attached?
2. Is it possible to earn a living selling this product even if I don't recruit new distributors?
If your answer to either of those questions is "no" it's best to avoid that particular opportunity.

Credibility of network marketing

Many wealth building gurus such as Robert Allen, Robert Kiyosaki and Donald Trump tout MLM as a great way for the average person to build wealth. Warren Buffett owns a number of MLM companies and Donald Trump recently launched his own MLM company. Several MLM companies are publicly traded on the major stock exchanges. The U.S. Chamber or Commerce endorses the concept of network marketing. The company I work with had been featured in many national business publications, is endorsed by the Presidents of the U.S. Chamber of Commerce and National Black Chamber of Commerce. They have also been endorsed by four former Attorneys General.

I still often come across people who say that network marketing "is an illegal pyramid". None of those people have the business or legal knowledge of those who are endorsing the industry.


Direct Sales, Home Based Business, Mlm, Multi-Level Marketing, Network Marketing

Meet the author

author avatar JD
I am a single father of two children. For the past several years I have worked from my home. I have worked as an employee, an independent contractor and as a home based business owner. I currently operate a home based medical billing company, a home ...(more)

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author avatar ppruel
30th Jul 2010 (#)

thank you for sharing this. i am already engage with MLM almost a year now this article could be a great help for me.

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author avatar Rob@optimize your blog
15th Jan 2012 (#)

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