You’ve probably heard the term pyramid, used in reference to a multi-level-marketing or MLM business.  What you probably don’t know is most of the time this term is used incorrectly.

Pyramid Schemes, as they are called are illegal because they depend on the person at the top getting people underneath them for the sole purpose of recruiting other people.  There is always a “sign up fee” of which a percentage goes to the person at the top of the chain or pyramid.  There are no products or services being sold and the entire point of the pyramid is to get to the top of the group (some arbitrary number of people below you) where you get a bonus based on the number of people in the group.  This is illegal in just about every state and unfortunately has been used to describe almost every business online or off, whether it’s legitimate or not.

If you look at the structure of any affiliate program, they are all designed to reward performance, not placement.  Let me explain.

Let’s say two people are interested in the same business and I am their sponsor into this business.  John registers under me, and Larry registers under me.  I now have 2 people in my downline.  This works for any affiliate business where I will earn a certain commission for sales of those I have sponsored in my downline. Let’s say I get 5% (which is extremely high, but easy for math) for each member in the first spot of my downline.  We’ll start with John.  John registers Jerry.  John now gets 5% in commission from Jerry, but I will only earn 2.5% from Jerry.  And so on, on down the line.  Eventually there is a point where I don’t make money from anyone below a certain level.  Let’s say it’s structured to 5 in a line. At most I can have 5 people in one “leg” that I can make money off commissions.  Now I have 2 legs that are 5 deep.  I make commissions from the sale of products or services these 10 people produce.  Note, that I said products or services.  This is the key difference between an “illegal” pyramid scheme and a legitimate multi-level-marketing or MLM business.

Now, let’s say I basically stopped promoting my business and i have 2 active legs at 5 deep.  John then goes and creates 3 legs 5 deep. Remember I still only make 5% of what John produces, but he is now making 5% from 3 groups where I am only making 5% from 2 groups.  Who do you think is going to be making more money?  John will because he has 1 more group or “leg” than I, and his business is going to build much faster.

In other words, the more people you directly register, the more potential you have to make money.  Of course I am going to get my commission because I introduced John to the business, but if he works harder than I do, he can certainly pass me up and make much more money.

Quixtar, one of the businesses I am affiliated with works this way, so do most online MLM businesses.  You probably know one more pyramid that everyone has accepted as standard practice.  YOUR JOB.  That’s right, your job is a pyramid. NO you protest, my job is part of a company that has employees.  Right.  And at the top of your company’s “Organization Chart” which looks strangely like a pyramid, don’t you think? At the top is the CEO.  The CEO makes the most money of anyone in the company, even if he doesn’t do his job as well as you do or produce as much product or revenue.  Sort of unfair don’t you think?  You work a lot harder but because he’s been there for a long time and worked his way up the pyramid he is rewarded more money for being at the top.  This all of course is legal and accepted by the general population as fair.

The media and some bad apples here and there have given MLM business a bad name and yes, there are scams out there and there is always someone willing to take your money from you if you are willing to give it, but there are many more legitimate businesses out there that offer a product or service that you can sell and promote and have other people sell for you (that’s what affiliate marketing is all about).

So next time you hear someone say “oh that’s a pyramid scheme”, why not call them on it and ask them why they think it’s a pyramid scheme.  Really have them explain it because they probably don’t really know what it means.

Here are some legitimate businesses that aren’t illegal:

I am sure there are others and I would love to hear your experiences in online marketing or MLM.  Leave a comment.

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