Is Network Marketing a Pyramid Scheme?

By Belinda Ellsworth

It is a common misconception that direct selling is a pyramid scheme. A pyramid scheme is based on people making money when more people invest in the scheme after them. In direct sales, people earn money when people who join after them sell products.

A pyramid scheme only pays out for a limited amount of time, because people are paid on investment of dollars by new people brought into the scheme, and eventually that arrangement collapses. In direct selling, you get paid for supporting people who are selling actual product to end consumers and who are recruiting others to do the same, which generates revenue that is divvied up among the people who get paid commissions on those particular sales and the company itself.

The Direct Selling Association — the industry organization that advocates for the direct sales model with government, media, and consumers — heavily regulates compensation plans and commission payouts to ensure payments aren’t being made based solely on bringing new people into the networks. This is also one reason the association discourages purchases of large amounts of inventory by people who are joining the business (they call this inventory loading or front-end loading, and it is typically prohibited by the companies themselves).

There have been fraudulent companies claiming to use the direct sales business model, when in practice they are not about selling anything at all. These companies emphasize a significant investment in large amounts of product or services, as well as persuading other people to join the company and invest in similar amounts of product or services. Training for finding customers to purchase the product is practically nonexistent in these companies. Within these operations, it is possible for a representative to purchase enough product that they, in effect, purchase a promotion, rather than earning it through personal and team sales (this is also called bonus buying, and most companies prohibit this practice, as well).