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The Real Pyramid Selling

Spot the pyramid

Spot the pyramid

One of the challenges of any business is dealing with its reputation. Reputation is very important to success. A good reputation is something that most business people aim to achieve and to keep. A bad reputation can break your business. That’s why people protect their reputation. Brands are built upon reputations.

Some industries have bad reputations which have come about through the unscrupulous practices of a minority. Estate agents have a bad name, in general, but most of them work hard to sell your property. Double glazing companies have a bad reputation for sharp sales tactics and over-inflated prices, but not all double glazing companies behave like that.

Business models which are well known for being scams and are illegal as a result include ‘Ponzi’ selling schemes and ‘Pyramid’ selling schemes. The financial crisis we are in has revealed one massive fraud through Bernard Madoff’s Ponzi scheme where people are taken in by large confidence tricks. Pyramid selling has been banned because it involved persuading people in their team (their ‘downline’) to buy products for resale for which there was no market. The products were purchased on a ‘no return’ basis which meant the purchaser was stuck with this worthless stock.  But people confuse network marketing for pyramid selling.

Network marketing works on a completely different basis. It is based upon an individual building a team of motivated people who also build motivated teams. If you start a network marketing business, you gain from other people’s sales. It is a highly leveraged method of building a business and it is a very efficient form of distribution.

But, the teams of motivated individuals are not infinite in depth. The most successful network marketing firms only go three deep. Nobody has to buy a whole load of stock up front which is difficult to sell because it has been marked up so much by the numerous people above you in the chain. The price of the products are controlled centrally.

However, it is common for people to misunderstand network marketing. They think it is ‘pyramid selling’. However, the point I want to make is that we live in a business world which is not so far off ‘pyramid selling’ and it is hard to see why network marketing as a model is so looked down upon when it is so different from ‘normal’ distribution methods and illegal pyramid selling.

Our ‘normal’ distribution model relies on a manufacturer producing their products which are then purchased and resold, perhaps, by a national agent. The national agent sells the products to distributors who might sell it to wholesalers or retailers. All the way down the line, each party takes a cut of the recommended retail price. A pyramid of stock is spread throughout the chain.

Each one of them holds stock and gets a better deal on the products they buy based upon the risk they are prepared to take in knowing how much they can sell. Often, the manufacturer sells their product based upon a limited amount of unsold products that can be returned. This transfers risk from manufacturer to the agent who then might pass this down the line to the distributor to the wholesaler to the retailer. Unsold stock is often sold off cheap, hence the wave of ‘end of season sales’. Sometimes, the retailer is able to return all of their unsold stock to the wholesaler or distributor.

Compare that to network marketing where the distribution channel consists of the manufacturer who is also the distributor, that ships products directly to the end customer or sometimes through the person who is the local networking marketing agent. No stock is held in the pipeline. The networking marketing agent and their team is supplied directly by the manufacturer/distributor.

The team of networking marketing agents are all paid by the manufacturer and the person who built a team below them is rewarded for doing so and paid on their results.

So, why is networking marketing believed to be pyramid selling when traditional distribution methods are far more akin to that sales model? It comes down to reputation. Pyramid selling caused such a scandal that it tainted a very good, efficient and reputable business model. People cannot separate network marketing from pyramid sales models. And, ironically, illegal pyramid selling schemes are far more like mainstream distribution models than you may care to believe.

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