Why Multi-level Marketing is Not a Pyramid Scam

A comment many people make is the Multi-Level Marketing (MLM) business model does not work because it is just a pyramid scam. Yet, a number of large companies using the MLM business model are listed on the New York Stock Exchange and subject to U.S. Securities and Exchange Commission (SEC) scrutiny. Companies listed include Avon, Primerica, Nu Skin and Herbalife.

But here is the rub. The MLM companies listed on the stock exchanges do not consider themselves as being in the MLM business industry. In fact, when I checked the Standard Industrial Classification (SIC) Code List used by the SEC to classify companies by industry, I could not find MLM listed anywhere. Checking the newer North American Industry Classification System (NAICS), I did not find MLM either. It turns out that these companies classify themselves by the products/services they produce. For example, Primerica is in the financial service industry while Avon is in the personal care product industry.

Multi-Level Marketing is not an industry

An aspect most people fail to realize is that when a company starts up their business, the company must decide what business model they will use for the marketing and distribution of their products and services. Factors that determine which business model include the competition, cost of entry into the industry, existing modes of product distribution within existing industries and company financial resources to cover marketing and advertising costs or even the financial risks or costs of launching a new product. There are several basic methods companies have for distributing their products into the marketplace. They can distribute via distributors (intermediators who sell to retailers or other distributors), retailers and/or direct distribution (direct marketing). Direct distribution methods include infomercials, corporate sales force, independent sales force and internet among others.

Amway was not in the soap business. They could not compete head-to-head against the soap/personal products market leaders like Procter & Gamble or Colgate-Palmolive. Their alternative was tying a business opportunity to the sale of personal care products. Amway's product was the business opportunity or selling the "dream" by connecting with people and building relationships. But in the sales and marketing world, Amway is classified as a personal care products company.

The bottom line for MLM marketers is that it does not matter what the business model is called or what industry we are in. Promote/sell the dream and build relationships, not lead with the product line. The company could have chosen another distribution channel to move their product into the marketplace.