What is a pyramid scheme and what ISN'T?

Everybody knows that pyramid schemes need to be avoided. Everybody thinks they know what a pyramid scheme is as well. Here's the problem, most people don't actually understand what a pyramid scheme is! I did a quick google search to see how pyramid scheme is defined. The first thing that pulled up was a yahoo definition. Here it is:

1. pyramid scheme

                *n.noun

      1. A fraudulent moneymaking scheme in which early participants are paid of  money received from later recruits, with the final recruits putting money in and getting nothing back



Here is how the SEC (US securities and exchange commission) defines it on their website:

Pyramid Schemes

In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.
The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money.

There is another AWESOME article that the SEC put on their site and you can see the whole article here. I recommend EVERYBODY that is interested in any MLM read it. Here is just a small part of it and I'm going to highlight the part that I want to emphasize:

In an MLM program, you typically get paid for products or services that you and the distributors in your "downline" (i.e., participants you recruit and their recruits) sell to others. However, SOME MLM programs are actually pyramid schemes -- a type of fraud in which participants profit almost EXCLUSIVELY through recruiting other people to participate in the program.

In other words, it's possible for a pyramid scheme to masquerade as an MLM but that does NOT mean that all MLM's are pyramid schemes!
So how do you know the difference? Here's the biggest red flag: Are the distributors actually selling something of value? If so, is the commission generated just a PERCENTAGE and not more than the actual cost of the product of the retail sale? If you can answer yes to both of those, then chances are, it's a legitimate business. If you answer no to either, then you better take a serious look at it before joining. If anyone tells you that you can make a lucrative income by EXCLUSIVELY recruiting other people who recruit other people who recruit other people etc...then you're listening to a pyramid scheme. Here's why: There is a bunch of people transferring money but NOBODY is transferring any product. It's unsustainable because there isn't any actual sale happening!
Now I want to demonstrate how an MLM can be a totally legitimate business model and I'm going to use Beachbody as my example.
With beachbody, they sell an actual product. No money is made whatsoever unless a product is sold. I could sign up 15 million coaches and never make a penny unless at least some of those coaches (including me) are selling exercise programs and health supplements. In fact, I have some coaches on my team that I make $0 on ever. They signed up to get the coach discount with no intention of selling to anyone and then stopped ordering any products. Guess what happened? The instant they stopped buying products, I get nothing from them being a coach.
However, if I sign up a coach and they either buy products or sell products of beachbody, THEN I make money. I don't actually make commission from it, it's all through team volume points that I'm not going to get into in this blog because it will just confuse anyone that isn't familiar with MLM compensation plans. I only make commissions from my own personal customers.
In other words, signing up coaches CAN build an income for me but ONLY if they are selling products and signing up other coaches who are selling products. Do you see the difference? Sale of products=money generated. Recruiting coaches=no money generated unless there is a sale of products.

There are 2 ways to sign up as a coach.
      1. You can JUST sign on as a coach for $40. With that $40, you get a bunch of info about "coach basics" you get 3 different websites of your own (for team beachbody, shakeology, and the ultimate reset), and you get a healthy eating cookbook. So yes, there is a fee to become a coach but you actually get something for the fee...it's not just a fee for nothing. 
      2. You can get that $40 fee waived completely by buying a challenge pack! So for example, the brand new challenge pack called the "club challenge pack" costs $140. With that, you get one month of shakeology (normally $130 for a bag) and 90 days of a club membership that gives you a TON of good benefits, not the least of which being a LIBRARY of AMAZING exercise programs that you can stream on any device that has the internet. The price is $140 regardless of if you become a coach or not. However, if you buy a challenge pack, and you want to become a coach, then the $40 fee is waived!

In Both cases, you pay money but you actually GET SOMETHING. This is the best example I can give because it's the company that I'm most familiar with. There are so many good MLM companies out there though. There are sketchy ones. There are some that I've encountered that I don't want to touch with a ten foot pole. There are a lot of really good ones though that sell a lot of great products. I've talked to some other MLM companies and if I weren't already doing beachbody, I'd probably have signed up with them. We use products from multiple MLM companies and love them. Once properly understood, the issue isn't with the MLM business model; it's with the minority of "MLM" companies that are actually illegal pyramid schemes. I put that in quotations because a pyramid scheme is NOT an MLM. It is a sketchy illegal imitation of an MLM. I'm going to write another post in the future about why I think network marketing (MLM) is the greatest business model but this post has gotten long enough.
If you have any questions or comments, please comment on this post! If you want to know more about the business opportunity that is available with beachbody, check out my website or either comment here or reach me on facebook. I look forward to talking with you!

-Mike Stanger