Have you ever heard somebody say "Network Marketing is a Ponzi scheme" or "like a Ponzi scheme"?

In my 30+ years in Network Marketing, I've been asked this question thousands of times.  Thousands.

I was even interviewed by Larry King having to do with Ponzi Schemes vs Network Marketing (and he grilled me about it too!), so I feel somewhat qualified to give you a proper answer here.

Tim Sales interviewed by the great Larry King.

First, let me explain how a Ponzi scheme works (like how Charles Ponzi set it up in the 1920s), and then I can illustrate the differences between Network Marketing and a Ponzi scheme, so that you can see it for yourself.

How Ponzi schemes work

There are 3 stages to how this works...

  1. To start, there is an administrator -- usually one person at the top.  And they don't usually allow people to know what's going on behind the scenes.
  2. Then, there are new people coming into the scheme -- people who are putting money in with the hopes of getting a return on their money.
  3. Finally, there are existing investors (who came in earlier), who now want to get their money out.  Fast.

Normally the administrator is charismatic and well-liked, and he typically creates some kind of an idea to put up a false barrier, like "I don't work with a lot of people" or "you have to know somebody in order to get in."

Then he offers you some substantial amount of money for keeping your money in.

Charles Ponzi offered clients a 50% profit within 45 days, or 100% profit within 90 days.  It was a ridiculous rate of return. In contrast, Bernie Madoff only offered 10% consistent gains ("even when the market was down" was his pitch).

The only way Ponzi was able to fund such a scheme was to use the money from the new people joining to pay the previous people who wanted out.  Simple enough.

But let's go a little bit deeper, because I don't want anyone to get scammed or duped.  Ever.

And if you're looking at any business opportunity, you need to know the warning signs to watch out for.

So, here are the nuances that define a Ponzi scheme:

  1. One administrator.  One person at the top.
  2. No product or service.  You're basically investing your money and it sits there for some period of time.
  3. Current investors are paid interest on investments from the new people.
  4. Requires more deposits than withdrawals.

In other words, you've gotta have more people coming in than leaving, because if too many people leave and they pull their money out, there's not enough money to pay those current investors.  (And then they have to really crank up the promotion side of things to get more suckers coming in.)

"So how's that any different than Network Marketing?" Larry King asked me.

Let's look at these 4 differences.

Ponzi Scheme vs Network Marketing

#1 - In a Ponzi scheme, you have one administrator, whereas legit Network Marketing companies have no administrator.  You're paid commissions based off the volume of sales you and your team generate, and there's a clear paper trail for accounting.

#2 - Ponzi schemes have no real, tangible products or services to offer.  In contrast, Network Marketing companies offer multiple products and services for sale, often very good ones.

#3 - In a Ponzi scheme, current investors are paid interest, but in Network Marketing, there is no investment you can potentially lose.  In order to lose something in Network Marketing, you would have to put money in and it be sitting somewhere, while you wait for a return.

NOTE: We're not talking about buying a starter kit or pack of products, in order for you to explore whether or not you want to do the business. Those products would get consumed, so you can't call that a loss necessarily.

Any business inherently has risk, and almost every business you can imagine has some up-front cost for research and due diligence. Deciding not to pursue the business doesn't make your purchase fraudulent.
Plus there's 100% money-back guarantee in most companies for thirty days, and even then there's a 90% or 80% or 70% return for up to a year.
So when people act like they've lost a lot of money -- or were ripped off -- from buying a kit… those folks probably shouldn't have come into any kind of business anyway if they consider that a loss.

(OK, exiting my soapbox now.)

#4 - Ponzi schemes requires more deposits than withdrawals in order to pay investors.  But in Network Marketing, the company doesn't collapse just because leave, because they are not withdrawing money on the way out.

The only way that you get a collapse in something then is when everybody starts to try to pull their money out all at once.

For example, when you have a bank that collapses, why does it collapse?

Because a whole bunch of people get fearful that there's not going to be any money there when they go to withdraw it.

And that's exactly how a Ponzi scheme collapses, whether it be Madoff or it be Charles Ponzi.  Everybody makes a run on the bank to try to get their money out first (or before it's all gone).

These are the reasons I give whenever someone asks me, "Is MLM a Ponzi scheme?"

I happen to think Network Marketing is the greatest industry in the world, and I don't apologize to folks that don't understand it.  I didn't apologize to Larry.  Instead, I took time and explained the differences in a thoughtful way, so that he could go step-by-step and note the distinctions.

I recommend you do the same with your prospects.  Maybe send them this blog post if you like.

What do you think?  Do you have another way of communicating it better to your prospects?  Write a comment and let me know your thoughts, or better yet, subscribe to Network Marketing Power on YouTube and follow us on Facebook.  There's lots of good dialogue from like minded business builders, and I'm in there every week answering your questions.  -TS