Referral System vs Multi-Level Marketing
You may confuse customer referral system with pyramid or multi-level marketing system, but they aren’t the same. They are quite different. In a customer referral system, you don’t pay commission to two persons for referring one customer, meaning if Jonh who has been refered to George through David refers a new customer, then John is the only one who gets commission and nothing will be paid to David.
If a commission is paid to more than one person in exchange for referring a new customer, then the process is classified as multi-level marketing. In multi-level marketing, it’s possible to pay commission to more than one person according to an exact mathematical formula without putting the company through bankruptcy. Many cosmetic businesses are operating their business through such method.
This process is different from pyramid marketing. In multi-level marketing, there is no pyramid and companies can work it through using proper methods, but the whole thing is extremely complicated. There are two major problems regarding multi-level marketing: First, it requires devising complicated mathematical formulas. Second, there is a control issue over the whole structure which allows some profiteers to defraud the system and most times, this makes the whole system fall apart.
In the US, companies sometimes hold sessions with 10 and 20 thousand people to brief them about multi-level marketing. This is done so everybody can work in line and avoid costly mistakes that could make the system crumble. When all procedures are transparent, the system is not likely to crumble. Business which apply multi-level marketing are in fact creating their entire business model based on such method, and therefore, multilevel marketing is not just a sales and marketing tool.
Pyramid scheme was first applied in Italy many years ago, and people on top of the pyramid would gain profit and people on bottom of the pyramid would face losses. In North America, pyramid scheme is forbidden because it lacks a proper logic, and some get rich in exchange for others’ loss.