Is Affiliate Marketing A Pyramid Scheme? [Do They Compare?]

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Is Affiliate Marketing A Pyramid Scheme? [Do They Compare?]

Affiliate Marketing is an online business opportunity that commonly gets recommended for beginners and those looking to earn an income online. At times, the model has been compared to a pyramid scheme; but is this reputation accurate or even fair?

So, is affiliate marketing a pyramid scheme? Affiliate marketing is not a pyramid scheme. Pyramid schemes work by recruiting people with the promise of future payments, who in turn will enroll others into the scheme with the same promises. Affiliate marketing however, is where an individual or business earns a commission or payment for referring a customer and helping to generate a sale of another businesses product or service.

Pyramid schemes have acquired a bad reputation; and rightly so. In fact, they are actually a fraudulent practice and even an illegal offense in many states and locations.

Affiliate marketing on the other hand is an entirely legitimate and safe business model – so long as the affiliate marketer adheres to good practices and is honest, fair and forthright that they are promoting a product in the hope of a commission.

Let us know take a closer look at the two, very different different models. We will be taking a look side by side at exactly why they cannot be compared and how to be an affiliate marketer the right way to ensure you comply with your ethical and moral obligations.

What Is A Pyramid Scheme?

Pyramid schemes are financial structures where members are invited to join with the promise of a future payout.

The model only works when each member can subsequently recruit new members.

Every time a member is invited to join, they need to pay a fee (which varies between schemes) to the member who invited them.

From there, these new members will go out looking to recruit others, and then will in turn earn a percentage of the referral fees. The remaining capital then gets sent to the more senior and older members of the hierarchy.

If you can therefore imagine, a pyramid structure is created, whereby different levels provide a different amount of income potential.

Pyramid schemes are usually seen as scams, and due to the way money is transferred, are illegal to be a part of and operate in some countries.

Pyramid Schemes Key Points

  • The majority of pyramid schemes will generate their income by recruiting new members whom are required to pay fees; often, goods and services are not involved.
  • Pyramid schemes will mostly profit those at the top of the hierarchy and those whom initially set up the scheme. As each new member signs up, they become another ‘level’ and their earning potential is lower than the members who came before them.
  • Most of the recruitment fees are sent to the top of the hierarchy.  

How Does A Pyramid Scheme Work?

To help me explain how a Pyramid Scheme works, I will be using a scenario as an example.

Imagine the founder of the scheme. Sitting the highest level.

They recruit 10 people, whom form the second tier of the hierarchy. They pay a fee to do so, which goes back to the original founder.

Those 10 new recruits go out themselves, and recruit a further 10 people each. All new 100 members will be paying their recruitment fees (some of which going to the second level recruiters, with the rest going to the original founder.

Those new 100 members, will then go out and recruit a further 10 members each, repeating the recruitment fee process and sending money back to the top of the hierarchy.

So as you can see, the original founder quickly earns a lot of income, while new members are out of pocket until they can find the next tier of individuals to sign up.

Pyramid schemes are therefore destined to failure eventually. They only ‘work’ when new members can join; and this becomes harder as time goes on.

Moreover, the original founders and those whom join the hierarchy early end up with considerable more in return than each subsequent level, as you can see below:

Ultimately, when new memberships and joiners cease, the hierarchy collapses. This is when people really start to lose money as they cannot find new members to recoup their initial membership fees.,

What Is Affiliate Marketing?

Affiliate Marketing, on the other hand, is a business model whereby an individual or business promotes the products (both physical or digital) and services of another business.

With each successful referral, the affiliate marketer earns a commission or percentage of the sale.

Commissions differ depending on the agreement, program or arrangement established by the marketer and or the original business.

With affiliate marketing, there is always a consumer involved, and its all about connecting customers with products and services. Payments only occur when a referral is made.

Affiliate marketing is essentially, and as the name suggests, a marketing method. It is a promotional strategy that companies often turn to to boost their exposure and sales.

Affiliate Marketing exists in almost all niches, and most of the worlds largest companies have been, and continue to use it, due to how effective it is. Perhaps the largest example is Amazon.

Affiliate marketing can theoretically take place anywhere, but it is most commonly see online.

How Does Affiliate Marketing Work?

Affiliate Marketing works through a collaboration and partnership between the affiliate marketer and a business selling products and/or services.

Affiliates never physically own or touch a product or service, but promote them through a range of techniques, platforms and avenues.

For an affiliate marketer, they need to actively find out affiliate marketing programs, or businesses willing to offer a financial incentive for the successful referral of a new customer.

Commissions are typically earned on a per sale or per lead basis.

Affiliate Marketers often promote another businesses products and services online. Usually, it is in the form of a review, recommendation or through content marketing (i.e via a blog) , video marketing (i.e via YouTube) or another outlet such as email marketing.

Either way, an affiliate marketer will go out looking for customers for a particular business. They will be provided with an affiliate link (referral link) which tracks the referral/sale back to the affiliate marketer.

When the payment threshold is met, along with once the sale is fully qualified, the affiliate marketer is paid.

It is often a percentage of the final sale price of the product or service, for example 25%.

With affiliate marketing, the affiliate is only responsible for sending traffic over to the business. They do not provide any after care service, or have to deal with customer service, returns or any other aspect of the product. That is the responsibility of the business whom owns the products.

As you can imagine, affiliate marketing can be very lucrative and as such, it can be competitive. This is perhaps the largest challenge an affiliate marketer faces.

Then there are the costs of running a website, promoting content or even running advertisements to entice customers to purchase the product they are promoting.

Nevertheless, its an established businesses model that has made many online millionaires, while exploding the growth of many online businesses worldwide.

Pyramid Scheme vs Affiliate Marketing; The Main Differences

Let us know take a closer look at the differences between a pyramid scheme and affiliate marketing side by side so you can easily understand why they are not the same:

Pyramid SchemeAffiliate Marketing
Illegal in many countries, locations and states.Fully legal enterprise used by leading global organizations as a marketing channel
• No products or services are usually sold (some pyramid schemes can involve products, but these are not the primary method that income is generated)• Products and/or services are exchanged from a business to customers with a need, desire or want.
• Expanding structure; new people are required to join to maintain and continue the model.• Affiliate marketing businesses can be run by one person, or by a team.
• New members are persuaded to join, with a level of deceit as to what is involved.• Customers are actively looking for products/services and want to buy.
• Cannot be sold as a business entity through legal channels• Assets are commonly built, like websites, which can be sold to potential buyers and/or investors.
• Requires face to face interactions • Can be operated passively online.

Pyramid Scheme vs Affiliate Marketing; What Should You Do

At this point, you will likely know that pyramid schemes are not a recommended model to either set up or become a part of.

Even if they are legal in your area; consider that from a moral and ethical perspective you would be inviting people into a structure that can only ultimately fail (and that some people, somewhere, will be massively out of pocket.)

On the other hand, affiliate marketing proves to be an ideal opportunity for beginners and businesses looking to generate an income online.

An affiliate marketing business requires minimal investment upfront, the risks are low, and you can enter a diverse range of niches that suit your own preferences and passions.

You can also market the products and services of the businesses of your choosing, via a number of different ways.

Content marketing and building a blog, creating a YouTube channel and releasing videos; these are just some of the two more common avenues to pursue.

There are many individuals whom have successfully managed to build and scale an affiliate marketing business; due in part to the fact that they are promoting legitimate products/services from legitimate business.

And perhaps better still, affiliate marketers often begin earning what is known as ‘passive income’. Money that is earnt from prior work and that no longer requires any effort to support and maintain.

Affiliate marketers build assets; like profitable websites, that are valued at a 25-40x monthly earning multiplier.

Its no surprise to see that affiliate marketing style websites are being sold for 5/6 and even7 figures on reputable online marketplaces like Flippa and Empire Flippers. But you won’t find pyramid schemes on there.

The only real negative to affiliate marketing, is that although it is simple in theory, there are challenges which can prevent success….

How To Succeed With Affiliate Marketing

To succeed with affiliate marketing, there are a number of best practices to follow and considerations to be aware of.

For example, due to the low cost and barriers to entry, it can be very competitive.

Knowing what kind of niches to enter, what affiliate programs to join, and the kinds of products and services to promote will make all the difference.

This is why, if you want to build a successful affiliate marketing business, it is generally recommended to conduct a lot of research ahead of time.

It can be a challenge to find all the information you need, and it can be quite conflicting.

That is why, signing up to a well-structured and laid out course is one of the best things you can do to get started.

It will explain the model in its entirety, and help walk you through step by step all the processes involved in the business nd how to execute them properly.

You’ll have access to all the information in one place, and you’ll avoid the common traps that can hold you back for months or years until you learn through your own experience.

Savage Affiliates by Franklin Hatchett, is my recommended course. Its one of the most comprehensive and cost-effective courses on the market. Better yet, the creator, is a practitioner whom runs his own affiliate marketing business and is actively using all the concepts taught in the course.

It was designed for beginners, so even if you do not have much technical knowledge or industry experience, you can get started.

Being a member myself, I wrote a review of my experiences, thoughts and results from applying the content.

So if you want to start a successful affiliate marketing business, I would strongly recommended you take a look.