“Affiliate marketing is a pyramid scheme!”
Such rumors have been circulating the web for years… Are they true though?
If you’re wondering the same thing, you’re in the right place!
This article is dedicated to revealing to you all the information you might need to fully understand whether affiliate marketing is a pyramid scheme or a legit money-making model that’s actually worth your time and attention or not.
Let’s take a closer look.
Is Affiliate Marketing a Pyramid Scheme?
Affiliate marketing is not a pyramid scheme. Whoever claims otherwise has no clue about either what affiliate marketing or what pyramid schemes really are. Yes, some aspects of the two might seem similar but they have literally nothing in common.
To fully understand why affiliate marketing isn’t a pyramid scheme, you need to get a solid grasp of exactly how affiliate marketing and pyramid schemes really operate…
What is Affiliate Marketing?
Simply put, affiliate marketing is the process of earning commissions for promoting products and/or services created and distributed by another company or individual to potential retail customers.
Here’s an overview of the typical steps involved in the process of utilizing affiliate marketing:
- You sign up to a merchant’s affiliate program
- The merchant gives you a unique affiliate link that points to their online store
- You share your affiliate link with your audience via a blog, YouTube channel, social media group, etc
- When someone (let’s call him “John”) clicks on your affiliate link he’ll be sent to the merchant’s online store
- The merchant recognizes that John landed on their online store after clicking on your affiliate link
- If John makes a purchase on the merchant’s online store, the merchant will pay you a commission
What is a Pyramid Scheme?
A pyramid scheme is a money-making opportunity in which the only way to actually make a profit is by getting other people to purchase some kind of sign-up kit that would allow them to enroll in the scheme themselves.
Eventually, recruiting more people in a pyramid scheme becomes impossible, most new recruits are unable to make a profit, and the pyramid scheme starts going on a downward trajectory until it collapses on itself.
That’s exactly why pyramid schemes have been deemed illegal in most countries.
If the money you make is based on the number of people you recruit and your sales to them, it’s not legit. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of their participants lose money.
– Federal Trade Commission
The video right below explains exactly what pyramid schemes are and how they operate.
Affiliate Marketing vs. Pyramid Schemes
According to a report published by the FTC, all pyramid schemes exhibit one or more of the following 5 red flags:
- Endless chain of recruiting
- Larger downline = more success
- Ongoing purchases “Pay to Play”
- Overrides paid to 5+ distributor levels
- Upline profits >= distributor profits
Affiliate marketing, on the other hand, doesn’t display any of the aforementioned characteristics.
Let’s take a closer look…
1. Endless Chain of Recruiting
Making profit in a pyramid scheme involves an endless chain of recruiting other people, who will, in turn, recruit more people who’ll be recruiting even more people, and so on.
As such, a pyramid scheme can be easily labelled as the perpetual process of recruiters selling to other people the ability to become recruiters for the actual pyramid scheme itself.
On the contrary, affiliate marketing doesn’t involve any kind of recruiting whatsoever…
No affiliate merchant will ever reward you for convincing another person to sign up as their affiliate but rather for promoting their actual products and/or services to retail consumers that might be interested in purchasing them.
2. Larger Downline = More Success
In pyramid schemes, rank advancement, size of income, and bonus qualifications are primarily dependent not on retailing products but rather on downline recruiting.
As such, pyramid scheme participants tend to spend no time and effort retailing, except maybe for token sales to satisfy “retail rules” that might be prerequisites to earning some kind of bonus or reaching a specific rank.
Again, affiliate marketing involves no recruiting, no downlines, no rank advancements, and no recruitment bonuses…
The only factor that determines the size of income generated by an affiliate marketer is the amount of paying customers they refer to the online retailers they’re affiliated with.
3. Ongoing Purchases "Pay to Play"
Another defining characteristic of a pyramid scheme is “Pay to Play”.
Pay to Play refers to incentivized purchases (often by subscription) required to join and advance in the hierarchy of an organization.
Examples of Pay to Play include, but are not limited to:
- Mandatory entry fees
- Additional monthly purchases of products, services, training, etc. to maintain an active status and/or qualify for certain bonuses & rank advancements
Unlike pyramid schemes, 99.9% of all affiliate programs out there are completely free to join and involve zero ongoing expenses.
Any money-making model that doesn’t involve sign-up fees and incentivized repeated purchases can never be considered a pyramid scheme.
4. Overrides Paid to 5+ Distributor Levels
According to the FTC, an opportunity that pays its distributors overrides (commissions & bonuses) in a hierarchy of more than five levels is a pyramid scheme.
Affiliate marketing involves no recruiting, no downlines, no levels, and no overrides… Affiliate marketers get paid commissions only on a single level – on the retail sales they personally generate.
5. Upline Profits >= Distributor Profits
Last but not least, a red flag signaling an illegal pyramid scheme is when the total commissions paid by a company to a distributor per retail sale are much smaller than the overrides paid to said distributor’s upline.
For instance, if a distributor’s upline gets paid $20 more per retail sale than the actual distributor (including incentives, group bonuses, discounts, etc.) then you’re looking at a pyramid scheme.
This red flag doesn’t apply to affiliate marketing as it involves no recruiting and no upline payouts.
Affiliate Marketing FAQs
(Click Each Question to Expand)
Affiliate marketing doesn’t exhibit any of the defining characteristics of pyramid schemes…
First, it doesn’t involve any recruitment whatsoever. Secondly, affiliate success depends on actual retail sales not building a downline.
Also, unlike pyramid schemes, 99.9% of all affiliate programs out there are completely free to join and involve zero ongoing expenses.
Lastly, affiliate marketers don’t get paid based on the sales of other affiliate marketers but rather only on the retail sales they personally generate.
Having said all that, affiliate marketing is NOT a pyramid scheme.
Frankly, whoever thinks otherwise has no clue about either what affiliate marketing or what pyramid schemes really are.
The two models have literally nothing in common.
Have any questions?
Leave a comment right below or contact me right here.
I’ll be more than happy to help you out!
All the best,
Harry, Founder & Editor at dearboss-iquit.com