One of the questions that I see (and answer) is, “is affiliate marketing a pyramid scheme? And, to be honest, I didn’t know what affiliate marketing was until I started looking for ways to make money online. However, I was well aware of what a pyramid scheme is and how to avoid them.
Watch the below video, where I discuss the difference between affiliate marketing and pyramid schemes.
Is Affiliate Marketing A Pyramid Scheme?
In short, no, affiliate marketing (when done correctly) is not a pyramid scheme. Continue reading as I define what affiliate marketing is, what a pyramid scheme is, how they are alike, and how they are different.
The below words will better understand affiliate marketing and the roles that each member (customer, content creator, and product owner) has in this relationship.
Why Is Affiliate Marketing Associated With Pyramid Schemes?
Affiliate marketing has a negative association with pyramid schemes because of a few bad actors. These scammers will do and say anything to earn a sale. Often these “marketers’ with making claims that can be very difficult to achieve.
In addition, affiliate marketing can be confusing if you don’t truly understand the inner workings of the business model (which I discuss in-depth below). It can be difficult for people to understand that you can earn commissions from major companies by recommending products).
We always want to know what the “catch” is.
How Are Affiliate Marketing And Pyramid Schemes Alike?
The biggest similarity between affiliate marketing and pyramid schemes is that affiliate marketers may recruit people into a program. If marketers refer other marketers, it can create a multi-tiered system, thus appearing like a pyramid scheme.
Another similarity could be the low commission payouts. If you’re using a large business like Amazon, you feel like you’re not making any money compared to the amount you’re making for the company.
Not that we’ve discussed how they are the same, let’s talk about all of the ways they are different.
How Are They Different?
There are so many differences that it’s hard to know where to start. Here is a brief list of the differences between the two:
- Affiliate marketers work directly with businesses
- Affiliate marketers create content
- Affiliate marketers are taxed and regulated
- Affiliate marketers can work with multiple companies
- Affiliate marketers don’t have account managers
- Affiliate marketers can generate additional
- sources of revenue with the same content
Now, let’s take a look at these points a little closer
Affiliate Marketers Work Directly With Businesses
As an affiliate marketer, you can work with any and every program that you’re approved for. If you’re a part of a pyramid scheme, you may be obligated to promoting calling cards (like Michael Scott from The Office).
As I mentioned earlier, if you don’t like the commission payout from one program, find a better one.
Affiliate Marketers Create Content
Affiliate marketers create content (free or paid) to get in front of their customers. Creating content requires learning about your customer’s problems then finding ways to solve them. For the most part, Pyramid schemes stick to a phone or email script and prey on their victims by making promises of wealth.
Which some of those promises happen in affiliate marketing. It is mostly about answering questions and solving problems.
Affiliate Marketers Are Taxed And Regulated
The biggest difference between affiliate marketing and pyramid schemes is that various governments heavily regulate affiliate marketing. In the USA, we are regulated by the SEC and FCC. Failure to comply with these agencies can result in jail time and fines.
Most pyramid schemes may attempt to work outside of government rules and regulations. In fact, one of the signs is the inability to provide accurate paperwork. If the paperwork looks different most of the time, it may be a scam.
Affiliate Marketers Don’t Have (High Pressure) Account Managers
People involved in pyramid schemes way have someone called an “account manager.” This person is above you and wants updates on your ability to add people to your pyramid. If you’re not producing, you may find the manager getting more and more frustrated with your lack of success.
With affiliate marketing, I am solely responsible for my success. If I chose not to work, I don’t get paid. I will not receive a call from anyone asking why I haven’t made any money this month. I don’t have to worry about high-pressure sales tactics or threats for my lack of performance.
Affiliate Marketers Have Other Sources Of Revenue
Another reason to consider affiliate marketing is that you can generate multiple sources of revenue with a single piece of content. For example, I can make money from this website in a few ways, including:
- Google AdSense
- Affiliate marketing
- Sponsored posts
- Banner ads
Pyramid schemes have one objective: get the worthless product in as many hands as possible before the cops catch on.
What is Affiliate Marketing?
Wikipedia defines affiliate marketing as “ a type of performance-based marketing in which a business rewards one or more affiliates for each visitor or customer brought about by the affiliate’s own marketing efforts.”
Basically, affiliate marketing is a content creator (blogger, YouTuber, Podcaster, Facebooker, etc.) that recommends a product or service to a potential customer. If that customer purchases the product using the content creators’ unique URL, the creator receives a commission.
Additionally, the content creator works with the product creator or seller to get approved to promote this product. The content creator has to agree to the terms and conditions set by the product owner before they can start promoting the product or service.
Note that the product’s price does not change when a customer clicks and buys from an affiliate link.
Here’s a dirty little secret I like to share about affiliate marketing: everybody’s doing it. If you go to a blog, and when you click on a link and that goes to Amazon, usually that’s an affiliate link. Most people aren’t aware that affiliate marketing is happening right under their noses.
Here’s another way to think of affiliate marketing: affiliate marketing is like asking a friend or family member what type of laptop they should buy. The friend is a computer nerd and has spent hours looking at all of the computers and its’ components.
After the friend asks you a few questions, like what are you going to use it for, and how long will you be using the computer. After much thought and testing, he recommends a laptop that’s perfect for you. He tells you the best time to buy it and everything.
You go to the store, walk right to the computer department and tell the employee you want model number XXXXX and these accessories. The employee picks the requested items, and you’re in and out in 15 minutes.
You are beyond happy with this recommendation. You saved time, energy, and frustration at the store, not talking to the employee and dealing with upsells.
The only difference between the employee and your friend is the friend doesn’t receive a commission from the company for recommending the product.
Now that we have a clearer definition of affiliate marketing let’s look at the individual roles of this partnership.
Usually, a customer has a problem, and when they have a problem, they take to the internet to have the problem solved. They go to Google or YouTube to have this problem solved quickly. They ask questions like: “how to lose weight,” or “how to lose 10 pounds in 10 days without exercise?”
The customer wants a solution to end the frustration because they are tired of living paycheck to paycheck or tired of being overweight or being single. The customer is looking for someone that has gone through a similar situation and doesn’t want to be sold by a big corporation.
They want to feel like the person on the other side of the computer identifies with their problems. The customer wants to buy from the friend that I discussed earlier.
Think about your problems, how did you solve them? You went to the internet and read blog posts or watched YouTube videos until you found someone that you trusted, and you followed that recommendation.
This is the key to affiliate marketing for a customer. The content creators build trust with the customer and provide a solution for the customer to end their frustration.
The customer has received enough value from the content creator that they’ve decided to click the link they are recommending and buys the product.
If you solve this customer problem, you will have both a customer for life and a new member of your tribe. Tribe members, now called “hived,” will do and say anything because you recommended it.
Your tribe is your cult.
Think about it like this: Is there a person, place, or thing you NEED to have? For many people, it’s Starbucks or another restaurant. Do you know someone that wakes up and “Needs” to have Starbucks? Do you know someone that maps out trips based on Starbucks locations?
That person is in the “Starbucks hive.”
The internet version of this is someone like Russell Brunson or Gary Vee.
If you can build a hive, you can print money. And the only way to create this hive is to add value to someone’s life by solving a problem.
Now that we’ve discussed the customer, let’s spend a few words on the content creator.
The content creator also called an affiliate marketer, creates free or paid content to help you solve the problem you’re searching for. For example, you search “affiliate marketing vs. pyramid scheme,” and here I am to solve your problem.
Your problem may be “how to make money online” or “which affiliate courses to follow,” but you’ve been told that affiliate marketing is the new pyramid scheme.
Someone you know and trust may have told you that affiliate marketing is a scheme because they project their failures on you.
As a content creator, my job is to solve your current problem and answer any follow-up questions you may have. The purpose of this is twofold: I want to add value to your life and possibly have you purchase a product or service that I recommend.
The content creator receives a commission from the product owner when the customer purchases a product or service. Usually, a commission is a portion of the total sale and can be as low as $.01 or as high as $5,000+.
In addition, the content creator creators a ton of content in an attempt to answer questions from multiple angles. Customers begin searching for answers at various levels of awareness. Most people know they have a problem but don’t know what the solution could be.
Other customers know what the solution is but may want to read product reviews and other solution details.
In addition, customers go to different places to have their problems resolved. While the most popular places are Google and YouTube, customers often go to Facebook, Twitter, and Pinterest to solve problems.
The most important role of the content creator is to solve problems and add value. If you can do that, you can print money.
Now that we understand the role of the customer and affiliate let’s spend a few more words on the product creator.
Product Creator/ Seller
The product creator is someone that has a product that they want to sell online. They can either sell the product directly or contract the job to a marketplace (like Clickbank) to sell the product for them.
The product sell is responsible for the following:
- Affiliate links
- Data tracking
- Product updates
- Tax information
Affiliate links are unique URLs that affiliates receive to promote a product or service. This link is unique for each affiliate marketer and product that is being promoted. This link includes other things like cookies (which is a whole nother topic) and tracking ids.
Once a customer purchases a product or service using the affiliate link, the affiliate can receive a payment from the product owner. The payment, usually a portion of the sales, is paid after the refund period. For example, if commissions are paid “next 30,” the affiliate is paid 30 days after the sale.
The payment timeframe will also vary based on the company’s policies.
The product creators are responsible for tracking the number of clicks, sales, and commissions paid. Usually, this information is contained in a dashboard that the company maintains and gives to the affiliate. Because all of this information can be requested by the government, it is meticulously tracked.
The next logical question is: “Why would a company like Amazon allow affiliate programs?” That’s a great question that I will answer in the next section
Why Do Companies Allow Affiliate Programs?
It might be beneficial to have an affiliate program for a few reasons if you’re a company. Below are just a few of those reasons:
- Cheaper than hiring a marketing department
- The lifetime value of a customer
- Trust in companies are at an all-time low
- Their competitors are already doing it
- And more
Let’s take a quick look at these reasons why a company like Amazon would have an affiliate program.
Affiliate Marketing Is Cheaper Than Hiring a Marketing Department
Amazon spends billions every year on traditional marketing. However, how much money could they save if they used a small portion of their marketing budget on affiliate commissions? Blogs and YouTube videos are created every day to recommend affiliate products.
Large companies could save millions every year by not hiring marketing firms or marketing departments.
Lifetime Value Of A Customer
Most companies use a metric called “The lifetime value of a customer” This metric assigns a dollar amount to each customer. For example, Amazon may assume that each person with an Amazon Prime account has a lifetime value of $5,000. If that’s the case, then it makes sense to pay an affiliate $10 for promoting a product or service.
In exchange for paying that affiliate, you gain access to more data on a customer and the ability to retarget them for similar items.
We Hate Large Companies
We have learned to tune out traditional advertising. How many times have you seen a banner ad on a website or used “TV timeouts” to go to the backroom? We see so many ads every day. We have learned to filter them out.
However, if the customer is searching for a solution, they will pay attention to the product or service that the content creator recommends.
I’ve spent many words defining affiliate marketing, its components, and the responsibilities of each. In the next section, I’m going to spend some time discussing pyramid schemes.
What Is A Pyramid Scheme?
Wikipedia defines a pyramid scheme as “a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products.”
In short, a pyramid scheme is a multi-level marketing business opportunity where someone recruits other members. Members may have to pay a small investment with the opportunity to make it back and more later.
A pyramid scheme usually involves high-pressure sales in which you need to make a quick decision because spots are being taken quickly. You may have an “account manager” call you to provide coaching and ask about your numbers,
An account manager is just someone 1 or 2 tiers above you, pressuring you to make more sales they can make more money.