I recently wrote a post discussing Ponzi Schemes and the fact that most of the current rev-share programs are Ponzi Schemes which are doomed to failure. Since publishing that I have been asked if I could also explain the difference between Legal Multi-Level Marketing Programs and Illegal Pyramid Schemes. These often get confused and that is because Pyramid Schemes try to mimic the very successful multi-level approach.
What is a Pyramid Scheme?
There are 2 different types of Pyramid Scheme: One with no product at all, and another with products. The one with no product tends to be very easy to spot, and is the one most people would recognise as a scam very quickly. For example, I recently was asked to join an email pyramid scheme where I would have had to pay £25 to someone for the privilege of then being able to email my own contacts to ask them to join me. All I would have to do is get 10 people to send me £25 and I would have £250. The 10 people who had given me £25 would each then get 10 more people to send them £25 etc etc. There was nothing changing hands except money. Obviously I did not sign up 😉
The second, product based pyramid scheme can be harder to spot, but when you know what to look for it becomes a lot easier to recognise.
Most legitimate businesses make money from selling goods to their customers for a profit. If the customers do not buy the products the business will fail, its as simple as that right?
The main reasons for customers not buying a product are a) It is undesirable (it has no real market) or b) It is not worth the price being charged. These are the 2 main things to look out for when assessing if something is a pyramid scheme or not, BUT you also need to ask the question “Who is the final Customer?” In other words, where does it stop being sold and start being used?
The reason these are the main indicators are because pyramid schemes are built in a way that usually offloads poor value goods, or those with no consumer demand onto those who sign up as distributors. These schemes usually have high cost ‘starter packs’ of the products which can cost hundreds of pounds, but you are assured the starter packs you buy will sell for a profit. It is only once you have paid for the items you realise that YOU have become the Final Customer because there is no real market.
Lets take an obvious example:
You are approached by someone who says that hot air is the next big trend, and if you sign up with them you will make a fortune selling hot air. All you have to do is pay £100 for 10 boxes of hot air, but hot air is currently selling for £25 per box so you will make £250 back and that is a great profit of £150….
Anyone want to buy 10 boxes??? What do you mean no? LOL!
Now lets take a less obvious example:
You are approached by someone who says that Butterfly Houses are the next big trend, and if you sign up with them you will make a fortune selling Buterfly Houses. All you have to do is pay £100 for 10 boxes of Butterfly Houses, but Butterfly Houses are currently selling for £25 per box so you will make £250 back and that is a great profit of £150….
In this example you would need to know if Butterfly Houses are actually a) desirable AND b) do actually sell for £25 per box – It could very well be a legitimate business that you could earn with couldn’t it? If not sure change the words Butterfly Houses to £100 notes and I am sure you would be able to sell those for £25 a box 😉
In both examples the fact is if you can’t sell the product on to someone else you will be left holding 10 boxes of ‘product’ which you need to sell to get your money back, never mind a profit. If you can’t sell them on YOU have become the Final Customer.
Sometimes instead of having to pay for a starter pack of products you will be asked to pay a large sign-up fee instead. In some ways this is worse than having to buy a starter pack, because the only way for you to recoup your costs is to actually recruit other people after you find out you can’t sell the items on.
Another indicator that you have been enrolled in a Pyramid Scheme is when your sponsor into the program tells you to just keep trying and you will make it, or is suddenly impossible to contact – A sponsor in a genuine business will want you to succeed and usually will provide support and training.
Myths about Pyramid Schemes
Due to confusion about Pyramid Schemes there are a lot of myths that circulate as people try to create rules for identifying a Pyramid Scheme. Some of these are:
- If there is a product to sell it is not a pyramid scheme
- If you have to recruit people to earn commission it is a pyramid scheme
- If there are X number of levels for earning commission it is a pyramid scheme
- If the structure appears to resemble a pyramid it is a pyramid scheme
NONE OF THESE ARE TRUE!
What is the difference between Multi-Level Marketing and Pyramid Schemes?
Some people think that any kind of multi-level marketing business is a pyramid scheme, however the fact is most businesses have multiple levels. The wholesale distribution system for example has several levels:
Sometimes it is even referred to as an ‘inverted pyramid’ because Manufacturers produce the most items, who sell smaller amounts to Wholesalers, who then sell smaller amounts to Retailers and on then to customers who buy the smallest amount of product.
Note the ‘inverted pyramid can very easily be turned round if you think of a single Manufacturer selling to 2 or 3 Wholesalers, who sell to 10 Retailers, who sell to 100 Consumers.
In the ‘normal’ distribution pyramid each level is happy to pay for the product because a) It is desirable (There is a real market) AND b) The price allows for profit or value to be provided to each level. The Final Customer has bought the product to use and not to sell….
In some Multi-Level Marketing Companies there is some blurring around the Final Customer idea, and that is because the distributor is someone who uses the products as well as sells them. This is not a problem as long as they are happy to pay for the product to use for themselves, and are not simply left with no choice because they can’t sell it on.
Are the number of levels important?
In a Multi-Level Marketing Opportunity there can be many different levels of distributors as people who have already joined recruit new people as distributors. This DOES NOT mean those who join later have less opportunity to earn than those who joined early. In fact it is quite possible for someone who joined later to earn more than the person who recruited them.
Fred joins The Multi-X Program and recruits 5 people. Fred is quite happy because he earns commission from his 5 team members. Fred does not encourage or train his team members to recruit others, but they are making sales so they are also earning. The total team size is 6
After a while Sue who was recruited by Fred decides she would like to try recruiting and she manages to get 2 people in her team. Excited by the fact she is now earning commission on her team members Sue encourages and trains her 2 team members. Both of these team members manage to recruit 4 people each. Sue now has 11 people in her team and is earning more than Fred.
The main questions to ask about an MLM opportunity
Is there a large sign up fee? If yes what do you get for that fee? If products are provided for that cost check the usual selling price for those on an independent website or ask some friends about the prices you would have to charge.
Do you have to buy product to sell on? If yes think about how you will sell them on – who is your target market? Do you have access to them? Is there a lot of competition for selling?
Is there a real demand for the product? Would you buy this product at the price being charged if you had no other motivation to do so? Is it a passing trend item?
Is there proper training and support available? Are there regular conferences, events, training days? Who will train you and how?
Are earnings based on effort (either sales or recruiting)? This can be a little confusing because passive, or residual income can seem like you get paid for doing nothing. There is a difference between having to do something once (like recruit someone) and then getting paid commission on sales they make, and getting paid to do nothing except put money into a program.
Can you earn more than the person above you? This is vital – EVERY genuine MLM program provides EQUAL opportunity for ALL members which means it is very possible to bypass your sponsors earnings from your own efforts.
Who is the final Customer? Who will be willing to purchase this product to actually use?
If buying the product yourself are you happy to buy it for the price you paid? Would you buy the product again?
Is the company registered? Do not just take the sponsors word for it, if in the UK check it with The Direct Selling Association, Companies House or a similar registration organisation if outside the UK.
If you are unsure about something, always ask for time to check it out. A genuine company representative will be happy for you to do so!
I hope you have found this post useful – I am always happy to discuss things further with anyone who comments 🙂