A
pyramid scheme is a non-sustainable business model that involves
promising participant’s payment, services or ideals, primarily for
enrolling other people into the scheme or training them to take part,
rather than supplying any real investment or sale of products or
services to the public. Pyramid schemes are a form of fraud.
A
successful pyramid scheme combines a fake yet seemingly credible
business with a simple-to-understand yet sophisticated-sounding
money-making formula which is used for profit. The essential idea is
that a "con artist" Mr. X, makes only one payment. To start earning, Mr.
X has to recruit others like him who will also make one payment each.
Mr. X gets paid out of receipts from those new recruits. They then go on
to recruit others. As each new recruit makes a payment, Mr. X gets a
cut. He is thus promised exponential benefits as the "business" expands.
Such
"businesses" seldom involve sales of real products or services to which
a monetary value might be easily attached. However, sometimes the
"payment" itself may be a non-cash valuable. To enhance credibility,
most such scams are well equipped with fake referrals, testimonials, and
information. The flaw is that there is no end benefit. The money simply
travels up the chain. Only the originator and a very few at the top
levels of the pyramid make significant amounts of money. The amounts
dwindle steeply down the pyramid slopes. Individuals at the bottom of
the pyramid (those who subscribed to the plan, but were not able to
recruit any followers themselves) end up with a deficit.
The
network marketing (NM) or multi-level marketing (MLM) business has
become associated with pyramid schemes as "Some schemes may purport to
sell a product, but they often simply use the product to hide their
pyramid structure." and the fact while some people call MLMs in general
"pyramid selling" others use the term to denote an illegal pyramid
scheme masquerading as an MLM.
In
modern days, it is also called as "Chain Business", "Introduction
Business", "Referral Business", "Direct Marketing Business", "Direct
Selling through Independent Business owner" etc.
Multi-level
marketing (MLM) is a purported income opportunity, in which persons
recruited into a pyramid of participants make ongoing purchases of
products and services, and recruit others to do the same, and they still
others, etc. – in an endless chain of recruitment and personal
consumption, in order to qualify for commissions and bonuses and to
advance upward in the hierarchy of levels in a pyramid of participants.
Product purchases become the means of disguising or laundering
investments in what is in fact a product-based pyramid scheme.
Typically,
prospects are lured into the scheme with exaggerated product and income
claims. And because the pay plan is heavily stacked in favor of those
at the highest levels in the pyramid, the vast majority of participants
spend more than they receive and eventually drop out, only to be
replaced by a stream of similarly misled recruits, approximately 99% of
whom are likewise destined to experience loss and disappointment.
Multi
Level Marketing (MLM) offers an inexpensive alternative to other more
expensive options for owning a business. A good franchise or buying a
business from someone else may cost a fortune, and starting a business
from scratch may take years to get off the ground. MLM is easy to get
into and can be a very pleasant way to be your own boss. Most of the
people get into MLM because of the potential of virtually unlimited
income as advertised by the MLM companies. The products and company are
usually marketed directly to consumers and potential business partners
by means of relationship referrals and word of mouth marketing.
Independent
distributors develop their organizations by either building an active
customer base, who buy direct from the company, or by recruiting a
downline of independent distributors who also build a customer base,
thereby expanding the overall organization. Additionally, distributors
can also earn a profit by retailing products they purchased from the
company at wholesale price.
it
has become apparent that a typical strategy of MLM sponsors is to
produce dietary supplements that supposedly cure or – with appropriate
anti-oxidants - prevent every disease under the sun. Most MLM companies I
have studied claim to have the latest and greatest supplement that is
just not available anywhere else in such high quality for the price.
They even claim to bypass the middle man,‖
when in fact with their endless chain of recruitment, they create
thousands of middle men – all hoping for a share of commissions.
Each
new recruit has a personal stake in advancing the scheme so that he or
she may profit from an expanding downline. New recruits are taught to
―be a product of the products‖
and to set the example of model recruiting and purchasing in suggested
amounts so that others will duplicate their recruiting efforts and
purchases, carrying them to success on the backs of downline
participants.
Sympathy Buyer:
As new recruits struggle to maintain purchases in order to qualify for
commissions and to advance up the various levels in the scheme, they
soon become desperate for buyers. They may pressure family members or
colleges to buy - or give them away even if they are not interested.
Counterfeit customers:
Other participants would buy products that they could not use in the
name of someone they knew but who had no interest in the products just
to satisfy any retail requirement the company may have. They may even
give products away to these people as gifts or samples.
Dummy distributors:
who were persons who agreed to sign up and allow their name to be used
to satisfy the head count, even though they were not interested in
becoming a distributor. The distributor would then buy products in their
name to satisfy head count requirements. Many people re-join as members
in their own chain when they are able to get more downline members.
Innocent leaders : Some
MLM leaders truly do not understand the inherent flaws in MLM as
endless chain recruitment schemes. Since they interact mostly with high
level people in the MLM organization, they don‟t get much feedback from
recruits who lose money and drop out. Since they live and work in an
echo chamber of enthusiastic promoters, they ignore or remain in denial
of the harm when they see signs of serious problems, such as high
attrition or high loss rates.
White collar criminals : The
rapid and huge gains that can be made can be very enticing to someone
who is willing to set principles of fairness and honesty aside in order
to cash in at others’ expense. These are the people who continuously
float and break companies.
Forced customers:
People are compelled by their superious officers to join such schemes.
If a Sub Inspector is member of the scheme, he can force all policemen
under him to join the scheme too.
Greedy customers:
people can join the scheme for making quick money without any effort.
They are largly unaware of the repercussions of the fraoud. A large
number of housewives have been cheated by such schemes.
The unemployed or underemployed: Many
are struggling and eager to improve their situation – often willing to
grasp at any straw that looks promising. They are sitting ducks for the
oft-repeated slogans of MLM recruiters that portray MLM as a solution to
their financial woes.
The unsophisticated and uneducated. Persons
unschooled or weak in their understanding of basic mathematics or
economics may they fail to see the inherent flaws in endless chain
recruitment systems. These folks may not be of low intelligence, just
lacking in mathematical savvy.
Affinity groups: MLM
recruiters have enjoyed an unusual pattern of success with tightly-knit
groups. Kudumbasree units in Kerala is an example for this.
Since
the upline‘s income is dependent on the recruiting success of downline
participants, the upline is motivated to promote aggressive recruitment.
And new recruits expect help with their recruiting from their uplline
in order to qualify for commissions and advancement in the scheme. This
pressure from above and below can create explosive growth in recruitment
and purchases by participants and sympathetic family members.
A
study conducted by Jon M. Taylor based on a careful analysis of more
than 350 MLM Companies, found that approximately 99.6% of ALL
participants in such schemes lose money (after subtracting ALL
expenses)!
According
to Eric Scheibeler, Who studied the functioning of Amway concluded that
out of 10,000 participating members, only 414 remained in the business
after the 5th renewal. That‘s a 95.9% dropout rate in only five years
for the largest of all MLMs .
MLMs
are recruitment-driven with very little incentive to sell products to
non-participants. Products are priced too high to be competitive, and
compensation plans provide rewards to participants that escalate
exponentially as they climb the hierarchy (pyramid) of participants. To
show how saturation is inevitable, in a binary pyramid one person
recruits two people, each of them two more, and they two more, etc., as
follows:
LEVEL
|
PEOPLE NEEDED
|
TOTAL PEOPLE
|
1
|
1
|
1
|
2
|
2
|
3
|
3
|
4
|
7
|
4
|
8
|
15
|
5
|
16
|
31
|
6
|
32
|
63
|
7
|
64
|
127
|
8
|
128
|
255
|
9
|
256
|
511
|
10
|
512
|
1023
|
11
|
1024
|
2047
|
12
|
2048
|
4095
|
13
|
4096
|
8191
|
14
|
8192
|
16383
|
15
|
16384
|
32767
|
16
|
32768
|
65535
|
17
|
65536
|
131071
|
18
|
131072
|
262143
|
19
|
262144
|
524287
|
20
|
524288
|
1048575
|
21
|
1048576
|
2097151
|
22
|
2097152
|
4194303
|
23
|
4194304
|
8388607
|
24
|
8388608
|
16777215
|
25
|
16777216
|
33554431
|
26
|
33554432
|
67108863
|
27
|
67108864
|
134217727
|
28
|
134217728
|
268435455
|
29
|
268435456
|
536870911
|
30
|
536870912
|
1073741823
|
31
|
1073741824
|
2147483647
|
32
|
2147483648
|
4294967295
|
33
|
4294967296
|
8589934591
|
. . . and so on until by the 33rd person in the chain of recruitment, the total number of recruits exceeds the population of the earth. Of course, it happens much more quickly if three or more participants are recruited by each new recruit.
It
is important to draw a distinction between total saturation and market
saturation. A city of 100,000 people surely could not support 100,000
direct selling distri-butors. Any expectation of such total saturation
would be absurd unless everyone was selling only to himself/herself. On
the other hand, market saturation may be reached with only 10 or 20
distributors.
1.
Each person recruited is empowered and given incentives to recruit
other participants, who are empowered and motivated to recruit still
other participants, etc. – in an endless chain of empowered and
motivated recruiters recruiting recruiters – without regard to market
saturation.
2.
Advancement in a hierarchy of multiple levels of “distributors” is
achieved by recruitment and/or by purchase amounts, rather than by
appointment.
3.Company
payout (in commissions & bonuses) per sale for the total of all
upline participants equals or exceeds that for the person selling the
product – resulting in inadequate incentive to retail and excessive
incentive to recruit. This is what is meant by a “top-weighted” pay
plan.
4.The
MLM company pays commissions and bonuses on more “distributor” levels
than are functionally justified; i.e., five or more levels, which only
further enriches those at the top of the pyramid.
As
a business model, MLM is likely the most successful con game of all
time. The very people who are out recruiting are themselves victims
until they run out of money and quit. And because victims seldom file
complaints, law enforcement rarely acts. It is a vicious cycle, No
complaints, no law enforcement action; no law enforcement action, no
complaints. So the game goes on.
The
issue is not TOTAL saturation, but MARKET SATURATION. In a city of
100,000 people, the notion of 100,000 distributors to serve them is
absurd. Perhaps the MARKET could be saturated with at most 5 or 10
distributors. Each added distributor would reduce the opportunity for
existing distributors, and resistance would build up for those who have
been approached several times. In fact, market saturation occurs rather
quickly.
It
is both very demanding and very expensive to achieve success at
recruiting a downline, which is essential if one is to realize
significant ongoing profits from MLM. Those who lock in a position as
the first ones in the chain of recruitment have a huge advantage over
those who come in later, but this is seldom disclosed to new recruits.
MLM assumes both infinite markets and virgin markets, neither of which exists in the real world.
Victims almost never file complaints about such frauds for a variety of reasons, including the following:
1.
Most people blame themselves, since they’ve been taught that anyone who
properly “works the system” will succeed and that if a new participant
fails it is their fault, rather than the fault of the system. Companies
DO pay if the members bring new members.
2.
Since they are part of an endless chain of recruitment, they fear
consequences for filing a complaint from or to those they recruited or
those who recruited them, who may be close friends or relatives still in
the program.
3.
They may fear self-incrimination, since in MLM every major victim has
likely been a perpetrator, recruiting unwitting persons in order to
cover their escalating expenses of participation. In fact The Prize Chits and Money Circulation Scheme (Banning) Act, 1978 makes every participant in such schemes an offender.
4.Law
enforcement agencies are generally hand in gloves with the scamsters as
many people in the law enforcement agencies themselves are active
participants in such schemes.Some companies ensure that close relatives
of police officers are made distributers of their schemes.
5.Many people are ashamed to admit that they are swindled of their money and suffers silently.
MLM observers have noticed cultish and even compulsive behavior from MLM participation. Some
MLM programs adopt cultist patterns in recruitment and retention of
members, becoming a rather closed society. Also, the evolution of ―MLM
junkies‖ has been observed, with traits of addiction similar to those for other addictions.
Except
for TOPPs (top-of-the-pyramid promoters), almost all MLM participants
wind up losing money – and eventually drop out of the program, many of
them discouraged and blaming themselves – rather than a flawed program.
Such
Schemes give it’s perpetuators a “license to steal.”It is so widespread
that a July 2011 google search for combination of “fraud” and “Multi
Level Marketing” yielded 31,100,000 results .
There are three types of Pyramid schemes in existence.
1.Unilevel –
There is no limit to the number of distributors that can be recruited
on the first level (who ―retail products to end users). However, there
is usually a limit on the number of levels deep that can qualify for
commissions or overrides. It could be considered a ―flat pyramid and is
probably the most fair of the compensation plans – though few would get
rich.
2.Binary –
Binary plans promote recruiting in a downline of two legs of
distributors (left and right ―profit centers), with incentives to
maintain matching sales volume between the two legs. Commissions are
paid only on matching volume, and this can sharply limit company payout.
Seldom are high volume producers matched in the same leg of the
downline. Binary plans could be considered ―split pyramids. Companies
like Bizarre and BikMaark follow this model.Most Indian MLM Scemes are
variations of this model.
3.Matrix –
A limit is placed on the number of distributors in the first level and
on the number of levels deep. Additional recruits ―spill over into the
next level. Growth is limited (for example, 4x12=48 total downline). Can
be played like a lottery – lazy participants can win. Matrix plans
could be viewed as a ―block pyramids.
