Pyramid Schemes - Network Marketing and Multi-Level Marketing (MLM)
It is a Scam, 99.9999% of the time! An MLM (pyramid scheme) is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public.
Multi-Level Marketing (MLM) Scheme
The participants pay to join a waiting list for a desirable product which only a fraction of them can ever receive. Since these schemes follow the same laws of geometric progression, they are doomed to collapse. Such schemes operate as a queue, where the person at the head of the queue receives an item such as a television, games console, digital camcorder, suit lengths, etc. when a certain number of new people join the end of the queue.
For example, five new joiners may be required for the person at the front to receive their item and leave the queue. Each joiner is required to buy an expensive but potentially worthless item, for their position in the queue. The scheme organizer profits because the income from joiners far exceeds the cost of sending out the item to the person at the front. The scheme collapses when no more people are willing to join the queue.
Such "businesses" seldom involve sales of real products or services to which a monetary value might be easily attached. 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.
Multi-Level Marketing programs or MLM’s, are a constant source of debate. They have their fanatical devotees, and often appear to behave in a manner much like a cult religion. Many of us must have been approached by a neighbor, colleague, friend, or worse yet, a family member, who said "Let me tell you about an incredible ground-level business opportunity" and you are then invited to a house or to lunch for "a discussion."
An Example of MLM Network Marketing - Speak Asia Scam
A classic case is the "Speak Asia" scam. Speak Asia Online turned out to be a Rs 2300-2400 crore fraud and the notional value of the reward points offered by the company is Rs 30,000 crore. Speak Asia, which conducts online surveys on a variety of products and services, has around two million Indian panelists, or members, who pay money to join the firm’s network and earn reward points for referring its offerings to friends and peers. Total money collected by Speak Asia in a span of 18 months (February 2010 - July 2011) is more than Rs 2300 crore and the total pay-outs assured by the company to investors is more than Rs 30,000 crore. This multi-level marketing firm is being investigated by multiple agencies such as the Enforcement Directorate (ED), the income-tax department, and the Serious Frauds Investigation Office (SFIO), besides Economic Offences Wing (EOW), for offenses including money laundering, violation of foreign exchange law, tax evasion and not making payments to investors.
Such Ponzi schemes are proliferating, especially in cases where the multi-level marketing model is being used without selling a product and that companies who do this have no financial integrity. There is no provision for the registration of online companies and this explains why they cannot be regulated. Some of the multi-level marketing schemes already under investigation include Pinnacle Education and Opportunity Ltd, Gurudev Travel Connection, City Limousine, and Kanakdhara Gold.
Myths vs. Reality of Multi-Level Marketing
- Myth: Better business opportunities than all other conventional business and professional models.
Reality: According to the underlying mathematics, less than 1% of people make a sustainable income from the MLM business. For everyone else, this is a loss-making opportunity.
- Myth: MLM is the most popular and effective new way to bring products as consumers like to buy products on a one-to-one basis.
Reality: Personal retailing including nearly all forms of door-to-door selling is a thing of the past, not the wave of the future. Retailing directly to friends on a one-to-one basis requires people to drastically change their buying habits. They must restrict their choices, often pay more for goods, buy inconveniently, and engage in potentially awkward business relationships with close friends and relatives. In reality, MLM depends on reselling the opportunity to sign up more distributors.
- Myth: Eventually all products will be sold by MLM. Retail stores, shopping malls, catalogs, and most forms of advertising will soon be rendered obsolete by MLM.
Reality: Less than 1% of all retail sales are made through MLM, and much of this is consists of purchases by hopeful new distributors who are actually paying the price of admission to a business they will soon abandon. It is those innocent and gullible victims who part their hard-earned money to begin this new era of business only to realize the loss it impounds both financially and emotionally. The distributorships are sold through misrepresentation and exaggerated promises of income. People are buying products in order to secure positions on the sales pyramid. The possibility is always held out that you may become rich if not from your own efforts then from some unknown person ("the big fish") who might join your "downline."
- Myth: MLM is a new way of life that offers happiness, fulfillment, and a way to attain all the good things in life.
Reality: The most prominent motivational themes of the MLM industry, as shown in industry literature and presented at recruitment meetings, constitute the worst form of materialism. Pictures of their team leaders next to BMWs and Mercedes don’t mean they actually own them. You can also get a beautiful picture of yours next to Ferrari when you visit the car parking at Five Star Hotel in your town.
- Myth: MLM is your way to freedom.
Reality: ’Robbing Peter to Pay Paul’ is not a way to freedom, but maybe a way to the prison. When the scheme goes bust eventually, you lose money, friends, reputation and most importantly you lose confidence in yourself.
- Myth: Success in MLM is easy. Friends and relatives are the natural prospects. Those who love and support you will become your lifetime customers.
Reality: The commercialization of family and friendship and the use of "warm leads" advocated in MLM marketing programs are destructive elements in the community and very unhealthy for individuals involved. People do not appreciate being pressured by friends and relatives to buy products. Trying to capitalizing upon personal relationships to build a business can destroy one’s social foundation.
- Myth: You can do MLM in your spare time. As a business, it offers the greatest flexibility and personal freedom of time. A few hours a week can earn a significant supplemental income and may grow to a very large income, making other work unnecessary.
Reality: Making money in MLM requires extraordinary time commitment as well as considerable personal skill and persistence. Beyond the sheer hard work and talent required, the business model inherently consumes more areas of one’s life and greater segments of time than most occupations. In MLM, everyone is a prospect. Every waking moment is a potential time for marketing. There are no off-limit places, people, or times for selling. Consequently, there is no free space or free time once a person enrolls in the MLM system. While claiming to offer independence, the system comes to dominate people’s entire life and requires rigid conformity to the program. This is why so many people who become deeply involved end up needing and relying upon MLM desperately.
- Myth: MLM is the best option for owning your own business and attaining real economic independence.
Reality: MLM is not true self-employment. "Owning" an MLM distributorship is an illusion. Most MLM contracts make termination of the distributorship easy and immediate for the company. Short of termination, downlines can be taken away arbitrarily. Participation requires rigid adherence to a "duplication" model, not independence and individuality. MLM distributors are not entrepreneurs but joiners in a complex hierarchical system over which they have little control.
- Myth: MLM is not a pyramid scheme because products are sold.
Reality: Though the sale of products is legal under the Money Circulation Scheme, buying products whose value has been inflated makes it barely legal.