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What is a Pyramid Scheme?
Considering a multilevel marketing opportunity MLM? Be careful. It may well be a legitimate multilevel marketing business. Or it may be a pyramid scheme — an illegal scam designed to steal your money. This article explains the difference between MLM and pyramid schemes so you can distinguish between them. It offers the opportunity to become involved in a system for distributing products to consumers. Unlike the person starting a business from scratch , the MLM participant has the support of a direct selling company that supplies the products and sometimes offers training as well. As a MLM consultant or contractor or distributor different companies call them different things you make your money by selling the products to other multilevel marketing participants. If they’re not already a member of your MLM company, you sign them up. Besides earning money off your own sales, you also earn a percentage of the income generated by the distributors that you’ve brought into the program these are known as your downline. Often there are bonuses for selling particular amounts of product or signing up a certain number of new members; you can earn cars and trips as well as cash. Sounds good, doesn’t it?
Pyramid schemes are an especially notorious form of «get rich» scams perpetrated by a small group of individuals who stand to gain the most financially. In a classic pyramid scheme, they are the «top of the pyramid» and get paid before other members of the scheme who stand lower on the pyramid. Ponzi, a Boston-based business man, was the first large-scale pyramid scheme originator who leveraged the cash of new investors lower down the pyramid to pay back old investors higher up on the pyramid until there were no new investors left, and the cash had dried up for good. While law enforcement officials don’t completely agree that a Ponzi scheme is technically a pyramid scheme, the two scams share basic similarities:. There is one key difference between Ponzi schemes and pyramid schemes. Ponzi actually promised his investors a defined, clear-cut rate of return.
What is a Pyramid Scheme?
The road to financial ruin is littered with failed pyramid schemes — illegal arrangements in which participants make most of their money not by selling a product, but simply by recruiting more members. The pyramid collapses when the supply of new recruits runs out, as it invariably does. Those at the top of the pyramid make money, leaving those near the bottom holding the bag. There’s no real revenue coming in,» Andrew Lelling, U. A Ponzi scheme uses money from new investors to pay earlier investors. In a pyramid scheme, the earlier participants recruit newer ones, and they are all ostensibly selling a product. No pyramid scheme was bigger than TelexFree, which conned 1. Lelling says TelexFree is the largest pyramid scheme ever prosecuted by the Justice Department. Charismatic co-founder Carlos Wanzeler, who moved to Brazil the day federal agents raided TelexFree’s offices, faces a count federal indictment alleging conspiracy and fraud. His business partner, James Merrill, is serving a six-year federal prison sentence after pleading guilty in to 10 felony counts. While TelexFree was ostensibly in the business of selling an internet phone service allowing free calls to Brazil and Latin America, participants were not expected to sell the product itself. Instead, they would spend their own money to buy ads for the service.
Multilevel Marketing (MLM) and Pyramid Schemes Can Be Very Similar
A pyramid scheme is 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. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal. Pyramid schemes have existed for at least a century in different guises. Some multi-level marketing plans have been classified as pyramid schemes. In a pyramid scheme, an organization compels individuals who wish to join to make a payment. In exchange, the organization promises its new members a share of the money taken from every additional member that they recruit. The directors of the organization those at the top of the pyramid also receive a share of these payments. For the directors, the scheme is potentially lucrative—whether or not they do any work, the organization’s membership has a strong incentive to continue recruiting and funneling money to the top of the pyramid. Such organizations seldom involve sales of products or services with value.
Federal Trade Commission
Are you considering a business opportunity that involves selling products to family and friends and recruiting other people to do the same? That kind of business is called multi-level marketing MLM or network marketing. Some MLMs are illegal pyramid schemes. Most people who join legitimate MLMs make little or no money. Some of them lose money. Some also end up deeply in debt. MLM companies sell their products or services through person-to-person sales.
Pyrajid schemes are scams. They can look remarkably like legitimate MLM business opportunities, but if you become a distributor for a pyramid scheme, it can cost you and your recruits — often your family and friends — substantial time and money. Your income would be based mostly on how many people you recruit, not how much product you sell.
Pyramid schemes are set up to encourage recruitment to keep a constant stream of new distributors — and their money — flowing into the business. You also may have to pay repeated fees for other items, like training sessions or expensive marketing materials.
In addition, the company may say you can earn lavish rewards, like prizes, bonuses, exotic vacations, and luxury cars. However, it often turns out that you have to meet certain product purchase, recruitment, training, or other goals to qualify for the rewards, and only a handful of yku ever qualify.
In the end, most people run out of money, have to quit, and lose everything they invested. Other MLMs may not be a good fit for your interests and lifestyle. Here are some tips to help protect yourself against a bad MLM experience:.
Ask tough questions and dig for details. A good businessperson needs those answers. Pytamid Trade Commission Consumer Information. Search form Search. Share this page Facebook Twitter Linked-In. Here are some warning signs of a pyramid scheme: Promoters make extravagant promises about your earning potential. Such promises are false. Promoters emphasize recruiting new distributors for your sales network as the real way to make yoi.
Walk away. In a legitimate MLM program, you should be able to make money just by selling the product. Leave by the nearest exit. Any company that tries to pressure you to join is one to avoid. Distributors buy more products than they want to use or can resell, just to stay active in the company or to qualify for bonuses or other rewards.
If you see this happening, keep your money. Here are some tips to help protect yourself against a bad MLM experience: Ask yourself these questions: Do you want to be a salesperson? Do you have a solid sales plan? Consider whether you have friends and family who will buy this product from you over and over.
Think about how you would find and keep other regular customers. Can people buy something like this product elsewhere, maybe for less? What are your income goals? You might think that, with your smarts and hard work, you can earn substantial income through the MLM. In fact, most people who join MLMs and work hard make little or no money, and some of them lose money.
Can you afford to risk the money and time? Every business venture has czn. MLMs are no different. Even if the start-up costs seem low, additional expenses can add up quickly. Expenses can include training and travel costs, website fees, promotional materials, costs to host parties, and costs to buy products. If you need to borrow money or use your credit card to finance your expenses, you may moneey hefty interest charges. Also, consider the time demands of the business, like going to training, recruiting new distributors, managing paperwork, recording inventory, and shipping products.
Do your homework: Research the company. Search online for the name of pydamid company and words like schdmescam, or complaint. You may also want to look for articles about the company in newspapers, magazines, or online. Does the company have a good reputation for customer satisfaction? Check with your state Attorney General for complaints. Research what distributors are saying.
Individual distributors often post their own training videos online to promote the MLM. Search for these materials. Consider the products. MLM companies may sell quality items at competitive prices. But some offer goods that are overpriced, have questionable benefits, or are downright unsafe to use. Those claims are generally false or at least unproven and, at ih, the products could be dangerous.
Understand the costs. Many MLMs make you buy training or marketing materials, or pay for seminars on building your business. You may need to book travel and pay for hotels and meals. Make sure you know what you must pay for, and how much it will cost over time. Ask about refunds. In many MLMs, before you can start selling the products, you have to buy them from the company.
Make sure it includes information about returning any unused products, including restrictions and penalties. Read the paperwork and have a friend or advisor review it. Ask them to look at your possible earnings and whether the company can back up its claims about how much money you can make.
Ask for their honest opinion about whether they think the MLM is legitimate and a good fit for you. Talk with current and past distributors about their experience in the MLM: Ask tough questions and dig for details.
Here are some questions to ask: How long have you been in the MLM? How much money did you make last year, after expenses? What were your expenses last year?
Have you borrowed money or used your credit card to fund your business? How much did you borrow? How much do you owe? Do you need to have recruits to make money? How many people have you recruited? How many xan you recruit last year? How many of your recruits have left the business? What percentage of the money you made came pyrsmid selling the product to customers outside the MLM? What percentage of the money you made — income and bonuses less your expenses — came from recruiting other distributors and selling them inventory or other items to get started?
How much time do you spend on the business? How much inventory did you buy from the MLM last year? Did you sell all of your inventory? Tagged with: investmultilevel marketingpyramid schemescamwork at home.
How to spot a pyramid scheme — Stacie Bosley
Federal Trade Commission
The main characteristic of a pyramid scheme is that participants only make money by recruiting more members. There are many different kinds of pyramid schemes, but the two monwy basic are product-based and so-called naked pyramid schemes. Sounds simple enough, but here’s the problem: Let’s say the initial 10 recruits each find 10 more people. That means they have to find 1, people willing to sign up for the program. And if they somehow find 1, people, that next level of the pyramid will need to sign up 10, to make a profit. Eventually, there won’t be enough recruits at the bottom of the pyramid to support the level above it. That’s when the pyramid topples and everyone at the bottom loses their investment. A product-based pyramid scheme is the same concept disguised as a legitimate direct sales opportunity. Here’s how it works:. The problem with most product-based pyramid schemes is that the products themselves don’t sell very well, or pyramic very slim profit margins. So the only way to make money is to find more recruits.
Are you considering a business opportunity that involves selling products to family and friends and recruiting other people to do the same? That kind of business is called multi-level marketing MLM or network marketing. Some MLMs are illegal pyramid schemes. Most people who join legitimate MLMs make little or no money.