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| Tuesday, 20 July 2004 |
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Pyramid schemes - scams or big bucks?
Let us first analyse Multi Level Marketing, or MLM. You need to understand how a genuine MLM works in order to clearly see how the pyramid version is a scam. Multi Level Marketing is a perfectly valid and effective way of distributing product to the end user, just as is direct mail, off the page, and even, through shops. Remember - the key words are 'distribution', 'product', and 'end user'. Any MLM scheme has End Users - People who Actually Buy The Product. It is like any other business. There is a product, there needs to be buyers. Given that, you can sell the product you can make a margin. It is worth noting that most genuine MLM schemes are restricted to products where the normal distribution system (factory to agent to importer to agent to wholesaler to shop) builds up reasonable margins, and where there is scope for repeat orders. Prime areas include diet and health related products, perfumes, cosmetics and jewellery. The MLM company avoids the normal advertising and marketing overhead, and by going for quality, can create a valid and sustainable niche. Fraudulent system A pyramid scheme is a fraudulent system of making money which requires an endless stream of recruits for success. Recruits (a) give money to recruiters and (b) enlist fresh recruits to give them money. In the classic 'pyramid' scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same. The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money. Pyramid schemes are popular because people are greedy and greed can do wonders to a person's thinking. For a person desiring to make a lot of money from a 'small' investment in a short amount of time. Scam artistes know how greed works and all it takes is one con man to get the thing started. In the UK and most States in USA, Pyramid Selling is illegal. This has not stopped it happening, and under various guises, such as 'business clubs', or (incorrectly) MLM. A pyramid presentation may take many forms, but there is one thing that they all have in common. They will draw charts showing vast wealth in short time, it would appear, quite modest numbers of people in your downline. Example Let us assume that you are not the person who starts it, but that you have been taken to a meeting or otherwise introduced. Let us assume that at the time you join, there are only 200 members in the entire country. . Simple question, how much money will you make? Let us make the following assumption. That each person talks to five people at each stage, and that two people, trusting their friend, actually join. Here goes the maths, and a 'phase' is simply the time taken for that level of growth. It might be a week, a month, or vary. Two hundred people tell five each, so numbers who know of the scheme grow to 1200, and those enrolled to 600. You have introduced two people. Next phase. The 600 tell 5 each so 3600 people know about it, and the numbers enrolled grow to 1800. You have introduced 4 people altogether, and your downline has introduced 4, giving you an organisation of 8. Does the scheme survive? Alarm bells are beginning to ring. An expert became aware of the scam when you passed 3000. Next phase. The 1800 tell 5 each so 10,800 people know about it, and enrolment grows to 5400. You have personally introduced 6 people, and your organisation is 26 strong. Does the scheme survive? I doubt it,(18 people in your group alone have handed over money and as yet seen NO return). But let's give you one more bash. 5400 tell 5 people each, so that 32,400 know about it. If you think there is still room for growth then you need your head examined. Lets forget this phase and assume that the scheme wound up with you having 26 people below you. (The next figures are, as it happens, 97200, and then 291600, and then 874,800.) As you can see we have only progressed three layers deep and run out of room to grow. Pyramid scams work partly because most people cannot do the maths and do not realise how fast the scam burns through the population. Did you make any money? As an early joiner you should have had some cash flow, but are you going to make any net money? Let us assume that profit is reached when you have an organisation of 4 people. Well you have 26, so you have made money. But let's look at those people. You introduced two people, probably friends, in each phase. They will have handed over some money. Thousands of Rupees for sure, on the basis that you said that they would make money. All they had to do was find 4 people, what could be simpler? Let's see. In the last phase you introduced two people who did not get the chance to introduce anyone and are totally out of pocket. How do you feel? Want to make good? In the previous phase you introduced two other friends, who have introduced two people each. They are out of pocket. Are you going to make good? In the first phase you introduced two of your best friends, who each have 6 people in their organisation, so they have made money, but all those 6 (i.e. 12 ) people are in a loss, and if your friends make their loss good then they have lost out. Are you going to help them? The money flowed up the chain to the people who started it, and you can be fairly sure that either they, or their money, have left the country, leaving you with, quite possibly, a series of civil court cases and perhaps bankruptcy. The more you made, the more you lose. You certainly lose the friends whose money you lost. It is heartening to note that the Finance Minister has agreed to bring legislation to ban pyramid schemes on high priority. However, I believe that before law enforcement can eliminate pyramid promotional schemes, it needs to be able to define such schemes and prove that such schemes are within the definitions of illegal activity. This requires distinct and well-written laws that delineate between illegal pyramid schemes and legitimate business practices. Such laws need to provide clear definitions to alert citizens to the fact that certain activities are unlawful. These laws must also contain enforcement and penalty provisions to deter unscrupulous individuals who would seek to establish and promote such illegal schemes, and penalize heavily those who purposely violate the law and victimize others. |
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Produced by Lake House |
Pyramid selling and MLM (Multi Level Marketing) schemes have recently
become the subject of much public confusion. The Central Bank has
initiated a heavy campaign in its crusade against pyramid schemes. The
Deputy Governor of the Bank assured that legislation banning pyramid
schemes would be incorporated as amendments to the existing Banking Act.
