When I look at this picture I like to imagine the man on the first camel talking to the man on the second camel about this “amazing new business opportunity.”
When he starts to explain the compensation plan he is quickly interrupted by the man on the third camel who exclaims, “That’s a Pyramid Scheme!”
Okay, I know. That’s a little corny (or maybe a lot). Chances are pretty high though that if you have been in the MLM industry for very long you have heard this claim directed towards you.
The Pyramid Scheme
So what is this scheme that has maligned the name of the great structures built by the ancient Egyptians? Wikipedia states that …
A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, often without any product or service being delivered.
The only way to recoup your investment in a pyramid scheme is to recruit other investors. There is either no product sold or the product has no real market value outside of the pyramid scheme – the product is only meant to be sold to its members but never really used. Your initial investment earns you the right to receive commissions on all the investments from people you recruit and all the people they recruit and so on.
The Pyramid Problem
Let’s say, for example, that for an investment of $1,000 you are required to recuit six other investors for which you receive $200 each plus $100 dollars for each investor they recruit and so on. You can get your original investment back quickly and make a ton of money. At just four levels below you there are already 1,296 people which means you have recouped your original investment of $1,000 plus $129,200!
Sounds like a great plan, huh? Well it depends on when you get in. The problem is that as more and more investors are added the possibility that those investors will be able to recoup their money quickly becomes zero.
Why? The math shows us that you would need an infinite number of investors flowing into the plan for the last investor in to be able to recoup their investment. In fact, you very quickly run through the world’s population!
At only eleven levels below the top person in the scheme it requires more investors than the U.S. population and at thirteen levels below the top person it requires more investors than the population of the entire world.
Inevitably, these plans collapse well before this point as new investors cannot be recruited. Only the first few levels of the pyramid scheme have a realistic chance of recouping their original investment and making money. This is why pyramid schemes are illegal.
Multi-Level Marketing
When it comes to MLM plans people tend to judge the book by the cover – if it walks like a duck and talks like a duck then it must be a duck (or maybe in our case a pyramid building Egyptian!). MLM plans do have a pyramid shaped structure (as does almost every company, school, or organization). In fact, many aspects of a MLM company’s compensation plan are almost identical to the pyramid scheme. If the MLM company only focuses on bringing in new distributors then it has the same problem – there just aren’t enough people to make it work.
So what should you look for when thinking about joining a MLM company?
First, look at the product or service sold by the MLM company.
It should be of high quality, fairly priced, proprietary to the MLM company, and there should be a strong demand in the real world marketplace.
Second, look at how you earn money.
You should be compensated primarily on actual sales that you make plus the sales that your distributors below you make. A bonus may be paid on new distributors you recruit but the focus should be on sales to end users.
Third, you should not be required to purchase more inventory than you can reasonably be expected to use or sale.
Most MLM companies today have online ordering systems that will drop ship directly to the end user. You should not have a garage full of inventory!
If these three cursory observations do not hold true for the MLM company, RUN, don’t walk to the nearest exit.
Ultimately, ask this question, “Can I recoup my investment and make money solely by selling the product without ever recruiting anyone to become a distributor?” The answer to this question must always be yes! If not, it is most likely a pyramid scheme.
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Thanks, I took it from Wikipedia. Sometimes there is no need to re-invent the wheel.
I was just on several teleconferences and apparently asked all of the wrong questions!!! The following call they managed to get one of the higher ups in the company to join in order “to answer questions”. All they seem to be pushing is the BUSINESS and NOT the product… These guys were tripping over their tongues and literally said the “… if we were forcing you to buy product, this would be illegal …” THAT was all I needed to hear. If you know ANYTHING about their “plan” you MUST autoship two units minimum per month… there were SO MANY more things that just REEKED about this business that it's not funny. All of this is so sad because it really is a great product!!! I had to bail when they were giving me a hard time about asking how I could make money JUST SELLING PRODUCT. They want you to buy at 10% below retail… in the meantime there is a distributor that is selling product for just under 50% of retail… I mean JESUS… they can't even get pricing straight on their own product!!!! I REALLY hope they get their act together otherwise BAD BUSINESS is going to kill what would otherwise be a great product that increases fuel economy, reduces emissions, and extends engine life
Unfortunately, that sounds like the typical MLM story. There is a follow up post on this one that I have been meaning to write which takes a deeper look at the questions you need to ask, but these three are enough to flush out most of the scams.
The next step is to determine if the MLM company is a good opportunity. One of the most critical things to look at is their training process. Just because a MLM company is above board doesn't mean it is one with which you want to do business.
I am pretty sure I know the company of which you are speaking. They are experiencing some growing pains because they have taken off much faster than they anticipated. The danger in this is that you don't get a chance to create copycats by training your distributors so you end up with people that are unprepared to answer the questions that arise. That doesn't stop some of them from trying though which creates a situation like you described.
Network marketing (MLM) can be a great way for a small or home based business owner to start a business. The secret to success is in the training, and without it the business is pretty much doomed from the start. I hope that the posts I file under this category help entrepreneurs determine if this type of business is right for them, and if the MLM company they are checking out is right for them.
It sounds like you did the right thing. Sometimes even great MLM companies have uplines that you do not want to be above you. In the end, you are correct. Too many of these bad uplines will bring down a great company.
This gives us clear identification on MLM and pyramid schemes. I've been a victim of pyramid scheme and I think you are very right with your article.
I'm sorry to hear that you have been a victim. Pyramid schemes can be dressed up very well and are often hard to recognize.
Unfortunately, there are still many SCAMs operating today…
The bottom line is look for a product or service that has a legitimate place in today's marketplace…that is fairly priced…a product that gets USED…a program that does NOT involve HIGH COST INVESTMENTS.. If the product or service is USED by us and others, then we have a workable program.
Is that all there is too it? No,but it's a good start.
My recent post Rick tribute
Sadly, there are many scams still out there in multi-level marketing. There are even more very poorly designed and managed MLM companies which turn out to be no better than a scam for most investors. I think the prolific nature of the internet has only served to make both of these issues worse.
The bottom line when looking at an MLM is to compare it to the tests you list in your comment and I write about above. As you point out, this is only a starting point; however, if you have your doubts at this stage then there is no need to take the chance on it.
On one of my presentation recently, my prospect had told me that MLM would collapsed if there are no more new people in the world to join the business. I was stumbled and couldn't recalled what I have answered…I simply was not convinced other wise. But your point of view help me to understand what do we need to look for in a company in order for us to held our heads high while do the business! Great work!
If your MLM turns out to only be pushing you to recruit more people (sadly, that is most of them) then it will collapse long before you reach the end of the population level. There are some MLM companies that have done very well and have been around for 30+ years. Unfortunately, this doesn't always mean that their distributors done well. I'm glad the post helped.
Well, my company does emphasize on product sales, but the strategy is always to talk about the business first and if the prospect is not interested, they might be intrigued to use the product instead. Do you think this is a proper way of conducting the business?
My recent post MLM – Pyramid scheme or SCAM
I tend to think that what we talk about first is probably what we are emphasizing. The real strength of the MLM approach is the word of mouth testimonials from people you already know and trust. When this is combined with an authentic selling experience about the product it's a winning combination.
By authentic I mean that you actually use and love the product. This comes shining through in a sales pitch. The story develops naturally from there. "I loved the product so much that I had to be a part of sharing it with other people." As you continue with your own story of how you went from customer to distributor that authenticity continues to flow through and your recruitment efforts will increase their effectiveness.
Starting with the company's story (no matter how great it is) will almost guarantee that the scam alert defense systems of your prospect will start going off in their heads. At least, this has been my experience, as well as, the experience of other distributors to whom I have talked.
Does that mean your company's strategy is not a proper way of conducting business? No, not necessarily; however, it would give me pause and make me look more closely at them.