Much emphasis is made of the fact, by those who
promote it, that MLM is legal and therefore not a pyramid scheme. Opponents
of MLM object that even though it is legal, it is still based on the pyramid
system, and it has all the inherent dangers and drawbacks of a pure pyramid
scheme.
Pyramid scheme: An illegal multi-level program wherein people pay
an entrance fee for the sole opportunity to recruit others to do the same.
Members to the scheme pay a joining fee which is passed on to those above them
in the scheme. Their purpose is to recruit new members below them in the scheme
in order to qualify for a share of their joining fee.
Characteristics of a pyramid scheme.
- Position in the scheme is important.
The scheme is based on a pyramid structure, hence the name, with a few people
at the top and an increasing number of members in each layer below. Money
paid in by new investors flows from the bottom to the top. It is therefore
important to be at, or close to, the top of the pyramid.
By design around 90% of members will make a loss and only 1% will make a significant
profit. It is the position within the scheme which dictates whether
or not you'll make money; not how hard you work at it.
- Earn money by recruiting.
The idea of a pyramid scheme is to encourage other people to join it below
you in a potentially endless chain. You then take a percentage of their joining
fee and you also get a percentage of the joining fee of any new members signed
up by your new recruit, and so on, up to several layers deep. This is where
the promise of great wealth comes in and is how the scam is sold.
In reality this cannot be achieved. Due the the difficulty of attracting new
recruits, 90% of members are always at, or near, the bottom of the pyramid
and will lose their money. It is this built-in feature of pyramids,
which guarantees failure for the vast majority, that renders them illegal.
- Profits come from others' investments.
The promise of great wealth comes from the concept of a "downline".
This downline consists of the members that you yourself introduce to the scheme,
and subsequently the new recruits that your members also introduce.
You will receive a percentage of the investment that each member introduces
to the scheme. With a downline several layers deep the potential is there
for a downline consisting of many thousands of people.
In reality this downline is unachievable both practically and mathematically.
This is the inherent fraud in pyramid schemes. They are bound to fail
by design.
Multi-Level Marketing: A multilevel program wherein people pay an
entrance fee for the opportunity to sell products and to recruit others to do
the same.
Members to the scheme pay a joining fee which is passed on to those above them
in the scheme. The members' purpose is to sell products in return for a commission
payment and to recruit new members below them in the scheme in order to qualify
for a share of the new members' commission.
Characteristics of an MLM.
- Position in the scheme is important.
MLM was born out of pyramid schemes and as such the structure and the nature
is very similar. The concept of the downline that will earn you money works
in the same way; you sponsor new members and earn commission from them in
a multilevel structure.
As with an illegal pyramid scheme, unless you are at or near the top of the
pyramid it is likely that you will lose money. Once the scheme has passed
its saturation point, no amount of hard work or enthusiasm will make a difference.
- Earn money by recruiting.
The difference between a pyramid scheme and an MLM is that MLM schemes are
in the business of selling goods to consumers. This is what makes them legal.
Most MLM schemes in reality, however, promote themselves with the promise
of great wealth: the appeal to greed. Selling products to consumers is not
the way to make riches in MLM. Any MLM scheme will make it absolutely clear
that the only way to make real money is through the recruitment of new
members and the creation of a downline.
- Profits come from others' investments.
The downline is the key component to making money in MLM. The concept is identical
to illegal pyramid schemes: you make money from the people you introduce into
the scheme.
The pitfalls are exactly the same as with pyramids; the vast majority are
bound to lose money by design.
Pyramids are illegal. MLM schemes are legal because of the fact that products
are sold. This is the only real difference between the two systems. No amount
of rhetoric; wishful thinking; self delusion or fallacious reasoning can alter
that fact.
If you remove the products from an MLM, all that is left is a pyramid scheme:
this is why MLMs are known as: product based pyramid schemes.
