Updated 9th April 2021
Why are so many people turning to MLM? Is it because it’s a means of earning a few extra dollars with a flexible work schedule? Maybe it’s more about a cost-effective way of starting and running a business with low start-up costs? Whatever the reason, there are many hidden barriers overlooked, far more than what first meets the eye— that, and sorting the difference between what’s genuine and what’s not can be enough to try the patience of a saint.
So then, in this Secret Five Red Flags To Pyramid Schemes, I’ll uncover how both work and whether they are suitable for you.
What Is A Pyramid Scheme?
In a few words, a shifty business model often termed a pyramid scam.
New money raised comes from recently signed up distributors who pay upfront fees to other associates with a share of the funds zooming its way up the money chain.
Essentially the core of a pyramid operation relies on new money to fund a select few high-ranking associates.
It’s also not uncommon for pyramid schemes to focus solely on recruiting rather than selling any products.
In summary: A pyramid scheme is a flawed business model where operations are illegal in some countries.
Despite pyramid systems being shoddy, it doesn’t necessarily mean all multi-level marketing operations are pyramid schemes. But to the contrary, as they are often an honest business.
Why Are Pyramid Schemes Fraudulent
In a nutshell, pyramid schemes are fraudulent, as they often fail because they run a dishonest sham.
And do you know why? They use a vale of sneakiness as a means of covering up their laser-like focus on an ever-increasing number of “shareholders,” knowing full well they’ll, (investors), all will eventually lose all money pledged to the scheme.
Leaving you out of pocket or, worse, in debt.
Without a shadow of a doubt, they are ripping money from those ignorant to the web. How deceitful is that?
Further, the head honchos selectively choose a specific group of shareholders to go out and recruit more new members to get the pyramid scheme rolling.
It’s also worth noting; several MLMs operate a Pyramid Scheme while hiding it up with silly promises not aligned to a legitimate marketing business. As you can see, the differences can be generally confusing.
On the other hand, legitimate multi-level marketing companies, most times, operate a genuinely viable business model.
What Is A Ponzi Scheme?
Ponzi schemes evolve on a platform designed to full-on fraud those who invest into the system.
Typically, investors pay significant sums of money to the schemes “collection manager”, who assures them a high return. Along with an assurance of returning their investment on demand.
While that may seem a straightforward arrangement, and given it looks solid enough. They invest.
However, what’s hidden from them, is another story. You see, the person building this type of falsehood manages the entire process, frequently shifting monies from one client to another without a basic investment plan.
Apart from that, when investors ask for their money, the payment comes from those recently invested in the scam.
These swindlers stoop to the lowest of all lows because they are fully aware that recruitment overload prevents such a scheme. So, it collapses. Therefore the cheats walk away with all the money.
Multi-level marketing is a platform for selling products directly to customers without the trouble of using retail stores. Products get marketed by a series of distributors or sellers mirroring a pyramid scheme.
How Does Multi-Level Marketing Work?
It’s a platform for selling products directly to customers without the bother of employing retail stores. Products get marketed by a chain of distributors/sellers mirroring a pyramid scheme. None the less, operate within the limits of honesty.
The going operation of MLMs, work akin to a pyramid scheme, except with a much stronger focus toward selling genuine products first, then recruitment second. Although, each distributor expected to recruit more new sellers attending to the demands of training them.
Mainly because they will earn royalties from their future sales, at the same time, the system continues to evolve over and over.
Multi-level marketing companies often considered a pyramid scheme. Whether viewed correctly or not, it’s how it is. Fair enough, too, considering the close alikeness of the two platforms.
Strange, yet honest, there seems to be some pull where MLMs attract people like moths to the light? And the one and the only thing that comes to mind, the attraction of receiving product rebates on products they’ll use while admitting the likelihood of earning some extra cash is real.
Is There A Difference In MLM And Pyramid Schemes
uses product/services to cover its campaign by collecting money from ground floor investors to pay other investors higher up the pyramid.
As a rule, pyramid schemes require new investors to pay an entry fee for the benefit of becoming a member with the freedom to sell products or services.
In reality, it’s nothing more than a front to entice folks for a full-on recruiting campaign.
Besides, and to a large extent, pyramid schemes have no products, and where they are available, they are usually of little to no value or way overpriced.
Genuine MLM Companies:
Success in multi-level marketing relies upon marketing genuine products with a realistic value. Whereby distributors, through hard work, get the right to earn a commission from their efforts.
Further to that, reliable MLMs tend to re-purchase unsold stock, even though it’ll be at a percentage of the initial price. Also, the honest MLMs see the recruitment part as a distant second.
What Are The Five Red Flags?
The Five Red Flags signal the lack of honesty in many areas of both schemes, raising many concerns. For instance, the truth gets routinely twisted in compensation plans relating to solid growth rates in MLM recruitment drives.
When in reality, MLM companies’ “loss rates are over 99%.” In truth, those benefiting is a tiny layer at the top of the MLM company? It comes as no surprise why they distort the truth.
On the other hand, pyramid schemes rely entirely on new money from recruiting. So, the bulk of their activity does not involve selling actual products or services with real value.
The unfortunate thing about both systems recruits loses money merely to play the game. It’s no wonder the platform resembles a revolving door.
Recruiting new members appears the prime motive with both businesses. However, more so with the pyramid system as they have little regard, knowing the plan will reach a saturation point at some stage.
In contrast, MLMs feed off an FTC (Federal Trade Commission) who ruled in 1979, Amway wasn’t a Pyramid Scheme, which opened up the flood gates for MLM recruiting methods.
Fast forward some forty years where the FTC rule remains, and recruits get trained on a false recruitment belief. Sure, as far as MLMs are concerned, building a downline has benefits, but so does selling.
Never the less, the hierarchy deem recruiting the primary motive for moving up the MLM structure and not selling. Putting it mildly, they encourage you “to be a product of the products,” a team player if you like, set the example of model recruiting then purchasing.
Of course, a pyramid scheme is nothing less than full-on recruiting, with a slim chance of bolstering your earnings from your investment.
It’s no surprise why both systems are flawed?
Let’s look at the pyramid scheme. They apply the theory success comes from recruitment. The more that gets hired, the stronger the plan is.
While this is true in terms of pool money, but not so when monies get dished out. You see, a more significant portion of the revenue goes directly into the head honcho’s pocket.
Indeed, most MLMs are not that much better. However, the process of a genuine MLM is somewhat different.
Enrollment into the program gets conducted in a manner that’s fair to both sides. From the outset, raw recruits receive sound reasons why selling genuine products offers lots of benefits, while at the same time how they stand the potential of earning a commission.
Of course, those above them also encourage product selling as they also gain a passive income from their sales.
Pay To Deliver:
Pyramid schemes, you agree when signing to participate in the system, you abide by the plan’s rules to qualify for bonuses and other incentives even though you must pay an upfront fee.
And in some instances, it can be many hundreds of dollars. In the simplest of terms, they are saying you agree to the system’s principles.
As a distributor, the MLM company influences the habit of engaging in product purchases, and you’re committing yourself to enter the “business opportunity.” A belief they foster is the likelihood of distributor advancement in the regime.
Whereby, with a pyramid scheme, you are abiding with pyramid scheme purchases hidden or laundered. Similar to normal like buying. It could also be called “pay to deliver” transactions.
Distributor Loss Rate:
The staggering loss rate for distributors totals thousands after subtracting purchases and other expenses, including feeding the top-level members.
At the same time, breakaway MLM compensation plans are a familiar occurrence in the fullest of extremes. They are an exploiting pyramid scheme that should be, without a shadow of a doubt, illegal.
Company payouts, what are they? Group bonuses that are sizable discounts or more generous payments per sale at higher levels from time to time.
With charges factored in to determine the actual payout per sale.
Why does it then discourage retailing of products to end-users? Simply, MLM’s offer modest rewards to first-line “distributors” for merchandising products.
And products, at times, are overpriced to maintain participants’ extensive network.
What Are The Types Of Pyramid Schemes
Naturally, the list varies. However, I’ve listed below three of the more common schemes that seem to attract the most attention.
Multi-level Marketing Pyramid scheme.
Multi-level marketing (MLM) for all sense and purpose appear a legitimate business system. Maybe so, for those who primarily offer the sale of genuine products as the core of their business.
Yes, for sure, they get classed as being legitimate. But is that true for all? I don’t think so. MLMs who have a strong emphasis on recruiting ahead of products cannot see them as genuine. They are dicey.
Long-established pyramid schemes place recruitment ahead of products, while in some instances, products not available at all. Further to that, they see recruitment as growing the business. Also, some MLMs may even fit into this bracket.
It runs as the name suggests. The scam influence is nothing other than a chain email asking the receiver to pay a premium to those already enrolled.
Once they pay, they must delete the first name off the list and add their name to the bottom before on-forwarding to friends. Of course, not all donate, none the less their name remains on the list until it reaches the top.
A Ponzi Scheme is a scam investment where promotors coax people into signing on by offering unrealistic returns. In simple terms, they rob Peter to pay Paul.
And how that works, the deposited money from early investors is used as payment on the first returned dividend. That’s the carrot they dangle, and the investors feel satisfied it works, so they elect to invest more capital. Not only that, they tell friends and family and entice them also to invest.
The principle behind Ponzi schemes, promoters use sly tactics by convincing investors they’ll receive a substantial return on their investment. And, they are mighty good at it too.
Therefore, if approached and it looks too good to be true, then step away because, in reality, they are no more than trickery investment scams.
An Actual Example Of A Real Pyramid Scheme
I understand this happened many years ago, but it’s a real example of how pyramid schemes work.
In 2008, a life-changing pyramid scheme whisked through Canada, promising residents the prospect of getting rich by marketing low-cost travel club membership plans.
Sellers (qualifying candidates) were required to first obtain one themselves at a unit cost of $3,200.
No surprise, with times pretty tough in Canada in that period, so more than 2000 people opened up their chequebooks with the promise of earning a lofty sum of $5,000 for signing on any new people.
What they didn’t know at the time, and how they got duped. To receive the bonus meant reaching a sales target of $100,00 in sales. And, as you’ve probably guessed, it was a sales target of more than thirty membership plans—a hurdle way above their head, given the crippling financial situation in Canada.
You see, these cheats played on the people’s psyche, knowing folks were desperately clinging to their money. The upshot, investors filed a class-action lawsuit and returned their initial investment, with the scheme shut down.
Why Pyramids Collapse
Pyramid schemes, as the name suggests, broad at the base and pointy at the top.
Therefore, the floor is the foundation of the pyramid for it to remain stable. Simply put, recruitment’s the foundation. Naturally, when cracks appear in the base! Well, you know, the structure collapses.
It’s clear cut and goes without saying investors lose money.
But not all; those select few at the top walk away with their pockets stuffed with your money.
Several countries have banned pyramid schemes. And with good reason too. Look at it like this. They don’t start these sorts of systems being in your corner.
No way. They are nothing more than a profiteering network, trapping people into recruiting friends and family, belittling everyone concerned and eventually severing relationships.
As you might expect, pyramid schemes run a shoddy operation at the best of times. And what more can you suppose when they rely on recruiting large numbers of people at the bottom to pay cash to a few people at the top. Sure enough, when the pyramid topples, investors lose everything.
As an investor, avoid them altogether. Please don’t get involved in being their next victim. Pyramid schemes are misleading and fraudulent.
Red Flag Warning
Red flag warnings highlight the point why illegal pyramid schemes are most potent.
They (red flags) identify the perils of enormous investment return. And of course, there are other flaws in compensation plans, shady recruitment, lack of accountability (pyramid schemes), investment risk, products sales, and more.
It’s no secret that huge returns on short-term investments are nothing more than a recipe for disaster in hell or high water. No wonder it sits at the top of the red flag totem pole.
Research is your security net as your ability to assess business trading credentials first hand. That otherwise, you would be flying blindfolded. Your piece of mind must be at the forefront, and if you have any doubt about what you’ve researched. Then start looking elsewhere.
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