Pyramids, Powerlines and Ponzi
By Trina L.C. Schiller
What are pyramid, powerline and Ponzi schemes? They are all different versions of the same thing... Illegal business ventures. They are illegal, and have the potential to financially devastate participants when the compensation system collapses. And it always collapses.
To understand why the pyramid is inherently flawed, you have to understand how it works. Most people confuse pyramid schemes with legitimate MLM (multi -level marketing) programs, because the difference between the two can be quite fuzzy.
Just because a compensation plan is based on a matrix does not necessarily mean that it is a pyramid. With a pyramid, the entity at the top always makes more money than everyone else is the program. It is impossible for any other person in the pyramid to even make as much as the person on the top.
Typically, pyramid schemes require an initial investment, usually substantial, and earnings are based on recruiting new members to make that initial investment as well.
Those participating in a pyramid program are lead to believe that they are at the top of their own little pyramid, when in truth, they are somewhere at the bottom of the grand pyramid. The program owner is at the top of the pile; therefore the creator of the program is the company. The company always gets a percentage of the new members' initial investment, and the remaining portion is distributed to the person responsible for the new membership. So, as the pyramid grows, the guy at the top, the "company" gets richer and richer for doing next to nothing, and your earnings are completely dependant upon how many new recruits you can come up with each month, whether it be based on a once off membership fee, or a monthly subscription to the program. If you don't bring in new members, you won't get paid.
Now here comes the major flaw in the system... Commissions are paid based on members recruited. There is a finite number of people who can be recruited. Therefore, once the program has maxed out, and there are no more people to recruit, those at the bottom of the pyramid will never recover their initial investment, let alone make a profit. The pyramid collapses and the guy at the top, the one who got stinking rich, takes off for the Bahamas and is never heard from again. Meanwhile everyone else is wondering what happened, and why they're not getting paid. He gets a nice tan, while you're wearing egg on your face, and all the friends and family that you brought into the program are hating you.
So what makes MLM different?
Legitimate multi-level marketing programs provide customers with a tangible, physical product, or a usable service. Commissions are based of the sale of actual products and/ or services, not membership fees. You can sell an infinite amount of products to a finite amount of people; therefore the system maintains itself; it won't self destruct, and people will make money.
MLM programs are based on a matrix, but since there is an actual product being bought and sold, the company receives a percentage, so it can produce more product to sell, and the member/ distributor earns a commission based on the actual products sold. As long as the company continues to produce a product for resale, the distributor has the ability to earn an income. Even if you stop referring new customers, if you keep your existing ones buying, you will continue to generate an income.
The key to making a large income in an MLM is to encourage existing customers to make repeat purchases in addition to finding new customers.
Consider this example from a traditional sales business:
Your father purchases a car from Dealer X. He gets a good deal on the car, and likes the product and the service he receives. So, the every time he wants to buy a car, he returns to Dealer X. (This means repeat sales and commissions for Dealer X.) In the meantime, your dad recommends Dealer X to a few friends, who buy cars. Dealer X, appreciating the referrals your dad has provided, gives your dad an extra discount on his next car purchase.
This sounds like a fair and equitable business dealing right?
That's because it is totally fair and legal.
Now, think about this multi-level marketing situation:
Your mother belongs to a catalogue shopping club. As a member of this club, she is entitled to savings on the products she buys, and in-home delivery of her purchases.
Mom shops there every month without fail, because she enjoys the products and the service she receives. She deems it a good value.
Mom is so delighted with her shopping club membership that she tells her friends about it. Some of those friends also join the shopping club and begin shopping there month after month. In appreciation for your mom's referrals, the company pays her a commission each month, based on the products her referrals purchase.
If one of Mom's friends refers someone to the shopping club, the company will give the friend a commission on products purchased by the new customer, plus they will give a smaller commission, from that sale, to Mom because she referred the friend who referred a friend. This is called an override commission. This is where the matrix comes into play. The matrix allows Mom to earn override commissions to a certain level for indirect referrals, generated by her direct referrals. This is how the company shares its income with its customers...
Example of a 3 x 4 multi-level marketing matrix:
Mom introduces Aunt Sally to the company. Each time Aunt Sally spends money with the company, Mom earns a 10% commission on what Aunt Sally buys.
Aunt Sally refers Cousin Meg to the company. When Cousin Meg shops, Aunt Sally earns a 10% commission on Meg's purchases, and Mom earns a 5% override commission.
Let's say that Aunt Sally also refers Uncle Bob and Cousin Sue. Uncle Bob's purchases and Sue's purchases will generate another 10% commission for Aunt Sally, and another override commission for Mom. This process continues, allowing Mom to earn an override commission up to 4 levels deep.
Click here for an illustration.
Again, because the sale of actual products are involved, the commission structure is solid. The only way that Mom would stop earning commissions would be if:
A. The company stopped producing products and closed down.
B. Every referral in Mom's matrix quit buying products on their own.
C. Mom terminates her relationship with the company.
Each multi-level marketing business has its own compensation plan. The above is just an example of how an MLM marketing plan can work, to demonstrate the difference between a pyramid scheme and a legitimate network marketing business.
Pyramid schemes have given network marketing companies and their business opportunities a black eye, because they disguise themselves as a multi-level marketing income opportunity, in order to draw people into them.
Here is an example of a so-called one up program, where you pay the company an membership fee, and they promise to do all the recruiting work for you. The first member the company recruits for you pays their fee to the company (your sponsor). The company then promises that you will make 100% commission of the next sale and every other sale that the company makes for you. All you have to do is advertise the web site they give you and some automated system the company has in place, will do the rest for you.
Sounds great... right? WRONG!
The way this scheme really works is that your sponsor aka the company, only recruits at two levels. The first level, where they receive 100% of the money collected, and on the second level, where they also get 100% of the money collected, based on the one up marketing scheme. The company grows wider, not deeper, so everyone on the the first and second levels never see a second sale. They lose their initial investment and spend the rest of their lives waiting for the second sale to come in just to break even. Meanwhile, your the company/ your sponsor makes buckets of money and laughs all the way to the bank.
Click here for illustration.
There are plenty of legitimate network marketing business opportunities available, and twice as many schemes. You must do your due dilligence and investigate a company before handing over your money. Find others who are involved in the business and find out if they've made any money. And, stay away from programs which have no product or service for sale. If the only way to generate commissions is from the membership fees paid by others, then you are looking a a pyramid scheme, and you will eventually lose, even if you make a little something out of the gate. Pyramid schemes always fail.
Copyright © 2005
The Trii-Zine Ezine
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Trina L.C. Schiller : About the Author
http://www.trinaschiller.ws
Keywords: pyramid schemes, multi-level marketing, network marketing, ponzi