Pyramids, Powerlines and Ponzi
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.
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