Pyramid Scheme vs. MLM, or scam vs. business
When you hear the word ‘pyramid’, you might not immediately think of the greatest scam scheme known to modern man. Instead, your mind may reach for something more like a monumental structure synonymous with the final resting place of the great pharaohs in Egypt. Pyramid scheme, however, is another thing altogether and the pyramid scheme is anything but great. I guess you could say that pyramid schemes are greatly illegal and that they cheat people out of their money but I want to get into details, the details are where I want to focus.
The pyramid scheme has infamy and presence in both history and in fiction. In The Simpsons, Homer is introduced to the aptly named ‘Trapezoid Scheme’, which truly captures the spirit of the thing: pyramid schemes never advertise themselves as such, that just wouldn’t do. They need to hide in plain sight to work.
The United States Federal Bureau of Investigation (FBI) defines these as, “Pyramid Schemes – also referred to as franchise fraud or chain referral schemes— are marketing and investment frauds, in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses.”
Companies such as Amway, Tupperware, Herbalife, and Avon have paved the way for hundreds of companies to copy a business model which at first glance seems a lot like the FBI’s description of an illegal pyramid scheme. Some of these companies have gingerly treaded the line between a formally legal Multi-Level Marketing (MLM) company and Pyramid Scheme for decades and the industry has proved to be a robust one. In a landmark 1979 ruling, the United States Federal Trade Commission (FTC) asserted that although Amway uses a sales person structure and compensation that is tiered, the organization was, in fact, not a Pyramid Scheme and perfectly legal.
It’s true that MLMs and Pyramid Schemes are both built on a business model that uses “multiple levels” of distributors and recruits, and while they appear to be the same thing at a glance, there is a notable distinction between the two. One is a legitimate business model and the other is a scam designed to cheat honest folk out of their hard earned cash. But where did it all begin?
Unfortunately, the modern pyramid scheme originated in America in the 19th century, so we can say that it is something of an American institution. Several variations of the Pyramid Scheme have developed over the years, with none more famous than the grand daddy of them all, the Ponzi Scheme.
Named after a 1920s swindle that went by the name Charles Ponzi, the Ponzi scheme reeled in investors by the promise of financial security and the offer of extraordinary profits for little or no risk or effort, save the contribution of their money. The success of both the Ponzi and the Pyramid schemes hinge on the recruitment of unsuspecting and somewhat gullible members or investors. The main difference between the two is that a Ponzi Scheme is controlled by an individual rather than being spread across a network of complicit parties, as you might see in a Pyramid Scheme.
Like a cheerleading pyramid, where those at the base do all the heavy lifting, for the lucky few who manage to reach the lofty heights of the Pyramid or Ponzi Scheme before it goes bust, it can be very lucrative at the top. Just ask Charles Ponzi!
“Conscience… that stuff can drive you nuts!” (From the movie “On The Waterfront”)
According to the New York Times, Charles was a” flamboyant con man” whose scam earned him a well deserved place in the history books.
“Charles began telling New York investors in December 1919 that investments in foreign postage coupons could yield 50 percent returns in 45 days. By redeeming coupons bought cheaply overseas for much higher amounts in the United States, he could double their money in three months, he claimed.”
Paying off early investors with payments made by later investors, Charles’ scam was so successful that it ran for over a year before it collapsed, costing his investors a cool $20 million.
“- You was my brother, Charley, you shoulda looked out for me a little bit. You shoulda taken care of me just a little bit so I wouldn’t have to take them dives for the short-end money.
– Oh I had some bets down for you. You saw some money.
– You don’t understand. I coulda had class. I coulda been a contender. I coulda been somebody, instead of a bum, which is what I am, let’s face it. It was you, Charley.”
There are two main variations of the Pyramid Scheme: “naked” (no product or “gifting” schemes) and “product-based”. According to mlmwatch.org, The Skeptical Guide to Multilevel Marketing, a product-based Pyramid Scheme is defined by features including “an endless chain of recruiters recruiting recruiters”, “commissions and/or bonuses to more than five levels of ‘distributors’” and “company payout per sale for each upline participant that equals or exceeds that for the person selling the product, creating inadequate incentive to retail… and an extreme concentration of income at the top”.
For the U.S. Federal Trade Commission “there are two tell-tale signs that a product is simply being used to disguise a Pyramid Scheme: inventory loading and a lack of retail sales. Inventory loading occurs when a company’s incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company’s distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. The people at the bottom make excessive payments for inventory that simply accumulates in their basements.”
Perhaps the biggest problem facing most product-based Pyramid Schemes is that the products themselves don’t sell very well to the general public, or have very low profit margins – information you can guarantee isn’t shared with new members. Instead, money is made by selling the organization’s recruitment of new members. This is why some companies build such big “global’ organizations through large-scale recruitment events, or as they may call them “expos”. Once the local market is saturated a company has to move on, expanding overseas and into new territories, far removed from the trail of destruction it leaves behind.
Aside from a lack of direct selling and the proliferation of recruitment, other Pyramid Scheme red flags include fixed startup costs for new members (often in the form of a mandatory “starter-kit”), a non-refundable membership fee, plus a minimum monthly order value. These are all things that Jeunesse Global insists on from new members upon launching their home based business.
All too keen to disguise their unsustainable and illegal business models, individuals and organizations often go to great lengths to distance themselves from pyramid clichés, peppering statements and clauses to the contrary throughout their recruitment comms. It’s not always easy for the work from home members. These people, who are referred to as “independent contractors” or “independent business owners” for legal reasons that I don’t entirely understand, find it hard to restrain themselves and don’t usually adhere to the policies and procedures that would keep them within the letter of the law.
Speaking of restraint, now it’s my time to talk about Jeunesse Global, namely Jeunesse Global Diamond Director Todd Hartog. Todd is a very special person who just couldn’t hold back from spilling the beans on the earning potential of working for stem cell skin cream business Jeunesse Global. In August 2015 he took to Twitter saying “Jeunesse is paying us over a million a year!” Which of course drew more than just positive interest.
With Jeunesse Global understanding the very real risks of appearing to operate like a Pyramid Scheme, this is exactly the sort of negative attention its founders Randy Ray and Wendy Lewis would prefer to avoid.
According to the boasting on Todd Hartog’s website, Jeunesse Global’s size and scale is clearly intended to impress new recruits: “Jeunesse is the number one network marketing company in the world already launched in 122 countries and will do $1 Billion annually in 2015. Jeunesse has doubled every year since inception. 2016 could be a $2 Billion plus year”.
If that’s not enough of a warning sign for the boom and bust, the long con trademarks of a Pyramid Scheme, Todd goes on to confess that, alongside his wife, “the new goal is to help as many people as we can, to achieve our level of success or even higher”. Instead of the “direct marketing” that they claim to specialize in, it would seem that the Hartogs are aiming to indoctrinate as many people as possible into the Jeunesse Global way of life.
Another underhand way that organizations make their business appear legit is by positioning themselves as experts in a consumer driven market. Whether that’s by creating a slick website, appointing a large executive team or simply by using jargon, too advanced or nonsensical for consumers to understand, there are many weapons of deception in the Pyramid Scheme’s arsenal.
Where Jeunesse Global fulfills this prophecy is through the appointment of a team of “medical experts” to its advisory board and the liberal use of science fiction and claims with no proof at every opportunity. From products such as AM/ PM Essentials and NutriGen, right through to the LUMINESCE daily moisturizing complex and Reserve Gel, Jeunesse Global’s claims of pioneering “best-of-the-best formulas that deliver real, youthful results” are nothing short of fantasy and as I have said many many times, in some very specific cases, ok primarily Jeunesse Global, their products are so bad that they are literally bad for your skin!
Masquerading as the wunderkind of the beauty world who claims to use “genius science” in its “patent-pending” stem cell therapy, it’s always funny to see “independent contractors” like Todd embellish the lies further: “there is nothing on the market like Jeunesse Global’s cutting edge products using patented Adult stem cell technologies”.
This is serious stuff that goes far beyond the purchase of a bogus beauty product or something that has nothing but a placebo effect like NutriGen or pm Essentials supplements.
Pyramid Schemes have disastrous effects on most of those who take part. It’s believed that “88 percent of the members on the bottom level of most Pyramid Schemes will lose their investment”. And, depending on which type of scam an investor falls victim to, it could get much worse. Up to “90.4 percent of people lose their investment” in a naked Pyramid Scheme, while “99.88 percent lose their investment in product-based Pyramid Schemes”.
Multi-Level Marketing – same thing?
The details and the law make the distinction that Multi-Level Marketing is not the same as a pyramid scheme. But the problem is that it’s one thing to call yourself an MLM company and another to actually operate as one, within every rule of law. The important distinction between an MLM company and a Pyramid Scheme is that in a Pyramid recruitment is everything. People pay to join, and are then rewarded for recruiting others, who also pay to become members. The pitfall in the system is that once the supply of new recruits dries up, the Scheme collapses. Particularly if there is a product that is being offered that simply is not as good as it claims, the scheme is doomed from the start.
Multi-Level Marketing companies, on the other hand, rely on the sales of real products for their income, not on the fees charged to new recruits.
The bottom line is, if the money you make is based on your sales to the public, it may be a legitimate multi-level marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a Pyramid Scheme. It is clear to me that the selling of an inferior product or a product even produced with some negligence is a clear sign of something being fishy. That reminds me a whole lot of a company that I have been complaining about for quite a long time.
http://www.consumer.ftc xenical orlistat 120mg.gov/articles/0065-multilevel-marketing