Avoid Getting Cough in a Pyramid Scheme
Multi-level marketing has become more prevalent in recent years. Many companies have used this marketing practice and have been very successful in attracting investors and achieving tremendous growth. As more and more investors are getting involved in multi-level marketing practices, the differences between a legitimate multi-level marketing company and a pyramid scheme need to be addressed. Furthermore, the reasons why people invest in pyramid schemes, and ways to avoid being defrauded, need to be discussed to prevent hard working people from getting scamed.
What is a pyramid scheme?
A pyramid scheme is a fraudulent system of making money based on recruiting an ever-increasing number of "investors." The initial promoters recruit these investors, who in turn recruit more investors, and so on. The scheme is called a "pyramid" due to the fact that at each level, the number of investors increases. The small group of initial investors at the top of the pyramid, require a large base of investors under them to support the scheme by providing profits to the earlier investors. Pyramid schemes are illegal as most state laws prohibit marketing practices where the potential for profit derives principally from recruiting other investors and not from the sale of products. The bottom line, however, is that in all pyramid schemes, the selling of a product itself is much less important than the recruiting of new investors.
What is multi-level marketing?
Multi-level marketing is a method of selling products directly to consumers without intermediary retail stores. Products are sold through a network of distributors or salespersons set up to resemble a pyramid: each distributor recruits and trains additional distributors and will earn commissions on their sales, as well as on the sales he or she makes. Because of their pyramidal structure, multi-level marketing companies can sometimes be considered pyramid schemes.
What are the differences between a legitimate multi-level marketing company and a pyramid scheme?
A legitimate multi-level marketing company emphasizes on selling reliable products or services. A pyramid scheme uses products or services to disguise its quest for collecting money from the investors on the bottom levels, to pay other investors further up the pyramid. In a typical pyramid scheme, new investors must pay a fee for the right to sell the products or services as well as for the right to recruit others into the pyramid for rewards unrelated to product sales or services. Very often the products or services the victims must buy are either useless or imposible to sell, and the pyramid's promoters refuse to repurchase them.
On the opposite hand, legitimate multi-level marketing companies will buy back unsold products, even though often at a discount from the original price. Success in multi-level marketing is based on two factors: product and service quality, and the hard work involved in being able to sell the products or services. Recruitment of new investors is secondary.
Why do pyramid schemes always fail? And why do legitimate multi-level companies sometimes survive?
Pyramid schemes are doomed to fail because their success depends on the ability to recruit more and more investors. Since there are only a limited number of people in a given community, and ultimately, in the world, all pyramid schemes will ultimately collapse. The only people who make money are those few who are on the top of the pyramid. Legitimate multi-level marketing companies, on the other hand, can be around for a long time. Although the recruiting of additional investors is an essential part of the marketing practice, since legitimate multi-level marketing companies involve solid products or services, participants in these companies are not subject to huge losses and they are actually in the retail sales business, selling a real product, and not “headhunting” for naïve people to give away their money.
Why do people invest in pyramid schemes? If all pyramid schemes fail, why would anyone invest in them?
There are three basic categories of people who invest in pyramid schemes:
- Those who participate out of greed.
- Those who are misled into thinking that they are joining a "investment club" or a "gift program".
- Those who believe that the products or services are legitimate.
The people who participate in pyramid schemes out of greed often know that they are illegal, but they still participate in them hoping that the scams will last long enough for them to make a profit. However, the end result of a pyramid scheme is always an inevitable collapse. At best, a few people, usually the promoters, walk away with a lot of money, leaving the bulk of the later investors to lose all of the money they put into the scheme. In fact, the only way anyone could make money from pyramid schemes, is if other people are defrauded into giving money upon the promise that they in turn will be repaid. Yet, not everyone is so easily defrauded. There will always be drop-outs from these schemes and, as stated above, there are only a limited number of people who will even participate. Pyramid promoters often target closely knit groups such as religious or social organizations, sports teams, and college students to increase pressure to participate. They give some pyramid schemes attractive names such as "investment clubs" or "gift programs." These clubs or programs are usually presented to these investors with assurances that they are perfectly legal, approved by the Internal Revenue Service or a Certified Public Accountant. Some even expressly state that they are not a pyramid scheme.
Those investors who actually believe that the products or services which the promoters sold to them are legitimate inevitably realize that they have been scammed. It is only when they realize that their garage is filled up with un-sellable products, and the promoters refuse to repurchase them, that they finally become aware that they have participated in an illegal pyramid scheme.
How can you avoid being defrauded?
The easiest way to avoid being defrauded is obviously not to participate in any promotion that appears to be a pyramid scheme.
The following are some additional tips to help you steer clear of pyramid schemes: Ask if you must buy a product to become a distributor. Find out if the company will buy back your inventory --you could get stuck with unsold products. Legitimate companies will buy back inventory for at least 80 to 90 percent of what you paid. If they make a promise to you, have them give it to you in writing. You should not HAVE to pay any amount of money to be able to be eligible for distribution of the product. The product should have real value as a retail product. What are you getting for your money? Beware of promises of quick, easy and unreasonably high profits. Do your research on the product and make sure it has real value. Resist the temptation to invest just because the people selling you the program are friends or are part of your religious or social organization. They may have been misled into believing that they could make large amounts of money in a short time. |
