MLM - Multi Level Marketing

by Rudolf Faix Thursday, July 9, 2015 1:15 PM

TV: Millions are being paid outMulti Level Marketing (MLM) is known for selling low quality products for a very high price. At WikiPedia you find the following definition about MLM:

Companies that use MLM models for compensation have been a frequent subject of criticism and lawsuits. Criticism has focused on their similarity to illegal pyramid schemes, price fixing of products, high initial entry costs (for marketing kit and first products), emphasis on recruitment of others over actual sales, encouraging if not requiring members to purchase and use the company's products, exploitation of personal relationships as both sales and recruiting targets, complex and exaggerated compensation schemes, the company and/or leading distributors making major money off training events and materials, and cult-like techniques which some groups use to enhance their members' enthusiasm and devotion.

If we take a look at the above definition, then we see that the product needs to be overpriced. Even if the company is saving the costs of having shops the company needs to pay the commission for the sales structure. If the commission is not high enough not one will sell something. Mostly you'll get low value products for a high price for financing their marketing structure.

In such a case MLM - Multi Level Marketing is hard at the border to become an illegal pyramid system. If the product has no value or the earnings for bring in new referrals are in average higher than the earnings for selling the products then the system is an illegal pyramid system or Ponzi scheme.

 

Ponzi Scheme

by Rudolf Faix Thursday, July 9, 2015 11:03 AM

Carlo "Charles" PonziIn turn of the century Boston, an Italian Immigrant named Carlo "Charles" Ponzi established the Securities Exchange Company. Ponzi offered investors a choice between a fifty percent return on a 45 day investment and a 100% return on a 90 day investment. Ponzi claimed that this return on investment was possible due to his unique understanding of the international postal reply coupon system; by international agreement, postal reply coupons were recognized by all countries but the cost of these coupons varied dramatically from country to country depending upon their economy.

Although true in principal (an IPRC that cost a penny in Germany cost a nickel in the US), Ponzi was fully aware that the scheme did not work in actual practice because of importation restrictions. Nevertheless, the story sounded good.

Ponzi schemes are fraudulent investment operations that work in a similar way to pyramid schemes. The Ponzi scheme usually entices new and well-to-do investors by offering higher returns than other investments in the form of short-term returns that are either abnormally high or unusually consistent. The schemer usually interacts with all the investors directly, often persuading most of the existing participants to reinvest their money, thereby minimizing the need to bring in new participants as a pyramid scheme will do.

With little or no legitimate earnings, Ponzi schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

Be cautious, but do not be discouraged from carefully researching business opportunities based on commissions. There are many legitimate multi-level marketing opportunities where you can legally earn an income from selling genuine products or services.

Protect yourself:

  • Pyramid and Ponzi schemes may be sent to you from family members and people you trust - they might not know that they could be illegal or that they are involved in a scam.

  • Never commit to anything at high - pressure meetings or seminars.

  • Don’t make any decisions without doing your homework - research the offer being made and seek independent advice before making a decision.

  • Do some research on all business opportunities that interest you.

  • If I am not selling a genuine product or service, is participation in this activity legal?

More information about Ponzi schemes:

 

Pyramid systems

by Rudolf Faix Thursday, July 9, 2015 10:48 AM

Pyramid System ExampleA pyramid system - also referred to as franchise fraud or chain referral schemes - is an unsustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public. The real profit is earned, not by the sale of the product, but by the sale of new distributorships.

In a pyramid scheme, an organization compels individuals to make a payment and join. In exchange, the organization promises its new members a share of the money taken from every additional member that they recruit. The directors of the organization (those at the top of the pyramid) also receive a share of these payments. For the directors, the scheme is potentially lucrative - whether or not they do any work, the organization's membership has a strong incentive to continue recruiting and funneling money to the top of the pyramid.

Such organizations seldom involve sales of products or services with real value. Without creating any goods or services, the only ways for a pyramid scheme to generate revenue are to recruit more members or solicit more money from current members. Eventually, recruiting is no longer possible and the plurality of members are unable to profit from the scheme.

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. At the heart of each pyramid scheme is typically a representation that new participants can recoup their original investments by inducing two or more prospects to make the same investment. Promoters fail to tell prospective participants that this is mathematically impossible for everyone to do, since some participants drop out, while others recoup their original investments and then drop out.

Various forms of pyramid schemes are illegal in many countries including Albania, Australia, Austria, Belgium, Brazil, Canada, China, Colombia, Denmark, the Dominican Republic, Estonia, France, Germany, Hong Kong, Hungary, Iceland, Iran, Italy, Japan, Malaysia, Mexico, Nepal, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Romania, Russian Federation, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, Ukraine, the United Kingdom and the United States. Many other countries will follow by adjusting their law.

These types of schemes have existed for at least a century, some with variations to hide their true nature. Multi Level Marketing plans have also been classified as pyramid schemes.

Tips for Avoiding Pyramid Schemes:

  • Be wary of “opportunities” to invest your money in franchises or investments that require you to bring in subsequent investors to increase your profit or recoup your initial investment.

  • Independently verify the legitimacy of any franchise or investment before you invest.

More information about pyramid systems:

 

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