Pyramid Scheme Business
Pyramid schemes are notorious and often steals the good name of genuine multi-level marketing (MLM) businesses but they are both not the same. For starters, pyramid scheme businesses are illegal whereas MLM businesses are perfectly legal and authentic. If you are someone who is confused by these terms or someone who wants to join an MLM business but is confused whether it is fraudulent because of pyramid schemes, it is worth knowing more about it so that you will understand why it is illegal and different from MLM business strategy. If you wish to know more about it, keep reading.
What is a pyramid scheme business?
In a pyramid scheme business model, you will be promised something in return, money or services, for enrolling other people into the scheme. While this might seem similar to MLM business, it is not in the sense that in MLM business, even if you don’t recruit other people into the scheme, you can still earn money through direct selling of products or services provided by the company that you are promoting. But in pyramid scheme businesses, the only way you can earn money is by recruiting more people into the scheme. There is no goods or services involved. Hence it is the only source of income generation as opposed to selling goods which is the primary source of income generation in the case of MLM businesses.
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The basic business model of pyramid schemes
In a pyramid scheme model, the organization will compel you to join them by making a payment. In return, you will be promised twice or thrice the money you paid which will be obtained by taking a share from each individual that you recruit into the scheme. The leaders (also known as the directors) of the organization will also get a share of the money paid by everyone who joins the scheme. Thus, they get money easily whether or not they recruit. This is just the general model of the pyramid scheme. There are several different models involved a few of which are explained below.
The eight ball model
Pyramid schemes are often sophisticated and tracing their routes is difficult. In such a case, it is difficult to recruit more people into the scheme. Also, people are aware of the pyramid scheme business sham and hence recruiting more people is a task. To remedy this problem, the eight ball model is used. Here, each person joining the scheme has to recruit only two more people under them. Recruiting two people seems less ambitious than recruiting a dozen of course. The catch here is that since only two people can be recruited by a person, it takes longer to earn back the money paid by the member when he or she joined. This model has been called the names ‘airplane game’ or the ‘original dinner party’.
Another popular pyramid scheme model is the matrix scheme. This model is in fact even more popular than the eight ball model. This model follows the mechanism of a queue. Here, a number of people queue up to receive a desirable product like television or laptop. The catch here is that only a few people have even the possibility of getting the product. The people at the front of the queue gets the item as more people join the end of the queue. To join the queue, the person needs to buy an expensive but worthless item like a CD or e-book. The scheme organizers make a profit because the money they get from the new members exceeds the money required to send out the person at the front. These schemes collapse when no more people are willing to join the queue. Matrix scheme organizers often tend to exaggerate their business to get more people to join.
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Now that you know what pyramid schemes are and the two most common types of pyramid schemes, you will be easily able to differentiate between genuine MLM businesses and pyramid scheme business with good research. As stated by the federal trade commission, it is best not to join businesses where the primary source of income is earned by recruiting more people rather than sales of products or services to people who are outside the plan. In that case, the business is authentic and the product is of good quality that people actually want to buy. Some steps that you can follow to ensure the authenticity of the product are:
- Study the company’s track record thoroughly.
- Learn about the products, its uses, if it is worth the money, etc. Ask questions to ensure quality. Make sure to get rid of any doubts that you may have regarding the scheme.
- Talk to other distributors who are working for the company. But always take their words with a grain of salt since there are shills, that is, people who publicly gives credibility to organizations without disclosing their relationship to the organization.
- Understand any restrictions and take your time with research until you are sure about it.
- Talk to a friend or an unbiased outsider to make sure that you are not being conned.
- Finally, if you feel that everything is legit, then think about whether the plan or business model suits your needs and goals. Joining something just because it is legal is not really a good idea. Have a clear idea of your goals before you join anything. Otherwise, it will end up a waste of time and effort.
The points mentioned above are tips to look out for while researching the genuineness of a scheme. Here is a checklist of red flags for recognizing a pyramid scheme way before you research.
- Do they ask you to pay a lot of money to become a distributor? This money may be disguised as inventory charge. Genuine MLM models do not charge a large start-up cost.
- In case you do have to buy a lot of products, does the company guarantee to buy back unsold inventory? Genuine companies buy back unsold products for at least 80% of what you paid.
- Do they genuinely market their products? If they do not focus on marketing their products, it is likely a scam as genuine MLM businesses depend on establishing a market for the company’s product.
- Do they put pressure on you to recruit more people instead of direct selling their products? This is a very important red flag.
- Is recruiting new members the primary way of earning money than selling products? Are you paid commission for recruiting new members? This is a signature of pyramid scheme businesses.
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In case any of these boxes check, it is better to drop that business plan since it is highly likely that it is a scam. In any case, do your research well, ask good questions and protect yourself from pyramid schemes.