Let me see if I can clear up some of the confusion about these types of sales schemes. They are alike but different. Everybody knows that Pyramid/Ponzi schemes are fraudulent. When someone accuses me of running a pyramid or ponzi scheme it really hurts me. I would not do that and certainly not to people that I care about. Hence, this blog about fraudulent investment schemes.
What is a Pyramid/Ponzi scheme?
This type of scheme is investment fraud. The early investors are paid by the later investors and the last investors are just out of luck. Usually there is no product involved, just promise of get rich quick! Or you invest into product that you have to sell by yourself to get your money back.
Also, the pyramid/ponzi schemes will fall apart when investors want out of the plan and try to withdraw their money or when the instigator can’t find new investors. Pyramid schemes only want to recruit, get that start up money and take off.
Pyramid/Ponzi schemes usually have expensive membership fees. If they have any training, you will be the one to pay for it. The only money you will see, is what you earn by selling the product you bought. If no product involved, oh well, you are just out the money. (And your time).
Red Flags for Illegal Pyramid Scheme
An issue for MLM is determining whether it sells products to consumers OR to its members. If they sell to their members so they can recruit new members to buy their product then BEWARE they are an illegal pyramid scheme.
Pryamid/Ponzi schemes put greater focus on recruitment than product sales, if they even have a product.
The Federal Trade Commission (FTC) cautions people to beware of MLMs who claim:
- Outrageous claims of huge earning potential
- Persuading you to recruit others is the real deal
- Pressure you to join without more knowlege of company
- To get in Now or lose the opportunity
- Continue to buy products to qualify for rewards
What is a MLM/Direct Sales?
Per Investopedia, MLM or multilevel marketing, points out a strategy used by some direct sales companies to sell products and services. This MLM scheme is based on existing members to promote their products to other people and encourage the buyers to join the team.
We give value for purchase. We are marketing savings discount. You already have the product, we want you to profit with discounts on that product. Our membership fees are very reasonable and our products will enrich your lives. I operate under MLM regulations to market products that I get from reputable Distributors.
We have products that we market for sale and yes, we get commissions from those sales. That can be the end of it. But if the buyer wants to make money doing what I do, marketing products, I am glad to train him and put him into my network. I want him to make money doing what I do, and since I invested in training him (free), then I get a very small percentage of what he earns.
How Does the MLM Work?
The multi level comes in when the network has commissions earned from these different networkers directly under me. Say I am Level A, and I recruit Level B, then B recruits C, who recruits D, who recruits E. I get a recruiting fee from B. That’s all I get until B is earning money. I get a small commission of what he sells, maybe 2%. Then when B recruits somebody, he gets a recruiting fee. B then trains C and when C starts earning commissions, B gets a small commission and so do I. So this goes down to the allowed levels of the Distributor. Now B may not be the only recruit that I have. My direct recruits are called my network or downline. But I only get commissions on his direct recruits. The same procedure takes place with every recruit that I have.
But bear in mind, that each recruit, pays a membership fee and is trained to market. He gets paid for his efforts. He only earns what he is willing to work for. We are not a get quick rich scheme, it takes time and patience to build a business.
Key Take Aways
Be careful when deciding on an MLM scheme as there are some illegal companies who run as a pyramid/ponzi scheme. They have really hurt the legal MLM businesses. Here are key takeaways:
- Multilevel is a legitimate strategy used by direct sales companies to sell products
- Existing members supposed to promote and sell products to the public
- Bring in new recruits to promote and sell products to the public
- Members are paid a percentage of their recruits’ sales
- All levels of MLM receive commission, more levels more money earned
- MLMs REGULATED BY FTC TO ENSURE OPERATION IS LEGAL.
Examples of Multilevel Marketing
Companies that operate under a model of sales through a network of salespeople is Avon. Everyone has heard of Avon, how about Tupperware? These companies provide the tools and resources needed to conduct business in home. This is known as Direct Sales Model, and that is what I do. I work from home as an affiliate of the companies I represent. One difference is that I just promote the product and provide a link to the offer and then the company takes over the business part of selling, shipping and customer service. I don’t really sell, I just point you at the company.
Response Magic