I have good news for you. The majority of those who ask you this question do not know what a pyramid scheme is! They have a misconception, that when people do direct selling of goods or services through an organization where distributors can sponsor others to get benefits, it is a pyramid scheme, especially when the organization structure looks like a pyramid. The fact is, nearly all organizations only work effectively as a pyramid and are shaped like a pyramid. For example, in any big corporation, you may have a Chairman and CEO, and under that person, the President, followed by Vice Presidents, Managing Directors, General Managers, Assistant General Managers, Managers, Assistant Managers, Supervisors, Assistant Supervisors and the rest of the staff. Even Governments are structured this way. In the United States, there is President, followed by the Vice President, and then the Secretaries of the various Departments, which form the Cabinet.
When we come to think of it, even traditional businesses also take the form of a pyramid, where there is the Wholesaler or National Distributor (one), who sells to the Area Agents (a few), who in turn sell to the Middlemen (a dozen or so), on to Retail Stores (many), selling to the Customers. If a pyramid scheme is what most people misconceive it to be, then we are all involved in pyramid schemes.
Insurance companies also work the way we do, where an insurance salesperson can also sponsor and get benefits from other sales agents, so how come they are never accused of being involved in pyramid schemes?
In order for you to be able to explain a pyramid scheme, you must first of all know what a pyramid scheme is. One of the first identifying features of such schemes is that they are designed to cheat people of their money, hence the public’s fear and loathing. How then do they cheat and how do we identify them?
The first thing all pyramid schemes will do is to insist that in order to become a member, there is a big registration fee and inventory loading. These schemes reward the sponsor an immediate ‘finder’s fee’ for getting a new victim. Most registration fees will be of the order of US$500 to US$3,000 but I have even come across one, where the fee was US$30,000.
Because a pyramid scheme is just a money game, the products are not important. Of course, it is very easy to find good products nowadays, so do not be surprised that many pyramid schemes also have excellent products. However, one thing I can guarantee you is that these products will be overpriced, as the emphasis is not in retailing of products to customers, but rather in finding investors to play the money game.
The easiest way to identify a pyramid scheme is where they have distributors but no customers, and the only customers they have, are distributors who buy those products because of their need to buy a distributorship to be involved in the scheme. If they have customers, it is because the distributors are selling their products at great discounts to get rid of the stock they have for playing games.
Other things to take note of, to help you identify pyramid schemes:
They always emphasize making quick money in the shortest time possible. Of course money is quick when you can get some stupid people to take out their credit cards to also join the money game.
Beware of companies that claim you need not do anything after you have registered, you are paid a ‘finder’s fee’, or that you only need to find another two or three victims.
Stay away from companies that do not have a money back guarantee or product return policy.
WHAT ARE THE CAUSES OF PYRAMID SCHEMES?
First, you have to understand that a proper MLM company is a channel to sell goods and services and not a channel to play the money game. So a pyramid scheme is just an investment game where selling or goods and services are just used by the wolves as a cover up to fleece innocent victims.
Pyramid schemes need 2 ingredients.
1/ Bad pyramid scheme company owners who know that many distributors can easily be exploited because they are lazy, greedy and would like to gain benefits for no work.
2/ Distributors who are lazy, greedy and would like to gain benefits for no work.
So these unscrupulous owners purposely write loopholes in their marketing plans to allow these people to do the business with money and not hard work.
The following are the clauses or loopholes they purposely write in their plans to attract inexperienced distributors into their schemes:
1. Low minimum requirement to move up to the leadership level.
2. One month move up to the leadership level.
3. No reversion.
4. No pass up.
To help you understand the marketing plans of the pyramid schemes, I may have to show you the marketing plan, of Amway, a real MLM company and the biggest MLM Company in the world. (Please note here that I am not an Amway distributor)
1. In the Amway plan, you have to do 10,000PV or USD10,000 (if 1 PV = USD1) to hit 21% leadership level or the highest step in the program.
The pyramid schemes reduced this to say USD2,000. In other words you only need to do USD2,000 to become 21%. Can you imagine the excitement and brainwashing we can now do to these lazy people telling them that Amway is too hard?
2. In Amway, for you to become a Direct Distributor, you have to do 21% or 10,000PV for 6 months, three months must be consecutive and the other three need not be.
The pyramid schemes allow you to become a Direct Distributor if you do 21% or USD2,000 only once in any one month.
3. In Amway, the stair steps is 0% to 21% and you revert to 0% every month and as a result it is impossible to use your money to buy up to any position. You are forced to build a solid organization and this is hard work. In the marketing plans of the pyramid schemes, when you do 21% or USD2,000 once, you stay at that level forever.
4. No pass up. In other words, when a distributor under you becomes a 21% or DD you also automatically become a 21% or DD. This leads to finding investors and staking. Let me explain:
All you need to do is to find 4 investors, A,B,C and D and everyone only needs to come up with USD500 x 4 =USD2,000 and all products are bought at D who in turn will push up C, B, A and you to become a 21% or DD.
With the above clauses, you can see how easy it is to fleece inexperienced and lazy distributors who will take out their credit cards and become a 21% in a few minutes or the amount of time for the credit card charge to be approved. It’s only USD2,000 and you only need to do it once and everyone ends up with a DD pin but no organization (and of course the owners of these companies laugh all the way to the bank). Many of them made millions and a few become billionaires. These people have made MLM the circus it is today. Thus was born the Pyramid Selling Scheme.
Another way the pyramid scheme owners use to make distributors play the money game is to use the Japanese style plan or the Forced Matrix plans. A forced matrix, as the name suggests, is a marketing plan where all distributors are limited by the number of distributors they can sign up as their first generation. In my 30 years in this industry, I have come across the 5-lines Forced Matrix (Quintuple Matrix) to the 4-lines Forced Matrix (Quadruple Matrix) to the 3-lines Forced Matrix (Triple Matrix) to today’s 2-lines Forced Matrix (Binary)
Forced Matrix, with their flush out clause only pays one level in leadership bonus (with matching bonus, they pay 2 levels) and that is why the company and uplines encourage new distributors to buy up 3, 7, 15, 31 or more business centers or legs when they join to maximize their bonus. So I would like to ask what has the buying up of 3, 7, 15, 31 or more business centers or legs got to do with a channel to sell goods and services?