When Is MLM A Pyramid Scheme? Do Yourself A Favour - Asess These Businesses Carefully
Tuesday, May 26, 2009
The following content is extracted from an article posted at malaysiafinance.blogspot.com and my friend, Peter told me about it. He thought the article might be useful and beneficial for the readers. I really appreciate it and thus post it here today. Perhaps this topic might offend some network marketing distributors or even companies. In fact, a direct selling business can be good for anyone who wishes to create a passive income source. Moreover, the network marketing business has been recommended by Robert T. Kiyosaki, author of the bestsellers "Rich Dad Poor Dad", as a real life business school for those who are keen on becoming an entrepreneur. So I am not trying to be stereotyping the entire industry. Instead I hope you all can distinguish between the genuine direct selling business and the pyramid scheme.
Disclaimer: The following article was written and posted at http://malaysiafinance.blogspot.com/2009/05/when-is-mlm-pyramid-scheme-do-yourself.html by Salvatore_Dali. Hence, I am not responsible for the article.
We know of Bernie Madoff, who basically ran a Ponzi scheme. A Ponzi scheme is in some ways close to a "pyramid scheme". The new phrase we use is "multi level marketing", some critics call it the new pyramid scheme. These MLMs need to be vetted properly before you go and sign up as a member or distributor. Some are genuine businesses, even though you may call them MLMs, such as Amway and Hai-O. In its intended form, MLM is a marketing strategy that compensates promoters of direct selling companies not only for product sales they personally generate, but also for the sales of others they introduced to the company. The products and company are usually marketed directly to consumers and potential business partners by means of relationship referrals and word of mouth marketing.
Independent, unsalaried salespeople of multi-level marketing, referred to as distributors (or associates, independent business owners, dealers, franchise owners, sales consultants, consultants, independent agents, etc.), represent the parent company and are awarded a commission based upon the volume of product sold through each of their independent businesses (organizations).
Independent distributors develop their organizations by either building an active customer base, who buy direct from the parent company, or by recruiting a downline of independent distributors who also build a customer base, thereby expanding the overall organization. Additionally, distributors can also earn a profit by retailing products they purchased from the parent company at wholesale price.
Danger Signs #1: Downline - Distributors earn a commission based on the sales efforts of their organization, which includes their independent sale efforts as well as the leveraged sales efforts of their downline. This arrangement is similar to franchise arrangements where royalties are paid from the sales of individual franchise operations to the franchisor as well as to an area or region manager. Commissions are paid to multi-level marketing distributors according to the company’s compensation plan. There can be multiple levels of people receiving royalties from one person's sales.
The MLM can easily be transformed into a pyramid scheme (Ponzi scheme) if you do not look at them closely. Even the insurance agents scheme we had, before it was revamped, was a bit questionable as the downline can be almost limitless. The downline depth is a first indication of how deviant the business model is. It cannot be forever limitless, because if it is it means its already a pyramidic scheme in essence, always creaming off the next level.
Danger Signs #2: Sign Up Fees - In the most legitimate MLM companies, commissions are earned only on sales of the company's products or services. No money may be earned from recruiting alone ("sign-up fees"), though money earned from the sales of members recruited is one attraction of MLM arrangements. If participants are paid primarily from money received from new recruits, or if they are required to buy more product than they are likely to sell, then the company may be a pyramid or Ponzi scheme, which is illegal in most countries.
New salespeople may be asked to pay for their own training and marketing materials, or to buy a significant amount of inventory. This is considered as acceptable. A commonly adopted test of legality is that MLMs follow the so-called 70% rule which prevents members "inventory loading" in order to qualify for additional bonuses. The 70% rule requires participants to sell 70% of previously purchased inventory before placing new orders with the company. There are however variations in interpretations of this rule. Some attorneys insist that 70% of purchased inventory should be sold to people who are not participants in the business, while many MLM companies allow for self-consumption to be a significant part of the sales of a participant.
Danger Signs #3 - Recruitment: The Federal Trade Commission in the US advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. The FTC also warns that the practice of getting commissions from recruiting new members is outlawed in most states as "pyramiding". In April 2006, it proposed a Business Opportunity Rule intended to require all sellers of business opportunities—including MLMs—to provide enough information to enable prospective buyers to make an informed decision about their probability of earning money.
Rules and regulations are getting tougher in developed countries, which is why many MLMs are moving to emerging markets to ply their trade. Be very careful with them because in MOST cases, they are pyramidic schemes rather than businesses that offer a genuine product. I would be even more wary if they were from a stand alone product - i.e. one product solely. NAME ME ONE MLM COMPANY WITH ONE PRODUCT THAT YOU HAVE BOUGHT FROM OR USED THEIR PRODUCT THAT IS STILL AROUND AFTER 3-5 YEARS (that's about the length of time for the founders to make their pile... remember Noni juice, what about Lampe Berger, Bel-Air). The danger in many Asian countries with MLMs is that the rules and regulations have NOT CAUGHT UP yet with some pyramid schemes which may be masquerading as MLMs. The second point is that even some MLMs are more sinister in that it obtains more profit from members recruitment than actually from selling the product. Our rules and laws are NOT ADEQUATE for the time being. I would strongly advise the Ministry Of Domestic Affair/Local Biz to have all MLMs properly registered, have a Complaints Bureau with teeth, have a Commission that looks at the integrity and credibility of the people behind these businesses.
I do not wish to attract legal repercussions by saying the following businesses are pyramidic schemes, but I would like to highlight that they need to be looked at and over many times, and if you still want to be a member, go talk to a psychiatrist or a really rational friend or write to me or the Securities Commission, maybe they can help you in the legitimacy of the businesses:
These are some well know MLMs, its been passed around a bit, do feel free to add your views. Up to you to consider if they are worth getting involved with... to me, they are not worth your time and heartache.The key takeaway from this posting is that: of course pyramid schemes are evil and absolutely wrong, but you don't have to be a purely pyramid scheme to have evil intent, and MLM being what it is, a multi level scheme / binary scheme needs to be vetted thoroughly.
To continue reading, please visit http://malaysiafinance.blogspot.com/2009/05/when-is-mlm-pyramid-scheme-do-yourself.html
Posted by Su Sheng Loong at Tuesday, May 26, 2009
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