MULTI-LEVEL
MARKETING versus
PYRAMID SCHEME
Lesson Obejctives:
1. Develop measure to prevent being victimized by Pyramid scheme;
and,
2. Differentiate Pyramid and Ponzi Scheme
Pyramid Scheme
A pyramid scheme is a fraudulent system of making money based on
recruiting an ever-increasing number of "investors." The initial
promoters recruit investors, who in turn recruit more investors, and so
on. The scheme is called a “pyramid” because at each level, the number
of investors increases. The small group of initial promotors at the top
require a large base of later investors to support the scheme by
providing profits to th earlier investors.
MULTI-LEVEL MARKETING
Multi-level marketing is a method of selling products directly to
consumers without intermediary retail stores. Products are sold
through a network of distributors or salespersons set up to resemble a
pyramid: each distributor recruits and trains additional distributors and
will earn commissions on their sales, as well as on the sales he or she
makes. Because of their pyramidal structure, multi-level marketing
companies can sometimes be pyramid schemes.
Differences between a Legitimate Multi- level
Marketing Company and a Pyramid Scheme
A legitimate multi-level marketing company emphasizes reliable products or
services. A pyramid scheme uses products or services to disguise its guest for
collecting money from the investors on the bottom levels to pay other investors
further up the pyramid.
In a typical pyramid schemd, new investors must pay a fee for the rigjt to sell the
products or services as well as for the right to recruit others into the pyramid for
rewards unrelated to product sales or services. Very often the products or services
the victim bought are unsalable, and the pyramid’s promoters refuse to repurchase
them. On the other hand, legitimate multi-level marketing companies will buy back
unsold merchandise, although often at a discount from the original price.
Success in multi-level is based on two factors: product and service quality, and
the hard work involved in being able to sell the products or services. Recruitment of
new investors is secondary.
Why do Pyramid Schemes Always Fail? And
Why do Legitimate Multi-Level Companies
Sometimes Survive?
Pyramid schemes are doomed to fail because their success depends on the
ability to recruit more and more investors. Since there are only a limited
number of people in a given community, all pyramid schemes will ultimately
collapse. The only people who make money are those few who are ont he top
of the pyramid.
Legitimare multi-level marketing companies, on the other hand, can be
around for a long time. Although the recruiting of additional investors is an
essential part of the marketing practice, since legitimate multi-level marketing
companies involve solid products or services, participants in these companies
are not subject to huge losses.
Why do people invest in
Pyramid Schemes?
There are three basic categories of people who invest in pyramid
schemes: those who participate out of greed; those who are misled
into thinking that they are joining an “investment club” or a “gift
program”; and those who believe that the products or services are
legitimate.