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'Ponzis and pyramids... what’s the difference?' blog discussion
in Martin's blogs & appearances & MoneySavingExpert in the news
10 replies 4.5K views
Former_MSE_Lawrence Former MSE
This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.
Read Martin's "Ponzis and pyramids... what’s the difference" Blog.
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Recruitment structures for MLM companies do look like a pyramid, and at first glance they have many similarities with pyramid schemes. But there is a fundamental difference; you are primarily recruiting people to sell products, rather than recruit other people. If they choose to recruit others, they are recruiting them primarily to sell products too.
This is important; rather than earning the joining fees of people who are joining, you are earning a commission on the products they sell. This means you are not relying on people joining in order to get your money back. There is no imminent collapse of the pyramid so long as recruits have enough customers who wish to buy their products. Many famous names operate this way in the UK. Home shopping catalogues such as Avon, and party-plan companies such as Ann Summers are run along these lines. I have personal experience working within both of these companies' schemes and am still involved in Avon. The majority of people who join these two businesses sell the products to their customers and never even try to recruit anyone else. MLM is an aspect of the business rather than the nature of the business model itself.
There's a statutory declaration that MLMs in the UK are legally obliged to publish on their literature (I know that in the case of Avon it is published in huge bold writing right above where you sign the contract:
It is illegal for a promoter or a participant in a trading scheme to persuade anyone to make a payment by promising benefits from getting others to join a scheme. Do not be misled by claims that high earnings are easily achieved.
Unfortunately some companies who display this message don't live by it, so don't just assume that if they're displaying that message they're okay. If you wish to join a business of this nature, go in WITH YOUR EYES OPEN. Is it going to make you a millionaire? Not on your nelly! Can you make a good living from it? Yes, but you have to work very hard for a long time. Most people who earn a decent living could, in my experience, turn their skills and work ethic to other types of self-employment or work for an employer, and earn just as much money.
There's nothing inherent in these systems that make it easier to make money. Most people I know in these systems just plod along, making a bit of extra cash but certainly not 'living the dream'. I think the systems work best for people who want a flexible self-employed business that they can fit around the rest of their lives, don't have the cash to start up their own business, and want the benefits of selling proven products for a respected brand.
If you do want to join this kind of business, look for one that is registered with the Office of Fair Trading and the Direct Selling Association. Look for a recognised company name and established track record. Make sure the company is primarily expecting people who join to sell a physical product, not one that doesn't sell a tangible product, or where selling the product is secondary to the business of selling 'the dream'. Also don't touch the ones that expect money upfront. A good sell-at-home business will not charge you anything until you are earning money from it yourself, and then it should only be a nominal sum.
Hope that helps
Silvercharming's analysis is very good.
Faced with a recruiter trying to get you to join a scheme the most important signifier is the movement of product to the end user or customer. If there is no product being supplied to customers you have to wonder where the profit is coming from. If the profit is not coming from visible sale of goods it is probably going to be coming from you!
The basis of a good MLM scheme is that there is the possibility of making a profit from retailing goods in proportion to the amount of effort you put in. It is one of the few ways that a person without capital reserves can become a business owner. The basis of real financial success is that if you can do it you can teach someone else to do it and for that the company will pay you a little bit of on-going bonus or commission - in proportion to how well you recruited and trained your 'downline'. You are looking for good people to work for your parent company and if you find them the parent company will reward you. Good people are hard to find.
A properly run MLM company is no more a pyramid scheme than your local supermarket is. Furthermore if your circumstances mean that stacking supermarket shelves or similar menial work is the best job you are going to find you could well benefit from considering (carefully) if you have what it takes to run your own business. Some companies are very supportive and they all want you to succeed.
The wonderful irony of the Pyramid/Ponzi scheme issue is that quite ordinary people are acutely aware of the pyramid trap and are therefore extremely doubtful about network marketing (Muti Level Marketing) , whereas a raft of obscenely well paid bankers and financiers couldn't see the biggest scam of its type and bought into these clever 'financial instruments' which were effectively a means of accessing the supposed excess trapped profit tied up in increased property prices. Essentially what happened is that mortgages were sold on at increasing prices until the sale value of the mortgage was greater than the value of the property it was secured against. The problem was then compounded by the fall in the property prices and the result was the collapse of the global banking system. The people who dreamed this up should be in jail. Like Bernie Madoff.
Interesting to think about the state pension scheme...... It is a bit like a Ponzi scheme except that it doesn't have the exponential growth factor built into it. The growth in pensioner numbers against a declining number of workers paying into the system is 'simple' demographics. Governments have not kept their eye on the ball and if/when they could see that there was a problem looming have failed in their duty to do something about adjusting the terms and chosen to leave the problem for somebody else to deal with. The basis of the state pension scheme is a contract between generations. There is no reason why it should not survive indefinitely, but it was seriously damaged by the change in linking pensions to prices rather than incomes. The alternative of money-purchase pension provision is vulnerable to the vagaries of the financial and stock markets and as we have seen over recent decades wide open to pilfering by asset- strippers: Hanson and White, Maxwell and others many who have stolen money to enhance their wealth now at the expense of the modest wealth of future pensioners.
It's not clear to me what you are referring to when you say these schemes have been outlawed.
Pyramid schemes certainly are outlawed and I'm not aware of any currently running. Though I expect someone is 'at it' somewhere. Maybe just in their local pub, or maybe in the field of international banking.
It's also not clear to me whether you include MLM schemes as part of the problem the law was set-up to address. The distinction as I tried to explain is fairly clear.
Kleeneze and Avon are working well within the law as are a lot of other companies, and genuinely offer 'opportunities' to make money quite legitimately though they are not charities and use the system because it produces shareholder returns. Personally I regard their product range as containing too much 'rubbish'. Sadly that is not illegal!
I'd be interested to know if you can find any flaws in the Wikaniko proposition because I am seriously considering going beyond being just a customer and beginning to actually trade their product.
Well, Wikaniko do make fraudulent claims about such products as the 'Universal Fuel Saver'. I'd have thought that was a pretty big flaw.
Thats not a subtle (not!) plug is it? I just checked out the whois record for that domain.
Anyone remember the 'echoes' MLM for perfumes and aftershaves? I wonder what happeded to them?
there is an interesting review of the company by Business Opportunity Watch magazine, on page 1 if you google Wikaniko
Echoes was made by L'Arome who folded in 1993 after being successfully sued by Chanel for copyright infringement. Much to my regret as the products sold themselves..
Many of the Play-Station Generation are of course aware of how the pensions Ponzi scheme works and they bitterly resent Old Age Pensioners, especially the "baby boom generation" who allegedly "have had it all."
May I just use your columns to remind people what life was like in the 1950's? There was food rationing for a start and real austerity. For example no television, no telephone, no car, no refrigerator, no washing machine, no double glazing, no loft insulation and no central heating.
Life would consist of sour milk every summer and burst pipes every winter. In winter I would often be sent to run to get the plumber when the pipes burst (no telephones or cars see!) The plumber would arrive later with his hand-cart and tools and he'd repair the burst.
This may read like a Monty Python sketch but it truly happened and this was the norm for people living in the north of England.
There were no Blackberries or Nike trainers for us. One can only surmise that the Play-Station Generation want more money so that they can buy drugs.
Isn't there a proverb "A nation divided against itself cannot stand"?