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Wednesday, November 10, 2010

Pyramid MLM : The Inside Truth

 The main characteristic of a pyramid scheme is that participants only make money by recruiting more members. There are many different kinds of pyramid schemes, but the two most basic are product-based and so-called naked pyramid schemes.

In a naked pyramid scheme, no product is sold. Here's how it works:
One person recruits 10 other people to participate in a "no-fail investment opportunity."
The 10 recruits each pay the recruiter $100.
The recruiter now tells them to go out and recruit 10 more people to do the same.
If each recruit is successful, they'll all end up with $900 in profit from a $100 investment.

Pyramid MLM : The Inside Truth

Pyramid schemes quickly become unsustainable.

Sounds simple enough, but here's the problem: Let's say the initial 10 recruits each find 10 more people. Those 100 new recruits will have to find 10 recruits each to make $900. That means they have to find 1,000 people willing to sign up for the program. And if they somehow find 1,000 people, that next level of the pyramid will need to sign up 10,000 to make a profit. Eventually, there won't be enough recruits at the bottom of the pyramid to support the level above it. That's when the pyramid topples and everyone at the bottom loses their investment.

A product-based pyramid scheme is the same concept disguised as a legitimate direct sales opportunity. Here's how it works:
A distributor recruits 10 salespeople who each pay $500 for a starter kit of products to sell.
The distributor gets 10 percent of each starter kit that's sold.
The distributor also gets 10 percent of each product that any of his recruits sells, including more starter kits.
The recruits are told that the fastest way to make money isn't by selling products, but by recruiting more people to buy starter kits.
The people at the top of the pyramid get commissions from everyone in their downline, the many levels of recruits below them on the pyramid.

     The problem with most product-based pyramid schemes is that the products themselves don't sell very well, or have very slim profit margins. So the only way to make money is to find more recruits. Eventually (and surprisingly quickly), the market becomes saturated. 

It's mathematically impossible for everyone to make money in a pyramid scheme. For example, if each recruit needs to find 10 more people to recoup the cost of his or her initial investment, the eighth level of the pyramid would have to recruit a billion people to make back their money. And the next level would need 10 billion, nearly twice the population of the Earth.

In fact, pyramid schemes don't work unless somebody loses. Those at the bottom of the pyramid are essentially defrauded by those on top. It's a mathematical fact that no matter how many people join a pyramid scheme, 88 percent of the members will be on the bottom level and will lose their money . Pyramid schemes are illegal because people don't lose their money due to normal market forces, but because the system requires them to lose so that a few at the top will win.

Do share your comments & experience for more information.


Len Clements on November 10, 2010 at 3:27 PM said...

"So the only way to make money is to find more recruits. Eventually (and surprisingly quickly), the market becomes saturated."

MLM companies have been around for over 74 years. There are thousands of them. Name ONE that failed due to market saturation.

If this inevitable condition actually does occur, ever (let along "quickly"), then why are there nine MLM companies over 40 years old, and eleven that had sales in excess of one billion dollars last year?

Len Clements
Founder & CEO

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Tracey E Mitchell on November 30, 2010 at 4:24 PM said...

Good Article. I wrote an article on this very subject==>

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