Is this a Pyramid Scheme?

1996 Leonard W. Clements

“Questionable” MLM programs continue to flood the market at a record pace. But unlike their predecessors, they’re hiding their true nature better than ever. Many quasi-pyramids and money games today are taking great advantage of the ignorance of most people as to what constitutes an illegal pyramid. Please understand, I do not use the term “ignorance” derogatorily. The term comes from the word “ignore” and many of us are simply ignoring two basic, simple facts that make up a composite of a typical pyramid scheme. Also, understand that I am not an attorney, an attorney general, or a postal inspector. But I know what questions they ask, and so should you! One of the most common, and least accurate, questions we’re taught to ask is, “Is there a product involved.” Terrible question. Almost every pyramid out there today has thrown in some kind of token product knowing you’ll ask that question. Some extremists will go so far as to tell us that the “service” they provide in exchange for your fee is their administration of the intake and outgo of cash. Some will claim you are paying to have your name added to a mailing list! Of course, the typical chain letter leads you to believe you are paying for a report of some kind. However, there are literally dozens of schemes out there that are not nearly as obvious. Some offer what appears to be an abundance of bona fide, tangible products.

One of the best examples I can recall was a program called The Ultimate Money Machine. For $300.00 you were to receive such items as luggage, a 35mm camera, and a seminar on cassette tape valued at, of course, hundreds of dollars. Well, the camera was a cheap, plastic job that Sports Illustrated couldn’t give away, and the luggage you unrolled from a tube. Total cost to the company for all of these products was probably less than ten bucks!

A program called Euro-Round required a $100.00 payment in exchange for nothing. Later, to “make the program legal,” they added a little book.

Remember Marathon? Here you were asked to invest over $2,000.00 for a series of cassette tapes and some literature. The participants claimed that “education was priceless.” Let’s give them the benefit of the doubt and say the information may even have been worth the $2,000.00. I guess it’s possible. Unfortunately, this was an ongoing monthly fee! Were the tapes and literature supplied by Marathon worth over $24,000 to a participant who’d been in for a year? Probably not.

Several companies today offer product vouchers or certificates that can be spent on items out of a catalog or from various local merchants. They then claim to be offering “thousands” of products. Uh uh. They are only offering the funds to purchase these products from third-party, unrelated vendors. How many folks do you know that would be willing to purchase a $200.00 product certificate for $200.00 cash?

So don’t just ask if there is a product involved. Question whether the product is even close to being worth the overall price paid. You don’t have to be an economics genius to know the answer. Just ask yourself this question:

“Would anyone realistically ever purchase this product or service without participating in the income opportunity?”

Thousands of people purchase products from such companies as Nu Skin, Watkins, Herbalife and Amway every day without becoming distributors. They just want the product. This is true for most of the MLM companies out there. But ask yourself, Would anyone have ever subscribed to Washington Power Digest for $125.00 per year just for the publication alone? Very few. Did many people pay over $350.00 to Consumer’s Buyline just for the $39.00 discount buyers service? Doubtful. How many folks would pay over $30,000 for a two day seminar in the Bahamas, as was offered by CommonWealth and several other such schemes? Unless it was one helluva seminar, probably no one.

Another consideration would be whether or not there is any kind of financial reward for just the act of recruiting. But this question is trickier than it seems as well.

For example, what if a product based company also offered upline commissions on sales aids and training fees? Wouldn’t it then be possible to earn commissions by just signing up new distributors and getting them trained and ready to do the business of selling the products long before they’ve actually sold any products?

They key question here is, Does the product or service have value to someone who just wants the product or service? Is it retailable? Again, would someone pay for it even if they were not a distributor? So, would someone go to your company’s distributor training meeting or buy your company’s brochure if they were not going to participate as a distributor? Of course not. Does the company claim you only have to make a one time purchase? I’ve seen several programs recently where they claim you pay once, then sit back and wait for the residual income to roll in. But think about that. Where is the “new” money coming from? Obviously they can’t pay out more than they take in, so the only way the program can continue is if people keep recruiting. So, even if the “one time” fee is for a perfectly legitimate, tangible product of reasonable value, and upline commissions are only coming from that purchase, it may still violate the principle of a financial reward for the act of recruiting. If youÕre not convinced, then ask yourself this question:

“If all recruiting stopped today, would this company still be able to pay monthly commissions in the months ahead?”

If you only have to pay a one time fee in the beginning, then the answer would be a definite NO. Eventually all the existing funds would be used up and no new funds would be coming in. Commissions could only be paid if people continued to recruit. Whereas legitimate, legally sound MLM companies could continue to pay commissions from the ongoing buying and selling of their products.

So if you can’t answer the above two questions with a confident, resounding “Yes,” you should probably tell your prospective sponsor “No!”

I want to make it clear that the previous article is not necessarily based on the author’s opinion of the way it should be. It’s simply the way it is. Personally, I believe we are all intelligent, mature adults and should be allowed to do what ever we want with our own money as long as there is full disclosure and we are made aware of the risks involved. Also, much of this discussion is based on years of precedent, not just my lawmen’s interpretation of the law.

In fact, the roots of most MLM law is founded on the Amway vs FTC decision in 1979. Perhaps the single most defining characteristic of a legal network marketing company came from these hearings. Essentially, the question was asked…

“Can the last person in still make money?”

Obviously, the last person in a pyramid scheme (the most obvious of which have no product at all, only a cash investment) will never make a dime. But if you were the very last person to ever sign up as a distributor for Amway, Nu Skin or Shaklee, could you still make money? Of course. By buying the product at wholesale and selling it at retail. In some MLM compensation plans it would even be possible to earn commissions or bonuses based on national bonus pools, car allowances, or other prize awards.

If you were the last person to sign up in your MLM program, could you reasonably expect to be able to mark up the product or service and resell it to an end user? That is, someone who only wants the product or service.

Understand that I’m in no way suggesting that any company who might be violating any of the above three principles are necessarily going to be shut down. First of all, federal and state regulators don’t go out searching for them. Usually, someone must bring them to the attention of the regulators. As long as the scheme is keeping people happy and no one complains, it could last for years.

There are also some very good, honest programs out there that might not receive a “yes” answer to one or both of these questions. For example, I know of one very promising program that does pay commission on sales aids. Again, that does not necessarily put them in dire jeopardy. If a regulator has a problem with this, they’ll just stop paying commissions on sales aids. Most of the time, unless it’s just an outright scam, the offending company will always be given the opportunity to fix the problem long before there are any serious consequences.

Leonard Clements has concentrated his full-time efforts over the last six years on researching and analyzing all aspects of Network Marketing. He is a professional speaker and trainer, and currently conducts Facts & Myths of Multi-Level Marketing seminars throughout the U.S., Canada and Mexico. He is also a contributing editor of Profit Now (previously published as MarketWave), an opportunity analysis newsletter focusing on the MLM industry. Mr. Clements is the author of the controversial book Beyond The Veil, an objective, no-holds-barred, insider’s look at MLM industry. He is also the author of the best selling cassette tape Case Closed! The Whole Truth About Network Marketing, which has been labeled “the best” generic recruiting tape by six MLM company presidents. Mr. Clements has been involved in the MLM industry for sixteen years and is a successful distributor for a prominent MLM program (which is never mentioned in either the book or the cassette tape).

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