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Pyramid schemes and Network Marketing
pyramidal system
The difference between pyramid schemes and Network Marketing
On one side, we have a "system", a business model.
On the other, we have a way to achieve his goal, a tool or technique.
These two are very different. A pyramid scheme is a type (illegal) business while network marketing is nothing more than a method to generate sales. While it is true that pyramid schemes are in general use network marketing to find new followers, the concept of network marketing is neither illegal nor immoral in itself: only use can be.
Explanation
Each new member will have to pay the entrance fee. This amount will be given in part to the "godfather" of the member then the rest is divided between "sponsors-of-sponsors" along the chain.
Having enlisted on average 6 people Member covers his last start and begins to generate a profit.
This system is called "pyramid" system because its members form a pyramid: each level is larger than the precedent, to the head, the top of the pyramid, the creator of the system.
The pyramids are illegal for two reasons.
The first reason is that pyramid schemes do not create wealth: the money earned by the members comes from other members of the lower levels. There is no value creation and therefore the system only transfers the money to the top.
The second - and main - reason is that the pyramidal system is not a sustainable system. In other words, the system is doomed to failure.
Consider a simple example:
To enter the game, each prospect must pay a fee - say € 100.
After becoming a member, that person will have to join 6 other people in order to recover his initial bet and continue to recruit prospects to generate a profit.
Now consider that each person enrolled an average of 6 new members.
At the top of the pyramid we have a founder. The "head" enlists 6 members, representing the second level.
Each of these members hired six members in turn. 6 x 6 = 36
At the third level, so we have 36 members, each 6 enlisting new members. 36 x 6 = 216.
At the fourth level, we already have 216 members, and the pyramid continues to grow exponentially at every level.
Now look at the 13 level of the pyramid: here we have over 2 billion members in the system !
And what does the fourteenth level? More than 13 billion members are now in the pyramid! A figure much higher than the world population!
This simple demonstration puts a light thing to function, the system requires continued enrollment of new recruits and therefore collapses when prospects are lacking.
From there, suffering from the collapse of the system ?
The last level of the pyramid who invested $ 100 and never find new recruits to cover the cost of the initial investment suffers a net loss. On the other hand, higher levels have had time to get rich money from their recruits.
For this simple reason, pyramid schemes are illegal in many countries including France.
Can this be legal ?
Some "like" systems of the pyramid while perfectly legal. This is where the major problem of justice differentiate a pyramid scheme from a legal system.
Here are three elements to take into account to estimate the legality of a sales system based on network marketing:
- Is there a real product or service sold? In other words: Does anyone pay for a product or is it a disguised entrance fee in order to subsequently sell the same right of entry to others? In most countries (including France) pay any sum for working is considered illegal
- Is there a limit to the number of sellers in the structure? Many bundling systems or sales at home using network marketing to sell a product. In general the idea is to organize a meeting in someone's home (the famous Tupperware meeting) for the group of friends can enjoy competitive prices on a certain product line. In this system, there is no entry fee but are mostly buyers pay only for the purchased product and do not become sellers in turn. The number of sellers is defined and controlled and revenues come from sales and not for recruitment of new members.
- The members receive a sum of money when hiring new salespeople? In a pyramid scheme, members earn their living by enlisting new recruits. In a legal system, sellers receive a fixed salary and variable sales but not related to the recruitment of new members.
The legal side: the multilevel marketing
There are some companies using a similar economic system often misinterpreted as being pyramid. These companies use a so-called commercial art multi-level (also called multilevel marketing or MLM) where the recruitment of new customers is through old and with a form of compensation for the "sponsor" (reduction voucher , gift, etc.). Some companies use this marketing method to the exclusion of any other, ensuring at the same circuit canvassing, advertising, and distribution.
The difference from a legal distribution is that in a pyramid, income exclusively from the "recruits". In a multilevel marketing honest (MLM companies recognized), there is sale of products or services, the product is real and the representative was able to enjoy himself, which was in fact one of the reasons for acceptance of the idea of selling it in turn. In addition, recruitment was done with good information about the earning potential that a seller "normal" is capable of achieving. Note that the remuneration is never due to the recruitment of new sellers, but its own commercial sales. On the other hand, the number of recruits is always limited by the distribution company because it knows only too well that too many sellers kill his own business in the future more will inevitably degrade its image.
Graphically, what happens ?
To more easily see the effects of a Ponzi scheme, I had fun creating some graphics. The figures I used to make them are totally arbitrary, but I think they illustrate the phenomenon. To start, I imagined an exponential increase in enrollment of members (in the Ponzi scheme) at first, then slowing the progression thereafter. Graphically, this is what happens:
Then I imagined that every incoming invests the same amount at the beginning and not anything out of his pocket afterwards. On the graph below, the red line represents the non-cumulative cash receipts from the Ponzi scheme (which therefore represent payments for new members, month after month). Next, imagine that each member benefits from compound interest while reinvesting all of its gains for a while (6 months in my example) and then begins to withdraw money when it gets interesting for him. Of course, he withdrew more and more over the month (50.- and 100.- and 200.- ...). These withdrawals are represented by the green line below. We see that at a certain time, spending (green line) become much higher than the cash receipts (red line) ... and the system collapses !
