Thursday, December 27, 2012

Learn More About Pyramid Scheme

In researching of any business, it is important to know whether the business is sustainable. I came across a very interesting presentation showing how a company may hide their true identity by selling products without much differentiation at a highly inflated price but in actual fact is just profiting when their distributor (customers) joining the company and make most of their money through recruiting new members.

So what is Pyramid Scheme?
A pyramid scheme is to get the number of participants by the way of multilevel marketing.
The differences between the two is pyramid scheme is often profiting more from recruiting members rather than selling the products like any legitimate multilevel marketing company.

Well, at the end, all pyramid scheme will eventually collapse and fall because there will not have enough new members to join the pyramid to sustain the payout.

"if the participants obtain their monetary benefits primarily from recruitment rather than sale of goods and services to consumers."

But if the definition is so easy to understand why are there so many people that still falls into the trap of pyramid scheme?

Company may hide these scheme under their so call products and services and in order to provide such a high payout commission to the members, they will need to sell something that worth minimal to nothing at a highly inflated price. It sounds like purchasing a normal product but in actual fact the amount of money you pay is not just for the product itself.

To achieve this, the company will then need to be highly active in recruitment because the moment the recruitment slow down or stop completely, the scheme will eventually collapse.

The summary of the above:
- not all MLM company which are selling products or services does not falls under the categories of pyramid scheme.
- Even very well recognized brand or listed company may still be considered MLM if they sell products and is not sustainable.

You need to know about Pyramid Scheme not just for your own investment but also when you are investing in any stocks market where company might be one of the pyramid scheme categories.

Another item to highlight. If the multilevel business you are planning to participant sells more products to their own distributors rather than the actual consumer outside of the network. It's most probably pyramid scheme.

From FTC Website:

  • Share On Facebook
  • Digg This Post
  • Stumble This Post
  • Tweet This Post