Despite all efforts made by direct sales industry’s players, legitimate direct selling model and pyramid schemes have often been confused.
Actually, there are clear distinctions between the two. Yet, pyramid scheme promoters do everything possible to disguise what they really are after and represent themselves as lawful network marketing activities.
We will go over some of the most frequently asked questions below:
It is a fraudulent scheme where a participant’s source of income depends solely or heavily on persuading other people to join instead of selling goods or services.
There are several characteristics common to all such fraudulent schemes:
* Promise of high income with a little effort
* Sales of products having little or no impact on earnings
* Requirements of high fees and/or purchases to join
* Pressuring rather than convincing others to participate
* So few people benefiting from the losses of many
All have those common features mentioned above. However, while some of these scams are easy to detect, some others misrepresent themselves to avoid authorities’ attention.
Generally, what the second group does is to sell products that have little or no value at unreasonably high prices. By doing so, they claim that participants’ earnings are based on sales of those products.
Features that exist at legitimate direct sales businesses:
* Participation is either free or against a small amount of payment
* Participants’ incomes rely on sales of goods or services
* Goods or services that are sold have values and are demanded by end users
* Inventory loading is not encouraged and a clearly defined buyback policy exists
Yes! That being said, not all countries have specific provisions against pyramid schemes in their legislations. Even in those countries though, pyramid organizations are prosecuted and shut down under various related laws and regulations.
In many cases, not only the “founders”, but also the participants face criminal charges for promoting the scam.
It is basically an investors’ pyramid scheme. In those organizations, investors’ earnings are based on newcomers’ investments, but not on the proceeds from their own funds.
These are named as such after Charles Ponzi’s infamous fraudulent scheme in the U.S. in the early 20 th century. Ponzi spent his last years in poverty and died at a charity hospital in Brazil.
No, all such schemes are bound to collapse. The “business” here does not rely on the exchange of goods or services, but on the acquisition of new people. So, any hiccups in the inflow of new participants results in a collapse. This occurs without any exceptions and sadly, those who initiate a pyramid scheme know this will happen from the very beginning.
Only a few people! They are those who establish the scam and also a few others who join at the start.
Looking for the existence of such scams’ typical features as listed here would help a lot. If start-up costs are reasonable, unsold products can be returned, and earnings are based on selling the products, most probably this is a legitimate business.
Not at all! This is a reality, but there are major differences.
First of all, earnings are based on exchange of products in network marketing. That means the source of income is not based on losses of new recruits. In other words, there is no transfer of funds between the participants,
Secondly, network marketing is economically a sustainable model and it can last for decades offering all participants the same opportunity to earn. Pyramid schemes however, are destined to fail.
Hakki Ozmorali is the Founder of WDS Consultancy, a management consulting and online publishing firm in Canada, specialized in providing services to direct selling firms. WDS Consultancy is the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.
