Tweamster's Blog

Pyramid, Scam, or For Real | May 31, 2010

What Are They and What’s The Difference?

I sometimes wonder why there is any confusion on these terms as they apply to working from home, but then other times I think it’s just par for the course. There seem to be people on this planet who enjoy denigrating, confusing and muddling up the issues. So, to piss off those types of people (who like to denigrate, confuse and muddle up things), I am going to inject some clarity into the subject. All right?

I guess being the unserious type; I should inject my humorous look at it first. The difference is in who gets screwed: with a scam everyone gets screwed (except the guy who thought it up); with a pyramid, the latecomers get screwed; and with a real business or opportunity – no one gets screwed.

Definitions

Scam – A fraudulent business scheme; a swindle. An illegal plan for making money. A scheme for making money by dishonest means.

Pyramid – An illegal scheme in which participants give money or other valuables in exchange for the opportunity to receive payment for recruiting others to participate in the scheme.     A fraudulent money-making scheme in which people are recruited to make payments to others above them in a hierarchy while expecting to receive payments from people recruited below them. Eventually the number of new recruits fails to sustain the payment structure, the scheme collapses with most people losing the money they paid in.              From the Federal Trade Commission – “Pyramid schemes now come in so many forms that they may be difficult to recognize immediately. However, they all share one overriding characteristic. They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure.”  – http://www.ftc.gov/speeches/other/dvimf16.shtm, paragraph 4

Network marketing – Most definitions of network marketing get way too complicated; here’s my favorite simple definition: “Any method of marketing that allows independent sales representatives to recruit other sales representatives and to draw commissions from the sales of those recruits.”  – Wave 3  The New Era in Network Marketing by Richard Poe ©1995  “Network marketing is a form of distribution of products and services that, through word of mouth promotion, uses the power of duplication  of effort.”  –  The New Entrepreneurs by Rene Reid Yarnell ©1999                                           “Some people confuse pyramid … schemes with legitimate multilevel marketing. Multilevel marketing programs are known as MLM’s (or network marketing) and unlike pyramid … schemes, MLM’s have a real product to sell. More importantly, MLM’s actually sell their product to members of the general public, without requiring these consumers to pay anything extra or to join the MLM system. MLM’s may pay commissions to a long string of distributors, but these commission(s) are paid for real retail sales, not for new recruits.”  –  http://www.ftc.gov/speeches/other/dvimf16.shtm, paragraph 7

Another way to define it is who gets paid; in a scam, the originator gets paid; in a pyramid, the early birds get paid; in network marketing, anyone who makes a sale gets paid.

Examples of Scams

If you get an email from Nigeria wanting you to send money to prove you’re worthy of helping them transfer money into the U.S.; delete immediately, it’s a scam.

If you get a check from anywhere that you weren’t expecting, and when you call to verify, they ask you to send them the cash in exchange for the check; call the authorities – it’s illegal and is called bank fraud & mail fraud; and yes it’s a scam.

Examples of Pyramid Schemes

If there is a one-time fee to buy into the program or “business,” and there are no ongoing product sales, it’s most likely a pyramid. If all recruiting stopped today, where would the commission payments come from?

If most of the money comes from recruiting someone and the actual residual income comes from a tiny percentage of an ongoing purchase of a product or service, that is probably a pyramid even though it is well disguised.

If the ad says “One-time fee, no buying, no selling, no recruiting, we build your organization for you.” RUN quick like a bunny! If they don’t need you to sell or recruit or buy anything, why do they need you? (Hint – it’s your money) Your money/cash/commissions are only coming from the people that join after you. It is a pyramid.

If the start-up fee is your cost to purchase a report, and you make money by selling others the report to get them started; look out Martha, it’s a pyramid.

Examples of Network Marketing

Okay, I’ll admit I’m only going to pick obvious companies here that have stood the test of time. The whole point of this series of blogs is to teach you how to pick a good and worthwhile company that you can use as your vehicle to create that stable, long-term, leveraged, residual income.

Disclaimer: I am not recommending any of these companies as your home business opportunity, if you are looking at joining any of them, it is up to you to research them and do your due diligence and figure out if it’s the right company for you.

Amway, Herbalife, Mannatech, NuSkin, Pre-Paid Legal, Shaklee, Visalus, Xango are all network marketing companies.

Mary Kay Cosmetics and Melaleuca are not network marketing companies, but if they were, I would put them on the list too.

If you want to be amused, check out how many company names are on a reasonably current list of network marketing companies at: http://www.mlmconsultant.com/mlm_company_list_directory.htm

Now That You Know The Difference

You have learned one more of the basics, for more info, go to www.AlansMLMTips.com and sign up for the “7 Days, 7 Insider Secrets” email newsletter. (No money down, no obligation, it’s freeeeeeee…)

Quote

“If I had to do it all over again, rather than build an old style type of business, I would have started building a network marketing business.”  – Robert T. Kiyosaki, entrepreneur and author

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9 Comments »

  1. Alan,
    I think you gave a fair review on “scams” and ‘Pyramid” businesses. It all boils down to using due diligence and researching for yourself any company you are thinking of aligning with. Don’t rely on someone else’s opinion or views. Check it out for yourself! 🙂

    Have an awesome day,
    Val 🙂

    Comment by Val Wilcox — May 31, 2010 @ 12:39 pm

  2. Hi Alan,

    You gave a good review on this subject. People are blinded by the differences especially when people do belong to legit network marketing companies and are frustrated and decide to take your money.

    People want to blame the company, yet it has nothing to do with them.

    I honestly have done all the homework researching different companies and when I started with MLM always thought there was something up.

    Later on, I realized that it is not the company it is the person representing the company. Like you and I, we are the ones that have to make it happen and if we don’t, try harder until it works.

    Thought I would throw in my “2 cents”

    Have a great night!
    Tommy D.

    Comment by Tommy DiPietro — June 2, 2010 @ 6:15 pm

    • Thank you for your “2 cents” worth! That why one of the things you should look at is who is sponsoring you.

      Thanks,
      Alan

      Comment by tweamster — June 2, 2010 @ 9:35 pm

  3. Hey Alan,

    This is a really good post, especially for beginners. I love how you broke it down.

    Rhonda 🙂

    Comment by Rhonda Miller — June 3, 2010 @ 11:17 am

  4. Alan,

    This is a good post but I have to disagree with one statement that you made.

    Mary Kay and Melaleuca are both Indeed Network Marketing companies.

    Neither of their products can be purchased in a retail store, the only way to get them is to know someone who is a distributor, or know someone who knows someone.

    They both also have a multi tier pay plan where residual income is earned by recruiting others in the the business.

    If that does not qualify as Network Marketing, then I don’t know what does.

    Comment by Scott Manesis — June 16, 2010 @ 7:31 am

    • Hi Scott,

      Thanks for the comment. I agree with you, that was a veiled allusion to the fact that they protest being called network marketing companies. God only knows why.

      I think Mary Kay calls themselves a direct sales company; and Melaleuca calls themselves a referral marketing company. Maybe someone would like to explain the difference and why they disdain the network marketing title.

      Alan

      Comment by tweamster — June 16, 2010 @ 9:28 am

  5. The difference pyramid, real business and scam has been very puzzling and difficult to nail down, but is now very clear and easy to differentiate due to the extremely good demonstrations and examples.

    Comment by Carrie — June 19, 2010 @ 7:51 pm


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