Discussion and review of 5 Flags which often identify Pyramid Schemes. Companies under the umbrella of MLM, Direct Selling, Party Plan... are all covered here. The discussion squarely focuses on recruitment practices and product purchasing.
Many companies launch with the mindset of Recruit, Recruit, Recruit... Design a Compensation Plan to Benefit Leaders.... (for their recruiting)... But, that practice can land you in a whole heap of issues. Further, you end up with a large group, possibly 70 to 90% of your sales force, not earning revenue, discouraged, and costing you in customer service calls, complaints, negative blog articles, letters to the AG and more.
Any company seeking to launch or correct their direction should take note of these points and the advise given within.
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If you'd like MLM Software or Direct Selling Party Plan Software, design by folks who understand the industry and what you need to operate and stay in business for the long haul... call 1-888-221-0106.
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Some exerpt.... Table 1: Characteristics and effects of product-based pyramid schemes
CHARACTERISTICS
1. Each person recruited is empowered & given incentives to recruit other participants, who are empowered and motivated to recruit still other participants, etc. – in an endless chain of empowered and motivated recruiters recruiting recruiters – without regard to market saturation.
EFFECTS
Demonstrates primary income is from recruiting, especially with the features of unlimited recruitment and such powerful incentives to recruit – vs. meager profits from retailing over-priced products. Hyper growth inevitably leads to perceived saturation, which often is followed by a Ponzi move to other markets to repay early investors.
CHARACTERISTICS
2. Advancement in a hierarchy of multiple levels of "distributors" is achieved by recruitment, rather than by appointment.
EFFECTS
Demonstrates primary income is from recruiting, since that is the only way to advance in the scheme and to realize major profits. In recruiting MLMs, most recruits are doomed to failure.
CHARACTERISTICS
3. "Pay to play" requirements are met by "incentivized purchases".
EFFECTS
Raises breakeven bar, assuring losses for most participants. May place MLM in category of a security or business opportunity – or a de facto investment in a pyramid scheme. Encourages hyper-consumption of products by participants – who are the primary buyers.
CHARACTERISTICS
4. Company payout per sale for upline participant equals or exceeds that for the person selling the product
EFFECTS
Removes incentive to do direct selling, since recruiting is potentially many times more profitable.
CHARACTERISTICS
5. (optional) The company pays commissions and bonuses on more "distributor" levels than are functionally justified.
EFFECTS
Demonstrates primary income is from recruiting, not retailing. Enhances leverage for top participants who profit hugely, while assuring high loss rate for lower levels. Virtually eliminates retail option, due to high wholesale prices that make direct sales with retail markup difficult. Primary retail target is new recruits – which are making de facto pyramid investments.
CHARACTERISTICS
1-5: Combining all five characteristics
EFFECTS
Results in high loss rates (close to 99.9%) – much higher than for no-product pyramid schemes (87.5% to 93.3%). Strong emphasis on recruiting as the primary source of income, satisfying most statutory definitions of a pyramid scheme. Demonstrates extreme leverage, necessitating fraud and misrepresentation in order to survive and grow.