Internet Users Hbk - Chapter 10c What are Affiliate, Pyramid and MLM Programs?
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I Read Your Ebook, and it Gave Me A Headache! - By Dr Don Yates Sr PhD
In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.
The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money. The chart below shows how pyramid schemes can become impossible to sustain:
In many cases, the token product alone could not be reasonably sold for the price listed, and as such legal experts claim that, regardless of what is said, the real product being sold is the "reward" in question in those situations. In these cases, the operator could be charged with running a gambling game or failing to supply ordered products. Steven A. Richards, a lawyer who represents multi-level marketing (MLM) companies for Grimes & Reese in Idaho Falls, Idaho, has stated that often there are no clear legal tests for Ponzi schemes. But if the product sold has no value or very little value, and consumers wouldn’t buy it without the attached free gift, the scheme probably runs afoul of federal and state laws.
The “Matrix List” by which the sites receive their name would be what is known as a straight-line matrix, or 1 by X matrix. This is similar to many MLMs that use Y by X matrices to fill a down-line.
For example, one situation may be a 1 by 10 matrix for a Sony PlayStation 2 (a common reward). In such a matrix the site would usually sell an e-book for $50 to be placed on the list. After 9 additional people purchased a spot, the first person would receive either a PS2 or cash value equivalent and would be removed from the list.
The person who had been second would move up to the first spot and an additional 10 people would have to purchase in order for this person to receive a PS2. It is this orderly movement which has also given the name “Elevator Scheme” to these sites as people would move up the elevator (escalator, ladder) to the top at which they would then “cycle” out of the matrix.
In such a matrix, 9 out of 10 or 90% of all customers will not receive the reward item, because the rules of the scheme are that one reward is issued for every 10 customers that join. (The fact that the reward is issued to the customer at the top of the list doesn't change the proportion of rewards given to customers signed up.) Supporters claim that additional revenue streams from advertising are used to keep the lists moving. However, detractors claim that it is impossible to generate enough outside revenue. If the entire world were to join the list, 90% of the world would be unable to cycle if the site did not draw sufficient alternate revenue streams. Adding more people to the list does not change the fact that the majority would receive nothing without these streams.
Additionally, the amount of time needed before a given individual will receive the product in question is often mistaken. In a matrix in which 10 people are required before it will cycle, the first person to join only needs 9 additional sign ups, but the second person needs 18 additional sign ups, 8 more for the person above him, and then 10 more for himself. The third person on the list likewise needs 27 additional signups, 7 for the person on top of the list, 10 for the person directly above him, and then 10 for himself. And then the number of people required continues to grow for each new person joining the list. For the 10th person to cycle it would require 100 people total, and 1000 for the 100th, and so on. Wikipedia
You can create almost any type of pay plan with a matrix and there are many, many kinds of plans. There is nothing dishonest about this arrangement, in fact it is one of the few plans that actually pays out less than it brings in, which makes it sustainable. This is good for you and good for the program owner since it means that theoretically the matrix can continue forever.
Matrix plans are extremely flexible which is why there are so many variations on the matrix theme. Because you can create almost any kind of pay plan with a matrix they can be created good, no so good and even downright bad by those who let greed overcome them. The pay plans of matrices can be as different as night and day.
But, the matrix plans do all have one thing in common. They all rely on the statement “If everyone does the same thing”. Ask yourself when is the last time you remember that everyone did the same thing. I think you’ll come up with the same answer that I did “Never”.
So, there are some things you need to know about matrix programs before you join one. The first thing is how things work when everyone does the same thing and the other is how to tell a good matrix from a bad matrix.
A lower profit is obviously better since it means more money is being paid out to members. Of course the owner will also have the first position in the matrix. And there is no way to know if he/she has taken additional positions as well.
You should also consider the pay outs for positions on each level. Some matrices are set up to pay out a lot for the first level to help members become profitable quickly. This is good if you’re in early, but it means that there is less money left for later positions when there are more total members. This can limit the overall potential of the matrix.
Other matrices will offer higher payouts for levels 2 or 3 in the members downline. This encourages members to recruit and help build their downline. This can be an effective way to keep the matrix together for a longer period of time.
Finally, matrices can be set up to pay out on the bottom most level. This can make some matrices look very attractive since it appears there is a HUGE potential when the matrix is completely filled. Of course the matrix owner knows that almost every person who subscribes will never see anyone on their lowest level so he will never have to make that huge payout.
Basically matrix plans can be good, not so good or downright bad. There are some people who do make money in matrix plans and there are also a lot of people who lose money in programs that have matrix pay plans.
The difference is that the people who make money in matrix plans know that everyone won’t do the same thing and that it takes a huge amount of time and effort to fill a matrix and keep it filled.
Those who lose money in matrix pay plans are the majority of people who sign up and then think that someone else will fill up their matrix because others will do the same thing they did and there will be enough spillover to go around. As you’ve seen it just doesn’t work that way.
If you don’t want to be one of the people who has lost money in a program with a matrix pay plan then always remember that the only way you will be successful with any program is to put a lot of work into it.
There is no such thing as a lazy man’s way to get rich and don’t expect that everyone will do the same thing. The only way to become successful at anything is through hard work and effort. Don’t expect others to do your work for you because they won’t. Period.
If you do get into a matrix and there is someone else who is working as hard as you in the matrix then that is just icing on your cake. MatrixSchemeScam
If a plan offers to pay commissions for recruiting new distributors, watch out! Most states outlaw this practice, which is known as "pyramiding." State laws against pyramiding say that a multilevel marketing plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors.
Why is pyramiding prohibited? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people -- except perhaps those at the very top of the pyramid -- lose their money.
The Federal Trade Commission cannot tell you whether a particular multilevel marketing plan is legal. Nor can it give you advice about whether to join such a plan. You must make that decision yourself. However, the FTC suggests that you use common sense, and consider these seven tips when you make your decision:
- Avoid any plan that includes commissions for recruiting additional distributors. It may be an illegal pyramid.
- Beware of plans that ask new distributors to purchase expensive inventory. These plans can collapse quickly -- and also may be thinly-disguised pyramids.
- Be cautious of plans that claim you will make money through continued growth of your "downline" -- the commissions on sales made by new distributors you recruit -- rather than through sales of products you make yourself.
- Beware of plans that claim to sell miracle products or promise enormous earnings. Just because a promoter of a plan makes a claim doesn't mean it's true! Ask the promoter of the plan to substantiate claims with hard evidence.
- Beware of shills -- "decoy" references paid by a plan's promoter to describe their fictional success in earning money through the plan.
- Don't pay or sign any contracts in an "opportunity meeting" or any other high-pressure situation. Insist on taking your time to think over a decision to join. Talk it over with your spouse, a knowledgeable friend, an accountant or lawyer.
- Do your homework! Check with your local Better Business Bureau and state Attorney General about any plan you're considering -- especially when the claims about the product or your potential earnings seem too good to be true. FedTradeCommission
'Tis the season for consumers to be confronted with a wide range of health, beauty and fitness products and promotions. Many of these items aren't available on store shelves and are sold only through distributors.
The Federal Trade Commission warns consumers to apply a healthy dose of caution before buying products advertised as having "miracle" ingredients or techniques and guaranteed results. Many of these "quick cures" are unproven, fraudulently marketed and useless or even dangerous. Before using one of these products, the best prescription may be to check with a health professional.
If you sign up as a distributor, you may be promised commissions or other rewards-for both your sales of the plan's goods or services and those of other people you recruit to become distributors. These plans, often called "multilevel marketing plans," sometimes promise commissions or rewards that never materialize. What’s a worse, consumer are often urged to spend or "invest" money in order to make it.
- What's the company's track record?
- What products does it sell?
- How does it back up claims it makes about its product?
- Is the product competitively priced?
- Is it likely to appeal to a large customer base?
- What up-front investment do you have to make to join the plan?
- Are you committed to making a minimum level of sales each month?
- Will you be required to recruit new distributors to be successful in the plan?
When you promote the qualities of a product or service, you're obligated to present those claims truthfully and to ensure there's enough solid evidence to back them up. The Federal Trade Commission advises you to verify the research behind any claims about a product's performance before repeating those claims to a potential customer.
Likewise, if you decide to solicit new distributors, be aware that you're responsible for any claims you make about a distributor's earnings potential. Be sure to represent the opportunity honestly and to avoid making unrealistic promises. If those promises fall through, remember that you could be held liable. FedTradeCommission
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.
There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. Inventory loading occurs when a company's incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company's distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. The people at the bottom make excessive payments for inventory that simply accumulates in their basements.
A lack of retail sales is also a red flag that a pyramid exists. Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.
A Ponzi scheme is closely related to a pyramid because it revolves around continuous recruiting, but in a Ponzi scheme the promoter generally has no product to sell and pays no commission to investors who recruit new "members." Instead, the promoter collects payments from a stream of people, promising them all the same high rate of return on a short-term investment. In the typical Ponzi scheme, there is no real investment opportunity, and the promoter just uses the money from new recruits to pay obligations owed to longer-standing members of the program.
In English, there is an expression that nicely summarizes this scheme: It's called "stealing from Peter to pay Paul." In fact some law enforcement officers call Ponzi schemes "Peter-Paul" scams. Many of you may be familiar with Ponzi schemes reported in the international financial news. For example, the MMM fund in Russia, which issued investors shares of stock and suddenly collapsed in 1994, was characterized as a Ponzi scheme.
Both Ponzi schemes and pyramids are quite seductive because they may be able to deliver a high rate of return to a few early investors for a short period of time. Yet, both pyramid and Ponzi schemes are illegal because they inevitably must fall apart. No program can recruit new members forever. Every pyramid or Ponzi scheme collapses because it cannot expand beyond the size of the earth's population. When the scheme collapses, most investors find themselves at the bottom, unable to recoup their losses.
Some people confuse pyramid and Ponzi schemes with legitimate multilevel marketing. Multilevel marketing programs are known as MLM's, and unlike pyramid or Ponzi schemes, MLM's have a real product to sell. More importantly, MLM’s actually selling 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 are paid for real retail sales, not for new recruits.
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I Read Your Ebook, and it Gave Me A Headache! - By Dr Don Yates Sr PhD
About the Author: Dr Don Yates Sr PhD
RSS for Dr Don's articles - Visit Dr Don's website
Author Internet Users Handbook, 2012, 2nd Edition (Full Version) - A Comprehensive Guide to Avoiding Scams Online While Doing Business.
The handbook is also available Internet Users Handbook, 2012, 2nd (Free Articles and Downloads)
Founder: The Internet Scams Anonymous (ISA) Groups
Forex, Investment Adviser, Business Entrepreneur, Mentor, Coach, Adviser
MBA, PhD Organizational Development and Human Behavior, Dissertation"Top Performers"
Former US Navy (enlisted and officer) 17 years, 2 sons in Desert Storm
Founding President/CEO/Broker La Jolla Newport Financial, Procomp Computer Services, Inc and Investment Quality Real Estate ((IQ), La Jolla California and Incline Village (Lake Tahoe), Nevada 1/1/1981. Bootstrapped $137 into $15 million plus. International Financial Adviser/Consultant for business, commercial and real estate development
Top Civilian for Aircraft Maintenance on the Staff of Commander US Pacific Fleet. Business Entrepreneur, Founder, Chairman, Director, CEO, President of a dozen successful ventures since age 8
Business Adviser, Mentor and Coach for start-up and existing growth companies.
Click here to visit Dr Don's website.
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