Internet Users Hbk - Chapter 10d 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
To the potential investor/recruit this may look like a very appealing opportunity. The pyramid promoter is likely to persuade the investor that he is "getting in early" and that he should consider himself at the top of the matrix. From this perspective, it appears that he can earn $3,960 on an investment of $500, a whopping 792 percent return.
Now consider the pyramid from the investor/victim's perspective -- after the entire scheme has collapsed around him. The victim, like the first investor, thought of himself at the top of the pyramid but suddenly realizes that he is actually at the bottom, unable to find people interested in the program to build out his downline. He is not alone because mathematics shows that MOST investors will find themselves at the bottom of the pyramid when it collapses. The very structure of this matrix dictates that whenever the collapse occurs, at least 70 percent will be in the bottom level with no means to make a profit.
A Ponzi scheme could yield even worse results for investors, because it does not pay out any commissions at all. This can have disastrous consequences, as exemplified by Charles Ponzi's infamous fraud in the 1920's. Charles Ponzi, an engaging ex-convict, promised the Italian-American community of South Boston that he would give them a 50 percent return on their money in just 45 to 90 days.
Mr. Ponzi claimed that he could pay such a high rate of return because he could earn 400 percent by trading and redeeming postal reply coupons.
These coupons had been established under the Universal Postal Convention to enable a person in one country to pre-pay the return postage on a package or letter sent back from another country. For a short time after World War I, fluctuations in currency exchange rates did create a disparity between the cost and redemption value of postal reply coupons among various countries.
However, Mr. Ponzi discovered that he could only make a few cents per coupon and that handling large volumes of coupons cost more than they were worth. He stopped redeeming any coupons but continued to collect investors' money. When he actually paid a 50 percent return to some early investors, his reputation soared and more money flowed in from around the country. Mr. Ponzi bought a stylish house in the best part of town and purchased a large minority interest in his local bank, the Hanover Trust Company.
Eventually his scheme began to unravel, bringing ruin to the bank and thousands of investors. When Mr. Ponzi began to overdraw his accounts at Hanover Trust, the Massachusetts Banking Commissioner ordered Hanover Trust to stop honoring Ponzi's checks. The bank refused and even issued back-dated certificates of deposit to cover Mr. Ponzi's overdrafts. A few days later, the Banking Commission took over Hanover Trust, and Mr. Ponzi was arrested for mail fraud. In the end, Charles Ponzi owed investors over $6 million, an enormous sum of money for that time. He was convicted of fraud in both state and federal court and served ten years in prison.
In re Amway Corp., another landmark decision from the 1970's, the FTC distinguished an illegal pyramid from a legitimate multilevel marketing program. At the time, Amway manufactured and sold cleaning supplies and other household products. Under the Amway Plan, each distributor purchased household products at wholesale from the person who recruited or "sponsored" her. The top distributors purchased from Amway itself. A distributor earned money from retail sales by pocketing the difference between the wholesale price at which she purchased the product, and the retail price at which she sold it. She also received a monthly bonus based on the total amount of Amway products that she purchased for resale to both consumers and to her sponsored distributors.
Since distributors were compensated both for selling products to consumers and to newly-recruited distributors, there was some question as to whether this was a legitimate multilevel marketing program or an illegal pyramid scheme. The Commission held that, although Amway had made false and misleading earnings claims when recruiting new distributors, the company's sales plan was not an illegal pyramid scheme.
Amway differed in several ways from pyramid schemes that the Commission had challenged. It did not charge an up-front "head hunting" or large investment fee from new recruits, nor did it promote "inventory loading" by requiring distributors to buy large volumes of nonreturnable inventory. Instead, Amway only required distributors to buy a relatively inexpensive sales kit.
Moreover, Amway had three different policies to encourage distributors to actually sell the company's soaps, cleaners, and household products to real end users.
First, Amway required distributors to buy back any unused and marketable products from their recruits upon request. Second, Amway required each distributor to sell at wholesale or retail at least 70 percent of its purchased inventory each month -- a policy known as the 70% rule. Finally, Amway required each sponsoring distributor to make at least one retail sale to each of 10 different customers each month, known as the 10-customer rule.
The Commission found that these three policies prevented distributors from buying or forcing others to buy unneeded inventory just to earn bonuses. Thus, Amway did not fit the Koscot definition: Amway participants were not purchasing the right to earn profits unrelated to the sale of products to consumers "by recruiting other participants, who themselves are interested in recruitment fees rather than the sale of products.
However, an appellate court decision called Webster v. Omnitrition Int'l, Inc., pointed out that the Amway safeguards do not immunize every marketing program. The court noted that the "70% rule" and "10 customer rule" are meaningless if commissions are paid based on a distributor's wholesale sales (which are only sales to new recruits), and not based on actual retail sales. The court also noted that an inventory buy-back policy is an effective safeguard only if it is actually enforced.
While new cases were refining the law in the 1990's, radical changes were underway in the marketplace. Pyramid schemes came back with a vengeance. Like most economic activity, fraud occurs in cycles, and new pyramid schemes exploited a new generation of consumers and entrepreneurs that had not witnessed the pyramid problems of the 1970's.
Also, the globalization of the economy provided a new outlet for pyramiding. Pyramids schemes found fertile ground in newly emerging market economies where this type of fraud had previously been scarce or unknown.
In Albania, for example, investors poured an estimated $1 billion into various pyramid schemes -- a staggering 43% of the country's GDP.
In the U.S., probably nothing has contributed to the growth of pyramid schemes as much as Internet marketing. The introduction of electronic commerce has allowed con artists to quickly and cost-effectively target victims around the globe. After buying a computer and a modem, scam artists can establish and maintain a site on the World Wide Web for $30 a month or less, and solicit anyone in the world with Internet access. Pyramid operators can target specific audiences by posting messages in specialized news groups (e.g., "alt.business.home" or "alt.make.money.fast"). In addition, through unsolicited e-mail messages -- known on the Internet as "spam" -- pyramid operators can engage in cheap one-on-one marketing.
Whereas it might cost hundreds or thousands of dollars to rent a mailing list and send 10-cent post cards to potential recruits, it costs only a fraction of that to send out similar e-mail solicitations. On the Internet, you can acquire one million e-mail addresses for as little as $11 and spend nothing on postage.
The Federal Trade Commission's current law enforcement efforts reflect this new wave in pyramiding. The Commission has brought eight cases against pyramid schemes in the last two years, and six of those have involved Internet marketing. One recent case, FTC v. FutureNet, Inc., is particularly instructive because it starkly reflects the potential for abuse in hi-tech and newly deregulated industries. FutureNet allegedly claimed that, for payment of $195 to $794, investors could earn between $5000 and $125,000 per month as distributors of Internet access devices like WebTV.
The FTC filed suit, charging that FutureNet's earnings claims were false because the company really operated an illegal pyramid scheme. Near the time of filing, FTC investigators discovered that FutureNet had begun to sell electricity investments as well, riding a wave of speculation in advance of the deregulation of California's electricity market. The Commission obtained a TRO and an asset freeze over the defendants' assets and eventually reached a $1 million settlement with the corporate defendants and two individual officers.
The settlement requires the defendants to pay $1 million in consumer redress, bars them from further pyramiding activity of any kind, requires them to post a bond before engaging in any network marketing, and requires them to register with state utility officials before engaging in the sale of electricity. The Commission continues to litigate its case against three non-settling individual defendants.
The staff of the Commission also has posted several "teaser" web sites, effectively extending a hand to consumers at their most vulnerable point -- when they are surfing areas of the Internet likely to be rife with fraud and deception. The "Looking for Success" site is one example. It advertises a fake pyramid scheme. The home page of "Looking for Success" promises easy money and talks in glowing terms about achieving "financial freedom." On the second page, the consumer finds a payout plan common to pyramid schemes, as well as typical buzz words like "forced matrix," "get in early," and "downline." Clicking through to the third and final page in the series, however, brings the consumer to a sobering warning: "If you responded to an ad like this one, you could get scammed." The warning page provides a hyper-text link back to FTC.GOV, where consumers can learn more about how to avoid pyramid schemes.
Thus, promoters try to appeal to a sense of community or solidarity, while chastising outsiders or skeptics. Often the government is the target of the pyramid's collective wrath, particularly when the scheme is about to be dismantled. Commission attorneys now know to expect picketers and a packed courtroom when they file suit to halt a pyramid scheme. Half of the pyramid's recruits may see themselves as victims of a scam that we took too long to stop; the other half may view themselves as victims of government meddling that ruined their chance to make millions. Government officials in Albania have also experienced this reaction in the recent past.
In another Pay per Click or Pay to Read Section, you will see that those sites that actually pay you, pay your very little and the only way to make any real income, is to get paid from your work and the work of others – your downline.
The likelihood of a top guru joining your affiliate or MLM site is nil, because they can make their own sites faster that you can join them. So you either take your time and slowly build your downline, or you create your own site with enough content and value, that perhaps your will attract a Joint Venture partner, or o a top performance joins under you and brings his or her downline with them. For one opinion on the differences, see the following video
AffiliatesSeeking.com is a good source of information on this subject and others.
NETWORK MARKETING EXPLAINED - BY TIM SALES
MLM: DO MOST PEOPLE FAIL? – TIM SALES
IS MLM A PYRAMID SCHEME - TIM SALES
FIRST CLASS MLM TOOLS
Money by FedEx - UPS only? Yikes! Scam Time! A trained MLM Detective will tell you the scam artists do this to avoid Postal Fraud charges! A PUB (private mailbox) address is an indicator of dodging Postal Fraud Investigators = 911 run a SCAM!
- The MLM Company's name (owners too) and the word "scam". Go through two pages! Look forforum message comments for legitimate complaints (see D below).
- Then do the same for "complaints, lawsuits, and news articles archived on search engines.
- Also check who registered the website domain of any new company claiming: amazing, incredible, proprietary, never seen before in the universe, revolutionary, products, services or technologies! Check http://www.whois.net/ for the domain lookup. Companies with good offerings would register a name 6 months to a year ahead of time.
- A warning on MLM due diligence for MLM Researchers! There are sad sites and forums that are unfairly negative toward all MLM - Network Marketing companies. Ignore these "Anti -MLM Zealots" and only look for appropriate information. A good MLM Detective will ignore 99% of their B S.!
A good MLM Detective will run if there is no way to join for under $500 See the new FTC warning (below) this MLM Detective due diligence article and my notes on the $500! SCAM example -Thinking it was MLM Here is a list by the FTC of States requiring "Biz Opp" registrations. Remember this if a recruiter is hustling you for $over $500 and no registrations.
Why join? They may get shutdown for not having thestate Business Opportunityregistrations! Why risk joining? You can lose time and money! There goes your opportunity! http://www.ftc.gov/bcp/franchise/netbusop.shtm
- Get a list of the MOST critical ingredients in the MLM’s nutritional product and put them beside your computer.
- Go to the U.S. Government National Institutes of Health nutritional research website PUB MED. Go to Pub Med after you read the next two sentences!
- Look up the major ingredient(s) by entering its name in the search box.
- Read through the scientific studies. Some may be complex, but the END sentence usually gives you a good idea if the study was a Plus or Minus for the product. Read over at least 10 articles use a piece of paper to keep track of studies like this Study #1 Good Study #2 good #3 What did they say? (Or just what?) Study #4 GoodStudy #5 Bad. Make your own judgment!
You are looking for the number of complaints the BBB has NOT resolved. If there are over 2-4, hold off joining, it very well could mean problems. MLM Detectives don't overly trust BBB reports but we the can be goodindicators. Here is the National BBB Advanced Search -don’t use the quick search. http://search.bbb.org/SearchForm.aspx?mode=Business
- Look for exclamation marks and capital letters used to lend legitimacy or urgency! Beware of disclaimers such as “this is not a pyramid selling scheme or scam” (legitimate offers don't contain such claims). Don't believe promises of fast wealth.
- If you feel, see or hear "Get Rich Quick!” Run! If it sounds too good to be true, it usually is! MLM - Network Marketing takes some work, like any good Home Based Business.
No small challenge, when you are trying to find a program that suits you.
Tips and guidelines were given to help you avoid the pyramids and scams.
As to which program is best for you, try to find something that you are passionate about, something of interest or something that ties back your hobby. If it is just about making money; do your due diligence and check out the company before you put your money down
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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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