An introduction to the comparison of multi level marketing and pyramid scheme

Business model[ edit ] Participant profits and losses[ edit ] The overwhelming majority of MLM participants most sources estimated to be over

This example illustrates what is known as a three by four matrix. Thus, the investor should receive commissions for four levels of recruits below him, each of whom must recruit three more members, hence the name -- a three by four matrix. You can do the math easily: Not a bad deal.

He is the person at the top of the pyramid but in fact looks at the scheme from the bottom. He views each new investor as a predicable set of revenues and expenses, with the revenues flowing down to 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.

In our example, even those people one level above the bottom will not have recouped their investment. In short, when the pyramid collapses all the investors in the bottom two levels will be losers. A Ponzi scheme could yield even worse results for investors, because it does not pay out any commissions at all.

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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. Ponzi claimed that he could pay such a high rate of return because he could earn 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.

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.

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When he actually paid a 50 percent return to some early investors, his reputation soared and more money flowed in from around the country. 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.

An introduction to the comparison of multi level marketing and pyramid scheme

Eventually his scheme began to unravel, bringing ruin to the bank and thousands of investors. The bank refused and even issued back-dated certificates of deposit to cover Mr.

Ponzi was arrested for mail fraud. He was convicted of fraud in both state and federal court and served ten years in prison. Ponzi lives on as pyramid and Ponzi schemes continue to plague us and challenge the law enforcement community.

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Fortunately, in the U. The Securities and Exchange Commission also pursues these schemes, obtaining injunctions against so-called "financial distribution networks" which in fact sell unregistered "securities. Postal Inspection Service, prosecutes pyramid schemes criminally for mail fraud, securities fraud, tax fraud, and money laundering.

California defines pyramids as "endless chains" and prohibits them under its laws against illegal lotteries.

An introduction to the comparison of multi level marketing and pyramid scheme

Unfortunately, the rise in legitimate multilevel marketing was accompanied by a surge in pyramid schemes. Those schemes played off the popularity of MLM or network sales but paid more attention to networking than to selling actual goods.

Pyramid schemes became so notorious that then-Senator Walter Mondale sponsored a federal anti-pyramiding bill.Jun 10,  · In a pyramid scheme, there's a small group of investors at the top that require a large base to support the scheme — hence the name "pyramid.".

Money from new participants is used to pay commissions to other participants.

How to Distinguish Between a Pyramid Scheme and Multi‐Level Marketing

The people at the top hold most of Author: Colleen Mckown. Mar 25,  · A comparison of MLM and Pyramid schemes. Skip navigation Multi Level Marketing VS Pyramid Scheme Investopedia timelines Jared Tolliver.

Multi-level marketing (MLM). The structure of multi-level marketing has been mistaken for a pyramid scheme with the. introduction of companies, such as Amway, Avon and Mary Kay Cosmetics.

Multi-level marketing is a selling method in which agents earn commissions on the sales they personally make, as well as Stay Connected Sign up for our newsletter and . Enagic sells water ionizers through multi-level marketing, a method that many people consider to be a pyramid scheme.

The multi-level marketing system used by Enagic® to sell its water ionizer is a scam because it doubles the price of the kangen water® machine. Mar 01,  · As the convenience of working from home, having your own schedule, and being your own boss becomes more attractive, so do the opportunities to work for a multi-level marketing company.

How to Distinguish Between a Pyramid Scheme and Multi‐Level Marketing