Small wonder the pyramid (or chain letter or Ponzi) scam remains a favorite among con men and women. (And it’s good to remember that “con” is short for “confidence.” Most folks find it easy to trust these likable, smooth-talking sharks.)
The pyramid has stood the test of time. Most recently it’s found its way onto the Internet and now is frequently touted as a “multilevel” or “network marketing plan.”
That isn’t to say every plan with either label is a pyramid scheme. Or that every plan that vehemently denies being one isn’t. So how can you tell?
If you’re a distributor for a legitimate multilevel marketing plan, your income will largely depend on goods or services sold to the general public. You’ll get a commission for those, a small finder’s fee for recruiting new distributors and a cut from items peddled by them.
A pyramid reverses that. Your income (assuming you’ll get anything) will heavily rely on those new distributors paying for “training” or “start-up kits” or products that those poor saps will never be able to sell.
No, they are supposed to go out and get more recruits. Who will fork over money for “training” or “start-up kits” or products that they will never be able to sell.
We need to take a little math break here. One that will explain why your money goes down the tube and why these plans simply cannot work for the vast majority of those suckered into joining.
The name “pyramid” comes from how the scheme is structured. Let’s say I begin a company called Give Bill Dodds Money. I’m selling … anything. It doesn’t matter. Rubber chickens. I recruit 10 people to be my distributors. It will cost each of them $500 to join my team.
I will give them a 50 percent commission on every chicken they sell and I will give them $100 for every distributor they recruit. Wow! Since the chickens sell retail for $20, they will receive $10 per unit. Suppose they sell “only” 10 per week. That’s $5,200 a year.
And if, as my company demands, they get 10 distributors, there’s another $1,000.
They have just bumped their annual income to $6,200!
I’m careful to assure them that I personally don’t need the money. I already have more than I know what to do with. No, I started Give Bill Dodds Money because, well, this is a little embarrassing … I just love people.
I’ve been there. Minimal income. Dead-end job. No one willing to give me a chance. So I’m doing this for the little guy or gal. The one who wants to better his or her life. There may well be a Nobel Prize in my future, but enough about me.
Dear Distributor, I will not only give you a high percentage for every chicken you sell and 100 smackers for every new distributor you recruit, but a percentage for every chicken they sell and distributor they recruit!
They are your workforce! Making you money, 24/7! There is no limit to your income potential!
OK, it really is math time. We’ll just keep multiplying by 10.
10.
100.
1,000.
10,000.
100,000.
1,000,000.
10,000,000.
100,000,000.
1,000,000,000.
10,000,000,000,
That last number is 10 billion. It’s highly unlikely Give Bill Dodds Money is going to have 10 billion distributors since there are only about half that many human beings on earth. And, theoretically, getting from just me to 10 billion took only 10 steps.
Let’s look at my company from another angle. I don’t care about the chickens. You probably quickly figure out you don’t have to care about the chickens. This ain’t about the chickens. I get the chickens for $2 per unit and charge you $10. That’s just gravy for me.
If, by some miracle, you sell one for $20, you make $10. Most likely, after your mother has bought one, you’re plum out of luck. You’ve got a case of them in your basement that’s going to stay there. (Sorry, no refunds.)
It has now dawned on you that:
a) You aren’t a salesperson.
b) People who want a rubber chicken go to a novelty store and buy one for $5.
Even so — at this point you are no longer quite so naïve but still a little dishonest and greedy — if you are high enough on the pyramid, you can make out like a bandit.
If you are among the 100 and they each recruit 10 who recruit 10, you will collect thousands of dollars just from their buy-in fees and start-up kit purchases.
So why not take a chance? Because, the Federal Trade Commission and the United States Postal Inspection Service point out, only about 5 percent of those involved will come away winners.
And, they are quick to add, win or lose, all participants are breaking the law. They are committing fraud.
From the viewpoint of those in the top tiers, that’s what makes the pyramid so appealing. If I do a good job conning you, Give Bill Dodds Money can have you innocently fleecing your friends and family. Not only do you fork over your own money but you convince your loved ones to do the same. (Can you commit a crime without knowing it’s a crime? If you blithely offer potential recruits the company line and it’s bogus, you may well be doing just that.)
You are not selling rubber chickens for me. You are breaking the law for me and giving me the money. You are defrauding those recruits and the majority of the loot comes to me. How could a crook not love the pyramid?
And after Give Bill Dodds Money collapses — which it must because at some point there are no more new distributors — then I can take my money and vanish. Only to pop up again selling distributorships for another venture. Another pyramid.
Only this time I will call it:
• Bill’s Investment Club. The club meets in someone’s house and you and all the other new recruits hand over $500 to get your names on the roster. Those one tier up each take $100 for each of “their” recruits. Higher-ups take a bite, too, but the bulk of the cash goes … well, to me, of course.
• Bill’s Gift Network: Ditto.
• Bill’s Chain Letter. Mail $10 to the name on the top of the list, add your name to the bottom and mail copies to 10 friends. And so on. In no time at all you will begin receiving ten-dollar bills in the mail — all tax free!!!! (A nice touch, no? It’s baloney, too, of course.)
• Bill’s Matrix Securities. A 10 percent monthly return on your investment. Guaranteed in writing. Step on up. No limit. Tell all your friends. Let me handle your account and, sure enough, there’s the paperwork proving your income is growing dramatically.
Like to get all your cash back? Gee, that’s not a good idea. Not with the market as fluid as it is right now. If you can just wait a month… Can’t wait? OK. How about just taking the 10 percent? There you go. No problem. Not for a while anyway. Not until the well of new investors dries up.
You see, I’m stealing almost every dime that’s given to me. And it’s that new money that I’m using to pay the old investors their 10 percent in cash when they really demand it. Or, worse still, the whole bundle if they start threatening legal action. But I can only do that for a little while. Those near the end of the line don’t have a prayer.
This is the ever-popular Ponzi scheme. Named for Charles Ponzi who used it so well in the 1920s.
How can you protect yourself from the many variations of the pyramid scheme that has worked so reliably for so many years?
The FTC suggests:
1. Avoid any plan that includes commissions for recruiting additional distributors. That’s a warning flag that it may be an illegal pyramid.
2. Beware of plans that ask new distributors to purchase expensive products, demos, and marketing materials. These plans may be pyramids in disguise.
3. Be cautious of plans that claim you will make money through continued growth of your “downline,” that is, the number of distributors you recruit.
4. Beware of plans that claim to sell miracle products or promise enormous earnings. Ask the promoter to substantiate claims. (And that doesn’t mean some dandy paperwork he or she just cranked out on a home computer or some splashy figures on a spiffy website.)
5. Beware of shills — “decoy” references paid by a plan’s promoter to lie about their earnings through the plan. (Honest people sometimes have a hard time believing people really lie. They mistakenly think they can somehow tell if a person is lying. It stands to reason that if you are paid to lie, if you make your income lying, you are very, very good at it.)
6. Don’t pay or sign any contracts in an “opportunity meeting” or any other pressure-filled situation. Insist on taking your time to think over your decision. Talk it over with a family member, friend, accountant or lawyer. (That’s worth repeating: Don’t sign anything without giving yourself plenty of time to think about it and seek advice from knowledgeable people you know aren’t crooks.)
7. 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.
8. Remember that no matter how good a product and how solid a multilevel marketing plan may be, you’ll need to invest sweat equity as well as dollars for your investment to pay off.
Yes, there are many get-rich schemes that work very well. Unfortunately, if you get mixed up in one, it will be someone else getting rich quickly off your money.
