Post No.: 0529
Fluffystealthkitten says:
I’m going to talk about multi-level marketing schemes, pyramid schemes and Ponzi schemes so that we can watch out for them because they’re basically scams…
Multi-level marketing (MLM) schemes involve the direct selling of goods and/or services (e.g. cosmetics, ‘wellness’ products, broadband, energy). But they also importantly have a recruitment dimension, where a portion of the earnings of anybody you recruit (‘downline’ to you) filters up to you; and where whoever recruited you into the scheme (‘upline’ to you) receives a portion of any income you earn, which will consequently include a portion of anything that anyone you’ve recruited has earned too. New members may also need to pay whoever recruited them for the right to sell those same goods and/or services.
So there’s basically a level-by-level (hence multi-level) filtering-up of money towards the top of the hierarchy. And if we step back and assess the total picture, there’ll be a pyramid structure of people – because it is basically a pyramid scheme, where the person(s) at the top (the founder(s) of the scheme essentially) earn (or really ‘earn’) a portion of the income of everybody who is below or ‘downline’ from them, and anyone who joins the scheme starts off at the present lowest level of (that part of) the pyramid and must find new recruits to build a new level below them, and for these people in turn to build a new level below them, and so on.
As you can see, it benefits that relatively small number of people who came in early into the scheme with a massive exponential trickling-up of money. And the chances of anybody who joins the scheme, even just a few levels down, earning any kind of profit from their investment becomes incredibly low. Over 90% or even 99% of members (depending on how long a scheme has been running for) won’t recover their investments, never mind make a profit or get rich – but of course the glitzy promotional adverts will only focus on those few people at the top of the pyramid who take away a lot of money.
New members can never one day reach the top of the overall pyramid – new members will always stay at the level they’d joined unless those above them leave. Well it’s not really about how many levels are above you but about how many people you can get below you on your own pyramid. The hope is that many new levels will be built below you and those levels will be full i.e. you hopefully recruit lots of people and these people will hopefully in turn recruit lots of others, and so forth. This however gets more difficult the more established a scheme has become because willing people who’ve not already joined/been burned become scarcer. Therefore such a business having been running for decades is not a sign of trustworthiness nor a ‘great business/investment opportunity’ but quite the opposite!
Laws concerning this area vary worldwide. Multi-level marketing schemes were designed to circumvent being labelled as pyramid schemes (which are outright illegal) by the addition of the direct selling (or more recently Forex/cryptocurrency trading) component. But if the emphasis on how one earns money – if one really wants to make it – is on the recruitment component then the law ought to see the truth that they’re actually just pyramid schemes. Some try to bull**** by calling their business model by another name. Some have even tried presenting the pyramid structure upside-down – but you only have to flip the diagram the other way around to see the truth(!)
Apart from money being generated from the direct selling of products – members might also need to pay fees for being a member, which might be disguised as for purchasing inventory (which is often overpriced, which means that even if there is an 80% buy-back price for unsold stock, you’ve still likely lost out). Members might even be encouraged to buy those products themselves (but again they’re typically overpriced, and you’ll never make money by buying things from/for yourself(!) But they encourage this simply because those above you will take a commission or residual income from every sale you generate, even if you sell something to yourself). The person who recruited you might pose as your ‘sponsor’ or ‘mentor’ who provides sales and recruitment training – but only if you purchase training materials or seminar tickets from them, which creates another ‘upline’ revenue stream. Sometimes commissions are awarded per new recruit and/or there’s a lure of high-value prizes, like cars, for the top recruiters. These are key signs that recruitment is the emphasis and it’s therefore really an illegal pyramid scheme.
A Ponzi scheme is illegal too and is somewhat similar to a pyramid scheme, but instead of the need for new members to in turn recruit new members in order to generate an ‘upline’ flow – a Ponzi scheme involves continually attracting new investment into a collective investment fund. These schemes might be linked to cryptocurrencies or whatever’s the current investment hype. A key feature that’s certainly in common is the lure of getting rich in exchange for one’s money. Great rates of return are promised in order to attract new investors into the scheme. However, the positive returns to members when they want to withdraw their investments from the fund don’t necessarily come from successful investments made in the markets but come out of new investment money received from new, later, investors. This means that a Ponzi scheme will inevitably collapse if too many investors wish to withdraw their investments simultaneously.
A pyramid or Ponzi scheme can basically only be sustained if it can continually attract new suckers into it. Once the numbers taper off – which it inevitably will because each new level of the pyramid needs exponentially more members than the level above it hence the pyramid shape, or the more investors who want to realise a great return on their investment then the exponentially more investment is needed to fund that – then so will the money. (Well what can happen with pyramid schemes is a constant churn of new members at the lowest levels joining then leaving after they struggle to recoup their investments, hence pyramid schemes can last a very long time.)
Multi-level marketing schemes tend to exploit vulnerable people who are poor and can only work from home (e.g. for looking after children and not being able to afford childcare – this usually means women, which is why most MLMs and their products are those aimed at women). Both avarice or desperation/vulnerability can be exploited by ‘get rich quick’ or ‘make money easily’ scams.
Pyramid schemes lead members to pester their own family and friends to join thus can change the dynamic of a relationship over time from a social one to more of a market one i.e. seeing them more like potential clients to extract money from than pure friends and family. This can fracture those relationships because interactions towards friends or family members can start to constantly sound like spam.
Moreover, if they do join then it basically passes the problem onto them – they’ll then need to find other people to recruit; and of course they cannot recruit those who’ve already been recruited into the scheme. It’s therefore selfish and horrible to try to get friends and family to join such a scheme. It’s not ‘join me and we’ll make money together’ – it’s ‘join this scheme and for as long as you remain a member, you’ll always be one level under me and I’ll always take a cut of your income from your activities in it but you’ll never take a cut of mine’. It’s not making money with friends or family but profiting off them. One thinks about others if one cares enough about others but we might not do this enough if we’re blinded by the hopes of personal fuzzy fortunes. You’ve never been a true friend to anyone if you’ve only ever viewed them as competition or an account.
If it’s not selfish then it’s brainless – members become simultaneously victims and culprits. In countries like the USA and UK, there’s also often a connection with targeting Christians because recruitment is essentially like religious mission and churches are already networks. Existing religious congregations are common recruitment grounds.
Pressure tactics are typically applied, like telling you to dream big then essentially calling you ‘weak’ and ‘lacking belief in yourself’ if you only invest small. And if you struggle to sell those (overpriced) products or ensnare new recruits then you’ll be blamed for your own failures – which is partly true, but not so much because of your own sales or recruitment efforts or techniques but because of not doing the independent research and mathematics, and for joining a pyramid scheme in the first place. Although you’d hardly be alone if so. It’s another piece of real-world evidence that shows that humans are generally intuitively poor at numbers and statistics – in this case for not understanding the exponential structure of such schemes. They are free market scams that attract people because people generally cannot do the maths or are overoptimistic (unless they know they’re one of the first members of these schemes in their own large networks).
The gains aren’t mutual but zero-sum – money only transfers up the chain from generally the newest members to the oldest. It’s not an enterprise that adds value to the economy. In a pyramid scheme – it’s about siphoning money off other people’s efforts or investments.
If you don’t do well then you’ll be urged to pay for training, which will involve a lot of pushy methods, naming endorsements rather than passing on any concrete know-how, and wishful ‘positive thinking’; along with a lot of personal blame if one still fails. It can be incredibly cult-like – leavers will be threatened, and doubt, questioning or criticism are discouraged. Members are made to feel like ‘family’ or ‘leaders’. They may be told that they’re part of something big that’s ‘going to change the world’. They’re told to not listen to the detractors for they are ‘haters’. They’re essentially taught to blame and shun ‘negative influencers’ (doubters and naysayers). And anyone who sees through the scam will be labelled as ignorant rather than themselves and their own ignorance.
Post No.: 0417 specifically examined some common traits of cults for comparison. Meow.
Members have also invested their own skin in the game and this makes it hard to back out. Amateur investors tend to want to stick with their investments until they’ve at least recuperated what they’ve put in, and this might mean putting even more into a scheme. So no matter how much one is presented evidence that it’s essentially a pyramid scheme – once one is in, it can be hard to leave. Many members will try to cling on even more strongly because it’s not just the money that’s at stake if one admits it’s a scam but one’s reputation, intelligence and belief in the vision, hence many will rather wait a bit longer than leave. Overall it’s unsustainable but the sunk cost fallacy and psychological coercion make it hard for members to leave before too much is invested. MLM schemes can tear real families and friends apart because people usually recruit those close to them. And culpability isn’t easy to apportion because if recruiters have invested their own money then they can be regarded as victims too.
Meow. Pyramid schemes are essentially about passing on a problem – it puts new members in a dreadful predicament themselves as they’ll then need to find new members below them in order for them to recover their own investments. It’s analogous to passing on a curse as each recruit or investor wishes to get off the bottom of the pyramid, but in doing so, this puts other recruits or investors onto the bottom of the pyramid instead. So get informed and don’t join them in the first place!
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