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pyramid scheme ?

by supermonster
10 replies
Hi Guys,

I want your input on a business method based on the scope of the United States Law, Internet Marketing Affiliate Marketing and Pyramid Schemes.

If COMPANY ABC is offering a legit service: WEB HOSTING of Ecommerce sites and systems.
COMPANY ABC offers monthly membership of $10.00. COMPANY ABC offers an affiliate program as incentive. If you invite a person to sign up, you get 50% of the $10.00 which is $5.00.

Question: Can COMPANY ABC be classified as a Pyramid Scheme since it has paying incentive money for the recruitment, and the incentive money comes from the new client joining COMPANY ABC ?

Thanks In Advance.
SuperMonster
#pyramid #scheme
  • Profile picture of the author jimmyjackson
    Originally Posted by supermonster View Post

    Hi Guys,

    I want your input on a business method based on the scope of the United States Law, Internet Marketing Affiliate Marketing and Pyramid Schemes.

    If COMPANY ABC is offering a legit service: WEB HOSTING of Ecommerce sites and systems.
    COMPANY ABC offers monthly membership of $10.00. COMPANY ABC offers an affiliate program as incentive. If you invite a person to sign up, you get 50% of the $10.00 which is $5.00.

    Question: Can COMPANY ABC be classified as a Pyramid Scheme since it has paying incentive money for the recruitment, and the incentive money comes from the new client joining COMPANY ABC ?

    Thanks In Advance.
    SuperMonster
    No not at all. That is the definition of affiliate marketing and many times you don't have to own the product to get commissions for selling it. Them paying you a commission is no different than them paying a sales person etc.
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  • Profile picture of the author WillR
    The main defining factor of a pyramid scheme is that people receive no other value for their money other than the opportunity to onsell that product or service to others.

    So ask yourself this question. If the opportunity to resell your services was not there, would people still think the product/service you are offering was a good deal and would they still buy it? If the answer is yes, then you don't have a pyramid scheme. If the answer is no, then it's likely your opportunity would be looked at as a pyramid scheme.
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  • Profile picture of the author SunilTanna
    I am no a lawyer, but I think a program is likely to be classified if there are no, relatively few, or few (as a percentage) retail customers.

    Retail customers are people who buy the product but are not involved in the business opportunity.

    If most (exact definition may vary, but I mean a significant majority) of the product buyers are not involved in the business opportunity, then a program is probably okay - all other factors being equal.
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  • Profile picture of the author eugenedm
    Many,many years ago I questioned it myself if it's legal or not. But later on I understood that it's just a simple referral system which could be utilized by anyone!

    As long as you don't do anything else illegal.

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    • Profile picture of the author supermonster
      Thanks Guys,

      I got my answer.

      SuperMonster
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      • Profile picture of the author Alexa Smith
        Banned
        Originally Posted by supermonster View Post

        I got my answer.
        That's a slight surprise, because it wasn't actually possible to answer the question from just the information you gave.

        It depends on a number of other things, too - and perhaps most importantly whether the company has its required proportion of genuine retail customers who are not distributors or involved in the business opportunity in any way (this varies from country to country, but in the US, 70% of the sales income generally has to come from genuine retail customers, otherwise a court or regulator may well eventually declare the business illegal, and it will stop trading).

        However else the company's run, and whatever else it does, if it has no genuine retail customers, and the only "purchasers" of the company's products/services are people themselves promoting the business opportunity and/or just having signed a distributorship agreement with the company even if they're not promoting it, then it's eventually very likely to hit the legal rocks. Regardless of how otherwise "legit" the products/services are. (In one recent US state court case, the court even specified that even if someone buys as a retail customer and subsequently becomes a distributor, their purchase may not be counted toward the requisite 70% - in other words, this can be pretty strictly enforced).
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  • Profile picture of the author seasoned
    Yeah, this is iffy. In the US now, there are a lot of idiots running the governments. It is too easy to break a law. With MLM and Ponzi laws, I couldn't truthfully answer your question. I doubt ANYONE could. If yu get charged wit a reasonable interpretation of the law, it is illegal, If not? MAYBE it is OK.

    Steve
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  • Profile picture of the author SeanSupplee
    Like others have said not an law expert but as long as the money is coming from a sale on a single level instead to multiple levels down then it is not a pyramid. A pyramid would require more then one level of commissions and also claim to pay out more then what they can possibly bring in as sales.
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    Sean Supplee -Expert Insight of an Affiliate Marketer (Blog)
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    • Profile picture of the author Alexa Smith
      Banned
      Originally Posted by SeanSupplee View Post

      A pyramid would require more then one level of commissions and also claim to pay out more then what they can possibly bring in as sales.
      This really isn't always so, Sean. Many companies have actually been closed down by the courts for being "illegal pyramids" without ever purporting to pay out more in commissions than they bring in from their sales (or doing so).

      And before anyone offers the view that it's about whether or not they have "real products", that also isn't always true: many companies with perfectly real and genuine products have also been closed down by the courts for being "illegal pyramids" because of various other legal problems (including not having genuine retail customers, as mentioned above, and paying people for sponsoring - that's illegal in most countries - but for many other things, too, which courts have decided make them "illegal pyramids").

      The unfortunate reality is that many illegal pyramids, Ponzis and various other related sorts of scams successfully masquerade as "MLM companies", some of them for quite a long time (typically until enough complaints build up to warrant investigation), and it's really terribly difficult for the public to judge what's legitimate and what isn't. Most people don't even know which questions to ask. Even many distributors and people with experience in the industry don't know which questions to ask.
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      • Profile picture of the author supermonster
        Thanks Guys,

        For taking the time to respond to my question.

        SuperMonster
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