In simple words. What is a pyramid scheme?

Banned 10 years ago

Originally Posted by bjacket

I'm not quite sure but what is a pyramid scheme?

Different people have different definitions.

Different countries have different legal definitions.

"Using the joining-fees of participants to pay commissions to earlier participants" is pyramidal. Paying people "for recruiting" is illegal in most countries, I think.

Originally Posted by bjacket

Does the MLM company has to have a product or services?

Yes, otherwise it's just a money-game.

In many countries, it has to have real products which real retail customers (who are not involved in the business opportunity) buy. In the US, for example, 70% of the sales revenues have to come from retail sales to retail customers who aren't distributors/affiliates/associates.

It varies a lot from country to country, but generally what courts and regulators look for is "evidence that retail customers think the products are real, because they're buying them". Without being able to show that, in some form, a company's eventually going to be on shaky ground, almost anywhere.

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bjacket

10 years ago

Hi Alexa,
Ok, lets say I open a MLM company that has a 2x5 matrix that sells online traffic as an initial fee and everyone gets commissions on it. Would that be a scheme? Even if there's a spill over?

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Steven Wagenheim 10 years ago

Unfortunately, having real products doesn't always exempt a company from being classified as a pyramid scheme.

Probably the best example I can think of is one that I actually got sucked into long before I hit the Internet. You can research it yourself. It's Bill Gouldd and Equinox.'

Equinox was a company that sold environmentally safe products and they were actually quite good, if not a little pricey.

The problem was the commission program.

In order to obtain a higher level of commissions, you had to become a manager. After that, director and then executive director. To do this, you had to sell OR buy a certain amount of product. For manager, it was $5,000 worth.

So what happened was this. A lot of people would buy $5,000 worth of product and then try to get other people to sign up under them to buy $5,000 worth of product in order to get paid commissions on those sales.

Actual product that went to real consumers? Who knows? But eventually the operation was shut down, I have no idea what happened to Bill Gouldd. I personally never signed up anybody. I actually tried to sell product and was horrible at it.

It is a time in my life that I am trying hard to forget, but threads like these just bring it all back.

I'm just glad I got out when I did.
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Steven Wagenheim

10 years ago

Originally Posted by bjacket

Hi Alexa,
Ok, lets say I open a MLM company that has a 2x5 matrix that sells online traffic as an initial fee and everyone gets commissions on it. Would that be a scheme? Even if there's a spill over?

On the surface, without knowing more details, what you're describing above is classic pyramid scheme and will probably get shut down before you can say I'm screwed.

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Alexa Smith

Banned 10 years ago

Originally Posted by bjacket

Hi Alexa,
Ok, lets say I open a MLM company that has a 2x5 matrix that sells online traffic as an initial fee and everyone gets commissions on it. Would that be a scheme? Even if there's a spill over?

I don't know.

But I think that if you're in the US, then to be legal you need 70% of the customers (or at least 70% of the sales income, not necessarily quite the same thing) not to be from distributors/associates/affiliates, but retail customers. Courts and regulators decide whether or not these things are legal according to their perception of whether the products are real products selling to real people for real value, and "the 70% rule" is how they usually decide that. If 70% of the money comes from people who aren't "incentivized" by being involved in the business opportunity, that's kind of "good enough to satisfy them". On that point, anyway. There are also many others, of course.

I'm not a lawyer (did you guess?), and you clearly need one! (And one who specialises in MLM regulation compliance, needless to say).

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Steven Wagenheim

10 years ago

Originally Posted by Alexa Smith

I don't know.

But I think that if you're in the US, then to be legal you need 70% of the customers (or at least 70% of the sales income, not necessarily quite the same thing) not to be from distributors/associates/affiliates, but retail customers. Courts and regulators decide whether or not these things are legal according to their perception of whether the products are real products selling to real people for real value, and "the 70% rule" is how they usually decide that. If 70% of the money comes from people who aren't "incentivized" by being involved in the business opportunity, that's kind of "good enough to satisfy them".

I'm not a lawyer (did you guess?), and you clearly need one! (And one who specialises in MLM regulations, needless to say).

There is a bigger problem here. PayPal has totally cracked down on Matrix programs. So if he wants to do this, he's first going to have to find a payment processor that will even touch the business model as PayPal won't.

MLMs is one of the first things I learned about online back in 2003 because it's one of the first things I got involved in without realizing what I was getting involved in. Some of them are so cleverly disguised but when you break it all down, it's the same crap and eventually they all go belly up. And many do even before the feds come in. But that's another story altogether and beyond the scope of this thread.

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Alexa Smith Banned 10 years ago

Originally Posted by jakedenver

I think the FTC is cool with it if there are products involved

If they're sold at "honest prices" mostly to retail customers, I think. Not if it's all participants "buying" in order to qualify to get paid. Those aren't considered "real" products in law ... is my impression.

Originally Posted by Steven Wagenheim

TPayPal has totally cracked down on Matrix programs.

Oh, absolutely.

It would be out of the question to use PayPal for anything like this. I think participants would lose their PayPal accounts as soon as PayPal realised what was going on.

(People used to use AlertPay/Payza for these things, while they lasted? I think very few payment processors are willing to touch them, now?).
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jakedenver

10 years ago

If you have a product, you're talking about “Network Marketing.”

In a pyramid scheme there is no product.

In Network Marketing you make money when customers buy a product from you and pass a % up the structure.

Network Marketing cuts traditional marketing costs. You want to get your products in the hands of consumers without using traditional advertising methods. Network marketing companies use commission based advertising to minimize up front expenses and share the rewards with the members.

The structure is a pyramid, but that’s not a bad thing if everyone’s sharing the profits from the sale of products. I think the FTC is cool with it if there are products involved

DISCLAIMER: I don’t know what I’m talking about so no LEGAL ADVICE is ever given from my end.
I considered this structure at one point and looked into it.

Popular merchant accounts like PayPal won't support this payment structure --- last time I checked.

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Steven Wagenheim

10 years ago

Originally Posted by jakedenver

If you have a product, you're talking about "Network Marketing."

In a pyramid scheme there is no product.

In Network Marketing you make money when customers buy a product from you and pass a % up the structure.

Network Marketing cuts traditional marketing costs. You want to get your products in the hands of consumers without using traditional advertising methods. Network marketing companies use commission based advertising to minimize up front expenses and share the rewards with the members.

The structure is a pyramid, but that's not a bad thing if everyone's sharing the profits from the sale of products. I think the FTC is cool with it if there are products involved

DISCLAIMER: I don't know what I'm talking about so no LEGAL ADVICE is ever given from my end.
I considered this structure at one point and looked into it.

Popular merchant accounts like PayPal won't support this payment structure --- last time I checked.

This has been proven untrue by the Equinox case. Real products. Still a pyramid scheme because of the reality of how those products were going from point A to point B.

Look up Bill Gouldd and Equinox and you'll get all the dirt.

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bjacket

10 years ago

How about if initial fee is %100 commission and the only profit the company makes are side services sold in the website? Is this same as an affiliate program?

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Steven Wagenheim

10 years ago

Originally Posted by bjacket

How about if initial fee is %100 commission and the only profit the company makes are side services sold in the website? Is this same as an affiliate program?

In order to answer your question we need more details on what is being sold, exactly how it's being sold and how all the participants in the program come into play and who the ultimate product gets into the hands of. Including exactly what the product is.

The little information you've given makes it virtually impossible to answer your question.

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bjacket

10 years ago

Originally Posted by Steven Wagenheim

In order to answer your question we need more details on what is being sold, exactly how it's being sold and how all the participants in the program come into play and who the ultimate product gets into the hands of. Including exactly what the product is.

The little information you've given makes it virtually impossible to answer your question.

ok, I've been visiting alot of adfly links and people are promoting adhitprofits.com.
Take a look and you can see they are selling advertising service as an entrance fee and has matrix system.

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Steven Wagenheim

10 years ago

Originally Posted by bjacket

ok, I've been visiting alot of adfly links and people are promoting adhitprofits.com.
Take a look and you can see they are selling advertising service as an entrance fee and has matrix system.

Okay, the site is a little over a year old. They accept PayPal but have a matrix? So they're flying under the radar, for now. Once they get big enough and PayPal gets wind of it, they'll close their PayPal account. It is only a matter of time.

Hey, I'm just trying to save you a lot of grief down the road. These programs never last long and always end badly. If you want to be part of that hell hole, power to you.

Hope you have a strong stomach. You're going to need it.

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jakedenver 10 years ago

I agree, you need to consult an attorney that specializes in internet compliance. This might be considered a "special purchase agreement" or something but I don't know and I'm actually sweating bullets right now just thinking about this...
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Alexa Smith Banned 10 years ago

Originally Posted by bjacket

How about if initial fee is %100 commission

How is that not "paying for recruitment"? I don't know.

Again, we're not lawyers, and you need one!
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luke1213

10 years ago

One thing I had always heard in MLM was that the product being sold should be a renewable product that is renewed very 1-2 months. If it's something like a diet or health niche where you sale actual products and can recruit other people into your downline, I think you would be safe as long as you sale and x amount of products in lieu of just creating a downline. I think this can also be applied to monthly subscription offers as long as it's a renewable product. But this was 3 years ago when i dabbled in mlm.

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Katie Rich

10 years ago

I've never been keen on the ''pay me and I will teach you how to pay to get other people to pay me and I'll give you a little cut'' type of marketing. I thought that was a pyramid scheme, seems like I'm wrong and it's just a different sort of dodgy.

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bjacket

10 years ago

So no matter what MLM or Network Marketing is a pyramid scheme.
No matter how things goes the person at the top makes money.
Same goes for franchise, CEO's, and Wholesalers.
They profit from recruiting.

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Alexa Smith

Banned 10 years ago

Originally Posted by bjacket

So no matter what MLM or Network Marketing is a pyramid scheme.

Not at all. This is just wrong. There are plenty of MLM companies which are many decades old and which are not "pyramid schemes", and have been publicly announced not to be (in some cases repeatedly) by regulators and courts in various countries. So that simply isn't true.

If you look at a very well-known company like (for example) "Send Out Cards": it's registered and regulated as an MLM company in the countries in which it trades; it's a huge international company (the third-biggest or fourth-biggest greeting-card company in the world, I believe); its sales income comes mostly from genuine retail sales to genuine retail customers who aren't distributors/associates (key point, there!); there's absolutely no suggestion at all, from anyone, that it's any kind of "pyramid scheme": it's totally legal, ethical, decent, professional, and all the rest of it. It's an MLM company with high-quality, low-cost products in public demand from people who aren't connected with the company. Nothing hard to understand there, is there?

Originally Posted by bjacket

No matter how things goes the person at the top makes money. Same goes for franchise, CEO's, and Wholesalers. They profit from recruiting.

There's a difference between "profiting from recruiting" and "paying people for recruiting". One is legal, and the other isn't. Surely that part's also not too hard to understand?

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Steven Wagenheim

10 years ago

Originally Posted by Alexa Smith

Not at all. This is just wrong. There are plenty of MLM companies which are many decades old and which are not "pyramid schemes", and have been publicly announced not to be (in some cases repeatedly) by regulators and courts in various countries. So that simply isn't true.

If you look at a very well-known company like (for example) "Send Out Cards": it's registered and regulated as an MLM company in the countries in which it trades; it's a huge international company (the third-biggest or fourth-biggest greeting-card company in the world, I believe); its sales income comes mostly from genuine retail sales to genuine retail customers who aren't distributors/associates (key point, there!); there's absolutely no suggestion at all, from anyone, that it's any kind of "pyramid scheme": it's totally legal, ethical, decent, professional, and all the rest of it. It's an MLM company with high-quality, low-cost products in public demand from people who aren't connected with the company. Nothing hard to understand there, is there?

There's a difference between "profiting from recruiting" and "paying people for recruiting". One is legal, and the other isn't. Surely that part's also not too hard to understand?

Alexa, he's just purposely being obtuse. He wants to create an illegal company and he's not liking what he's hearing so he's just throwing out all sorts of nonsense to try to justify what he's hell bent on doing.

It's classic denial.

Ultimately, he's going to do what he wants to do and hope he gets away with it.

Not my problem.

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alfa_375

10 years ago

For me over all it is illegal I think. If you put that much hard work to make money online other clickbank marketing or other type of affiliate marketing sure you will make money too.
Lol but not so easy.....

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In simple words. What is a pyramid scheme?

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