Secrets of the Pyramids, and other ancient scams.

Pyramid scams, pyramid selling and MLM ( Multi Level Marketing ) schemes are the subject of much public confusion, to the financial gain of a few con men and the loss of many ordinary people.

First of all Multi Level Marketing, or MLM. You need to understand how a genuine MLM works in order to clearly see how the pyramid version is a scam.

Multi Level Marketing is a perfectly valid and effective way of distributing product to the end user, just as is direct mail, off the page, and even , through shops.

Read that again. The key words are "distribution", "product", and "end user". End users are customers, but, as we shall see, in the con game, not all customers are end users. An end user is someone who wants the product or service purely as a USER. He is SPENDING MONEY WITHOUT HOPE OF FINANCIAL GAIN. He is the most important part of any genuine business. This is the very simple point that scam artists hope that you do not understand.

The difference between a genuine Multi Level Marketing business opportunity and a scam is that the MLM scheme has END USERS. People who ACTUALLY BUY THE PRODUCT. In any genuine scheme you should only be asking yourself one question " can I sell this, at the price being asked". It is like any other business. There is a product, there needs to be buyers. Given that you can sell the product you can make a margin.

It you think that the product is over priced, forget it, the business will not work for you, no matter what the margins or downlines. If you personally don't think you know people who will buy the product, forget it. But if you like the product, would use it yourself, and think the price fair, then perhaps there is a business.

Only then do you look at the business plan. This will show that the more people in your organisation the better your profits. But these profits are derived from ACTUAL SALES. No sales, no profit. Do not underestimate how hard it is to build and maintain an organisation of 50 people selling £250 per month each, ( which, in most respectable MLM companies would make you £1000 -£2000pm personal income). It is a time intensive people business requiring great innate organisational and admin. skills. It is also true that many ordinary people who get involved in MLM find that they have these skills, which they had never before suspected, and they make money.

It is worth noting that most genuine MLM schemes are restricted to products where the normal distribution system ( factory to agent to importer to agent to wholesaler to shop ) builds up very high margins, and where there is scope for repeat orders.

Prime areas include diet and health related products, perfumes , cosmetics and jewellery. The MLM company avoids the normal advertising and marketing overhead, and , by going for quality, can create a valid and sustainable niche.

Genuine MLMs also discourage stockpiling. They genuinely do not want you to buy your way to top level by filling your garage with junk. They know that a few sob stories means bad press, and they have a genuine business. Good MLMs will tell you to only buy to fill orders, and to only carry stock once you have steady turnover to get rid of it.

If an MLM is trying to move a product that people do not buy very often then I would question the logic of MLM as a viable plan. Ditto if the product appears overpriced compared to the usual channels. And if they suggest buying some so that the clients don't have to wait, drop it like a stone.

In short you can make a lot of money, ( I know someone who made £250,000 in two years, and I heard since that he went over the million ), in genuine MLM, but you have to treat it like any other business, albeit one with a very low entry cost. Are there customers for your product, customers that you can reach and sell to?

However the reality is that for most people even genuine MLM schemes will result is something between a modest loss ( £100 - £500 in sundry expenses ) and modest profit, ( some personal clients and a few parties, plus a couple of other part timers in the downline to make holiday / little extras money). That said I would recommend trying an MLM to anyone with pretensions to their own business. It will be a very good learning experience, and, even if it makes a loss, cheaper and more useful than most courses. And perhaps you will be one those who make good money.

But you wanted to know about pyramids and scams.

Pyramids

In the UK Pyramid Selling is illegal. This has not stopped it happening, and under various guises, such as "business clubs", or (incorrectly) MLM , ( hence my introduction above).

A pyramid is ALWAYS presented as a way to make money. There might be a product, but even the most cursory study will show that there is no real market for that product, and that the trick is to sell the product or service to others who would only buy it in the hope of selling it to others who etc etc. Such pseudo products can include "reports", "catalogues", or "membership", as well as obvious rubbish.

There might not be a product, ( this is the approach of the "business clubs"). You pay to join because you think that you can get others who pay to join because they think that they can get others who etc etc.

The scheme may be incorporated as a business ( a mistake as it makes it easier for the DTI to close it ), or they might avoid that trap and be structured in another way, such as a club.

They might come up with a spurious excuse or talk about tax issues, making income tax free or some such plausible tosh.

A pyramid presentation may take many forms, but there is one thing that they all have in common, they will draw charts showing vast wealth in short time, from, it would appear, quite modest numbers of people in your downline. A lot of schemes ask for a draconian "confidentiality" or "secrecy" clause. This is bunk. It means nothing and will not protect the scam from anyone who knows the rules, but they do scare lay people.

The other key feature of a pyramid is that it MUST have new members to keep it growing. If it stops growing it dies because the recent recruits are unhappy, as they realise that they have paid out , and won't get any money. ( Compare this to a genuine MLM. Imagine that you build an organisation of 50 people, and then stop building. Do the new recruits lose? No, because they are selling product to the public. They do not NEED new downline, though such downline may well be desirable).

Some people will make money from the pyramid. These are the people who get in early, normally those who start it. Let us assume that you are not the person who starts it, but that you have been taken to a meeting or otherwise introduced. Let us assume that at the time you join there are only 200 members in the entire country, which I think you will agree is pretty early. ( In fact of course you will always be told that you are in early, and what that means in terms of numbers will never be made clear. As you can see below it does not really matter how early you get it, it is always too late).

Simple question, how much money will you make? I'm not going to answer that, but what I will do is look at how the pyramid grows, and then you can judge for yourself if you get offered one.

Let us make the following assumption. That each person talks to 5 people at each stage, and that 2 people, trusting their friend, actually join.

We will assume that as soon a decent journalist or financial adviser hears about it the scheme dies, either due to bad publicity or the DTI closing it.

From this it can be seen that the money will be made during the period before which the story breaks and the DTI close it down.

Some numbers. There are circa 15,000 Independent Financial Advisers and 200-300,000 in Financial Services generally. Let us assume that people on the whole are not daft enough to invite such people and that in fact only a few of the potential experts might get involved. Let us say that there are 10,000 who might, eventually be invited, and that that invite means death to the scheme via publicity or DTI.

There are 50,000,000 people in the UK, so the scheme should grow quite nicely before this happens.

Actually make that 30,000,000 earners. Still, plenty of room. But note, 30,000,000 divided by 10,000 implies that one person in 3000 knows how to , and has the motive, to stop the scheme.

Here goes the maths, and a "phase" is simply the time taken for that level of growth. It might be a week, a month, or vary.

200 people tell 5 each, so numbers who know of the scheme grow to 1200, and those enrolled to 600. You have introduced 2 people.

Does the scheme survive? Probably. You'd be very unlucky to have snared an expert.

Next phase. The 600 tell 5 each so 3600 people know about it, and the numbers enrolled grow to 1800. You have introduced 4 people altogether, and your downline has introduced 4, giving you an organisation of 8.

Does the scheme survive? Alarm bells are beginning to ring. An expert became aware of the scam when you passed 3000.

Next phase. The 1800 tell 5 each so 10,800 people know about it, and enrolment grows to 5400. You have personally introduced 6 people, and your organisation is 26 strong

Does the scheme survive? I doubt it, the press is on the trail and there are mutterings in the ranks of the recent members, ( 18 people in your group alone have handed over money and as yet seen NO return).

But lets give you one more bash.

5400 tell 5 people each so that 32,400 know about it. That is one person in every 1000. If you think there is still room for growth then you need your head examined. Lets forget this phase and assume that the scheme wound up with you having 26 people below you.

(The next figures are, as it happens, 97200, and then 291600, and then 874,800.)

As you can we have only progressed three layers deep and run out of room to grow. Pyramid scams work partly because most people cannot do the maths and do not realise how fast the scam burns through the population.

The Money.

Did you make any money? As an early joiner you should have had some good cash flow, but are you going to make any net money? Let us assume that profit is reached when you have an organisation of 4 people.

Well you have 26 so you have made money. But lets look at those people.

You introduced two people, probably friends, in each phase. They will have handed over some money. Hundreds of pounds for sure, perhaps thousands, on the basis that you said that they would make money. All they had to do was find 4 people, what could be simpler?

Lets see. In the last phase you introduced two people who did not get the chance to introduce anyone and are totally out of pocket. How do you feel? Want to make good?

In the previous phase you introduced 2 other friends, who have introduced two people each. They are out of pocket. Are you going to make good?

In the first phase you introduced 2 of your best friends, who each have 6 people in their organisation, so they have made money, but all those 6 ( i.e. 12 ) people are in a loss, and if your friends make their loss good then they have lost out. Are you going to help them?

The money flowed up the chain to the people who started it, and you can be fairly sure that either they , or their money, have left the country, leaving you with, quite possibly , a series of civil court cases and perhaps bankruptcy. The more you made, the more you lose. You certainly lose the friends whose money you lost.

Say the cost is £1000 to join and you averaged an income of £500 per person in downline. If you get stuck with the can and try to reimburse their money you have to pay out £26,000 on an income of £13,000, or let friends, and friends of friends, down. Suddenly buying that BMW does not look so smart.

Read that again - in the space of a few weeks you personally banked £13,000 in scheme income and were well on the way to riches, but sudenly as the scheme fails you need to find £26,000 if you want to keep your reputation. Since the people who took the other £13,000 are the scammers you can be sure that they ain't going to give it back.

Bullet points.

Beware any talk that concentrates on money , not product.

Beware any event at which a confidentiality clause must be signed. ( Though feel free to sign, you can simply ignore the entire document it if it turns out to be a pyramid, and you can report them to the DTI.

Beware any scheme where the money is derived from getting people to join the scheme, and there is no emphasis on selling actual product.

Beware any scheme whose product you would not buy yourself as a customer.

Beware anything not set up as Limited Company.

Beware any scheme where buying the product in volume is acceptable in advance of sales.

Remember. Sharp suited conmen the world over know only one rule, "you can only hustle a hustler". If at any time there is a nod and wink, an indication that you are lucky to be there, fortunate to have been selected, or about to rip off the tax man then be alert. They are looking for the guy who is nodding, the guy who thinks that he is smart, but is really just asking for it.

If it looks too good to be true, then it is.

If you come across any interesting scams in the UK, ( or want to know if a proposed deal is legit) contact Trading Standards Net Site all about Trading Standards, and how complain about dodgy dealers, pyramid scams etc. Link confirmed 16/2/98

Postscript. Since writing this I have had about one email a week from the US, from people concerned about some organisation or other, and wondering what to do. I have been informed that the following people want to hear from you. The National Fraud Information Center http://www.fraud.org The National Fraud Information Center is a non-profit organization headquartered in Washington, D.C., which helps consumers to report fraud and offers helpful advice on how to avoid becoming a victim.Incident reports are entered in the NFIC database and referred electronically to the National Electronic Fraud Database administered by the Federal Trade Commission and the National Association of Attorneys General. NFIC incident reports are also referred to variety of federal and state regulatory and enforcement agencies- the FBI, Secret Service, U S Postal Inspectors, Securities and Exchange Commission, and US Attorneys.