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Multi Level Marketing
Transcript of Multi Level Marketing
The reason this business model is illegal is because they are unethical in two respects, first they involve no product and the entire business plan is centered on recruitment and not product, secondly they are fraudulent because no securities or goods are exchanged.
Pyramid and Endless chain schemes usually promise high returns on little money invested. The individuals who get in on these schemes early usually make a great deal of money however those who get in on these schemes later loose or make very little money due to the lack of remaining people to recruit. How Pyramid and Endless chain schemes are unethical. Chain letters are a form of endless chain schemes. Once you receive a chain letter you are usually asked to send something in return (money, emails, a post card). To the person at the top of the list on the chain letter, then the recipient is to remove the top person from the chain letter and add themselves to the bottom of the list.
The problem with this type of scheme as displayed in the famous David Rhodes electronic chain letter. In the David Rhodes letter you needed to recruit ten other individuals and you would not start to receive money until you reached number five on the list. The problem with this is once the individuals who started at the top reach their number five on the list there would have to be 10,000,000 participants. If the whole United States population participated in the David Rhodes scheme there would be no pay out after the second generation due to the lack of new participants.
The people who devise these schemes realize that many people do not understand geometric progression. Geometric progression is the rule that as the scheme gets bigger there is not as many people to recruit into the scheme and the scheme then dies out, with the people who started the scheme making all or most of the money. Endless Chain Scheme characteristics Ponzi schemes are like Endless chain schemes except they, involve the use of fictional goods or services that individuals believe they are buying.
Luigi Ponzi's selling point in his scheme was investors were guaranteed a fifty percent return on their initial investment after ninety days. The quick turn around time on the original investors investment is what encouraged them to recruit others into the scheme. as we can all see that as more and more individuals are recruited into the scheme there becomes a smaller group of people to recruit and the scheme eventually dies out with the people at the top of the scheme making nice profits, with the people at the bottom of the scheme loosing their entire investment. Ponzi Schemes The similarities between Endless chains, and Ponzi Schemes are obvious people are enticed by the ability to make quick cash in little time. However as the schemes grow they become very unstable. Nor does the situation within the schemes change if there are actual goods added into the scheme to make it appear more legitimate, this is due to the faulty business plan of the two schemes.
This is because the investor is paying for the right to recruit more investors and not to the rights of goods or services.
MLM appears to be the same as the Endless chains, and Ponzi Schemes however, the difference is MLM company's have goods that are exchanged between investors and the company. There is no definite line on what value must be returned to be a legitimate company but a general rule of thumb stated on the Securities Exchanges website is that as long as the goods or service are conceived by the purchaser as being worth the money spent then a legitimate business is present.
It should be noted that recruitment centered rather then product centered company's are not in the public's best interest, and is what makes endless chains, and ponzi schemes unethical and illegal. Similarities between MLM, Endless chains, and Ponzi Schemes. Multi-level marketing also called network marketing, is the process of supplying products or services via different levels of independent agents.
Independent agents in Multi-level marketing company's can be paid by commission, bonuses, dividends, discounts, or any other form of legal compensation. There is not a legal requirement on the type of compensation required to be considered a Multi-level marketing company.
The party who recruits others into a Multi-level marketing company is called the up line of the recruit, while the recruits themselves are called the down line of the recruiter. In Multi-level marketing company's the up liners are paid commissions based upon their direct down liners sales, and the down liners recruited by the up liners down liners.
Avon, NuSkin, Tupperware, and Mary Kay are four common companies that are in fact Multi-level marketing company's.
Multi-level marketing company's can be both legal and illegal, Multi-level marketing company's become illegal and unethical when they operate as a pyramid scheme or endless chain scheme. Legal and ethical MLM Because multi-level marketing company's can quickly turn into Ponzi or Endless chain schemes the courts have set some requirements to make sure they are running ethically and as a legitimate buisness.
1. The company must monitor performance of its independent agents to ensure they are really making sales.
2. The company must have a buy back program so the agents do not get stuck with excess product.
3. The company can not charge huge amounts of money as start up costs, these costs must remain low.
4. The company can not require you to sales and training materials, these purchases must be completely voluntary.