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The Difference Between Pyramid Schemes and MLM

Multilevel Marketing (MLM) Organizations are not Pyramid Schemes. I’m not trying to defend MLM companies, because I think those are terrible businesses for most people, but I wish more people knew what a real pyramid scheme was because they’re so fascinating!

Pyramid Dollar

So try to forget everything you know about MLM and pyramid schemes, unless of course you already know that a pyramid scheme is very different from Multilevel Marketing.

For those of you who are unfamiliar with multilevel marketing companies, these are the companies where your success depends heavily on how many other people you can recruit into the company (because you get a bonus for selling them in and/or a cut of their sales). They also involve direct selling of products. Some of the largest and most recognizable MLMs are:

  • Avon Cosmetics
  • Amway (Household Goods)
  • Mary Kay (Cosmetics)
  • Herbalife (Vitamins/Supplements)
  • Primerica (Financial/Investment Products)
  • Tupperware (Home Storage)
  • Pampered Chef (Kitchen Tools)

You probably recognize most of the companies listed above and they’re not small companies. Pampered Chef is the smallest one in that list and it’s a $500 million publicly traded company on the New York Stock Exchange! Avon is the largest at over $10 billion in revenue with more than 6 million sales people.

$10 billion in revenue and 6 million sales reps is impressive, but it also cuts at the heart of why I don’t like MLMs and why many people try to steer clear of them. If we do some quick math to understand those numbers, $10.3 billion in revenue leaves each of the 6.2 million sales reps and 42,000 employees with about $1650 each.

Of course, we can assume the 42,000 employees are being paid a reasonable salary or they’d probably go work somewhere else. So that leaves a sales rep with even less than $1650 as an average. We see the best sales reps driving around in pink Cadillacs, so we can also assume the best sales reps are making much more than $1650. In other words, some sales reps are doing very well and others don’t make enough to survive.

That’s not a problem per se, any sales rep is responsible for their own success of course. But a lot of people are sucked into these ventures with the promise of (potential) wealth. I’m not speaking about Avon specifically, but I have been invited to meetings for other MLMs and that was always the pitch. When the results don’t match the pitch, people start to feel like they’ve been scammed, especially when they’ve paid money to join or buy product inventory to get started selling. While they’re not exactly trying to scam people, they are giving a hard sell and I have been to pitch meetings where people were misled about typical results.

Multilevel marketing companies are legal, assuming they’re actually selling a real product (and the product is legal). Again, they might not be good business opportunities but they are technically legal. Like I said, they’re on the New York Stock Exchange! In fact, there are plenty of legal and lousy business opportunities out there, go to any franchise trade show and see some for yourself — MLMs do not have a monopoly on lousy (high failure rate) business opportunities.

On the other hand Pyramid Schemes are illegal. They are fly by night operations (sometimes literally since they may only operate at night). They are not traded on stock exchanges. In fact, these are some pretty big indicators that a business is not a pyramid scheme: it is legal and the company is on a stock exchange.

Because a lot of people dislike MLM organizations and think they’re a scam, they often refer to them as “Pyramid Schemes” either out of confusion or as an insult or exaggeration. There’s also that funny scene in The Office where Michael Scott draws the Organization Chart of an MLM and then Jim draws a pyramid shape around it to demonstrate that it’s a Pyramid Scheme:

office-pyramid

It’s a really funny scene, but as we know: MLMs are not Pyramid Schemes.

So, let’s get to the really interesting part:

What is a Pyramid Scheme?

The key indication that you’re dealing with a Pyramid Scheme is that the people involved actually describe it as a pyramid scheme. They may have clever code names for the organization, but nobody is denying the fact that it’s a pyramid scheme because it’s important for everyone to understand how that works and it’s important for everyone to know it’s illegal so they can tread carefully. On the other hand, people in MLMs never refer to their organizations as Pyramid Schemes, because they probably don’t know what a real pyramid scheme is, and they do know they’re not in one because their business is actually legal — lousy perhaps, but still legal.

So let me get back to the beginning, if there’s no product involved then how does anyone make money? That’s the evil genius of some pyramid schemes: they just pass around money!

The Eightball Model

This type of Pyramid Scheme is called the eight ball model because there are exactly 8 people at the bottom of the pyramid. There are exactly 4 people above these 8 (one person for every two below). There are exactly 2 people above the 4 (again, one person for every two below). Then there is 1 person above the 2 (again, one person for every two below). If you haven’t figured it out, this structure makes something that resembles an actual pyramid shape:

8 Ball Pyramid Scheme Structure

This is another key difference between Pyramids and MLMs — Pyramids actually look like Pyramids. MLMs can have any number of people on each level and therefore the never actually look like pyramids.

So how does a Pyramid Scheme keep its pyramid shape when new people join? The person at the top of the pyramid gets kicked out (blue) and the pyramid divides in two new pyramids with the 2 people on the second level (red) now as the top person in each of their own pyramids.

8 Ball Pyramid Split

Now there are two pyramids and the people in each pyramid will try to recruit people to join the bottom of their pyramid which will then force these 2 pyramids to become 4 pyramids (and so on). This is illegal because there are only so many people who can join the pyramid so eventually there will be many pyramids that are waiting for people to join and not enough people in existence to join them, thus everyone already “invested” in the pyramid will lose their money.

So again, MLMs are not Pyramid Schemes. But, to make things more complicated, some scams pretend to be MLMs. This further confuses people into thinking MLMs are scams and scams are Pyramid Schemes. One method of making a Pyramid Scheme sound like Multilevel Marketing is called a:

Matrix Scheme

In a matrix scheme, victims typically pay a fee (or buy a fake or worthless product) to join a queue to receive a luxury item (iPad, Cellphone, etc). These businesses are sometimes made to seem like MLMs because the people are told they will receive their item quicker if they get their friends to sign up.

The person running the scheme waits until income equals double (or more) of the cost of the item and then they send out the first item to the first person on the list. When income doubles the cost of the item a second time, they send the item to the second person on the list. This is a ponzi scheme to some degree, but it also suffers from the same problem as the 8 Ball Pyramid Scheme: exponential growth is required to pay each new person who joins, which eventually becomes impossible to sustain.

At the end of the day, the Federal Trade Commision does have some specific criteria to tell the difference between MLMs and Pyramid Schemes. MLMs:

  1. Have a real product to sell
  2. Sell the product without requiring the customer to join the MLM
  3. Pay commission for real sales, not recruiting

Regardless of the differences, you should be wary of both Pyramid Schemes and MLMs since it’s quite possible that you’ll lose your money in both.

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Sources: FTC, College of New Jersey

May 2, 2016 at 3:00 am Leave a comment

Sink Plungers are Not Toilet Plungers

Thankfully, my current home has good plumbing and I haven’t needed a plunger in a long time. But, I can’t say the same about previous places, especially some of those places in college!

The best way to get a plunger to work well is to use the right plunger. There are two main types of plungers: toilet plungers and general purpose plungers (for almost everything other than toilets).

plungersSinks and floor drains are typically flat, so a flat plunger is ideal. But toilet drains are typically curved and the curvature can vary widely among models. That means a flat sink plunger isn’t well suited for creating a seal and getting proper suction around the curvature of a toilet drain. You need good suction to clear a blockage and you’ll get better suction if you use a plunger with a flanged bottom to match the curve of the toilet drain.

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*Please checkout this game I’ve been working on with a friend. It’s available for free on Android and iOS. It’s a number based puzzle game that is designed for casual touchscreen gaming. Think sudoku, but better suited for visual thinkers (or people who just like palm trees). Click the phone below to check it out:

150wSkyscraper

September 5, 2014 at 9:55 am Leave a comment

Kids in Point Roberts USA go through Canada Twice a Day for School in the USA

Point Roberts, Washington is considered part of the mainland United States, but it’s only connected by land to Canada. Although it’s connection to Canada is similar to Alaska, it’s not as far from the rest of the mainland United States as Alaska — it’s only about 8 miles (13 km) across the water. The nearest large city is Vancouver, British Columbia at roughly 22 miles (35 km) away.

Point Roberts, WA

The Point Roberts school serves children from kindergarden through third grade. Older kids are shuttled on a 40 minute school bus ride that takes them out of the US, into British Columbia (Canada), and then back into the US again at Blaine, Washington. Then on the way home, they do it all over again.

The population of Point Bob is roughly 1,314 according to the 2010 census. So, it might not be feasible to school all of the children on The Point. Many high schools have more students than Point Roberts has people.

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Sources: wikipedia (Point Roberts)

July 29, 2014 at 11:36 pm 1 comment

Is Japan’s Coastline Longer Than Australia’s?

By Chad Upton | Editor-in-chief

I often come across the statement that Japan’s coastline is longer than Australia’s.

Although Australia has more than 20 times more land area than Japan, Japan actually has a longer coastline according to the World Factbook. The World Factbook, published by the CIA, lists Australia’s coastline at 25,760 km (16,007 miles) and Japan’s at 29,751 km (18,486 miles).

japan_australia

As you can see in the graphic above, Japan fits comfortably inside of Australia. So, how is it possible that it has a longer coastline? (more…)

May 30, 2014 at 8:00 am 1 comment

Bluetooth Technology is Named After a King

By Chad Upton | Editor-in-chief

King Harald Gormsson ruled Denmark from c. 958 until his death in 985 or 986 (sources vary). He also dabbled in ruling Norway for a few years starting in roughly c. 970.

bluetooth_vikings

He is known for building the first bridge in southern Scandinavia. It was a huge bridge for the time at 5 meters (5.5 yards) wide and 760 meters (831 yards) long. Bridges were of course useful, and this was the longest known bridge in the Viking era — a prestigious symbol for the builder. (more…)

May 21, 2014 at 8:00 am 4 comments

Dogs Poop in Alignment with Earth’s Magnetic Field

By Chad Upton | Editor

In case you don’t know, the Earth is basically one giant magnet. That’s why a compass always points to magnetic North. This is extremely useful for navigation and other location based activities.

Apparently, dogs also find it useful for pooping.

Dog Hydrant

Photo: Scott Spaeth (cc)

Scientists recently published a paper describing their observations and analysis of the direction that dogs poop. For two years they monitored 70 dogs and recorded the axis upon which they defecate. (more…)

March 27, 2014 at 11:00 am 9 comments

Passenger Boarding Passes with SSSS Require Additional Security Screening

By Chad Upton | Editor

For a while, I travelled every single week of the year (except for Christmas). Of all the new airports, airplanes, taxis, rental cars, hotels, motels, customs, passports, visas, bad restaurants and other necessities, airport security was the most stressful.

TSA Lines

I  have nothing to fear. I’m not on any watchlists, I don’t have a redress number, I literally don’t even take the free airline snacks with me (you have to declare them at all of the international border crossings I usually encounter). (more…)

February 17, 2014 at 8:00 am 2 comments

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