What Is a Pyramid Scheme?
Definition: A pyramid scheme is an illegal business structure in which recruitment of new members into the pyramid scheme is main avenue for compensation for participants. In a pyramid scheme, people recruit others to join an organization or business opportunity for a initial fee. They are then compensated--either solely or substantially--with a portion of these recruitment fees and the future earnings of their recruits.
There is often a cover for a pyramid scheme that makes it appear the compensation will come from something other than recruitment. Some might offer a work-at-home job opportunity for the the fee. But the work is simple and and entirely secondary to earning compensation. Sometimes they are dressed up as multilevel marketing (MLM) organizations, selling a product through direct sales. But in a true MLM, reps earn more through their own product sales than by recruiting others.
Pyramid schemes are illegal in the U.S. and many other countries including Canada, Philippines, China and the U. K. As the name implies, a small number of people at the very top can make large amounts of money in a pyramid scheme, while the last ones in at the bottom will lose money. This type of business model is not sustainable because there is no product of value powering the earnings. And when the market is saturated and people begin exiting the organization, it will collapse. This can happen very quickly.
Some covers for pyramid schemes include:
• Work at home jobs with initial fees and bonuses for recruitment
• Multilevel marketing business opportunities
• Chain letters
• Gift circles
• Investment clubs
Is It MLM Or A Pyramid Scheme?
Considering an MLM opportunity? Be careful. It may well be a legitimate MLM business. Or it may be a pyramid scheme.
MLM (multilevel marketing) is an attractive business proposition to many people. MLM offers the opportunity to become involved in a system for distributing products to consumers. Unlike the person starting a business from scratch, the MLM participant has the support of a MLM company that supplies the products and sometimes offers training as well.
As an MLM participant, you make your money by selling the MLM products to other MLM participants. If they're not already a member of your MLM company, you sign them up. Besides earning money off your own sales, you also earn a percentage of the income generated by the distributors that you've brought into the MLM plan (your downline). Often there are bonuses for selling particular amounts of MLM product or signing up a certain number of new members.
Sounds good, doesn't it? And being part of a well-run MLM business can be a lot like being a member of a large extended family.
Unfortunately,not every MLM opportunity is a legitimate business opportunity. Many pyramid schemes, frauds designed to part the unwary from their money, are disguised as MLM opportunities.
Like MLM, pyramid schemes depend on recruiting people to become distributors of a product or service. Like MLM, the pyramid scheme offers the opportunity to make money by signing up more recruits and by accomplishing certain levels of achievement.
The big difference between MLM and pyramid schemes is that MLM is legal in Canada and pyramid schemes aren't. (Participating in a pyramid scheme is an offence under the Criminal Code of Canada, punishable by up to 5 years imprisonment.) But it can be very difficult for the person looking for a business opportunity to tell the difference between a legitimate MLM opportunity and a pyramid scheme at a glance. How do you tell whether it's a legitimate business opportunity or a scam?
The big difference between MLM and a pyramid scheme is in the business' operations. The entire purpose of a pyramid scheme is to get your money and then use you to recruit other suckers (ahem - distributors). The entire purpose of MLM is to move product. The theory behind MLM is that the larger the network of distributors, the more product the business will be able to sell.
Use these questions as an acid test if you're in the least doubt as to whether the opportunity you're considering is MLM or a pyramid scheme:
1) Are you required to "invest" a large amount of money up front to become a distributor? This investment request may be disguised as an inventory charge. Legitimate MLM businesses do NOT require large start up costs.
2) If you do have to pay for inventory, will the company buy back unsold inventory? Legitimate MLM companies will offer and stick to inventory buy-backs for at least 80% of what you paid.
3) Is there any mention of or attention paid to a market for the product or service? MLM depends on establishing a market for the company's products. If the company doesn't seem to have any interest in the consumer demand for its products, don't sign up.
4) Is there more emphasis on recruitment than on selling the product or service? Remember, the difference between MLM and a pyramid scheme is in the focus. The pyramid scheme focuses on fast profits from signing people up and getting their money. If recruitment seems to be the focus of the plan, run.
These next two questions will help you determine what the focus of the company is:
5) Is the plan designed so that you make more money by recruiting new members rather than through sales that you make yourself?
6) Are you offered commissions for recruiting new members?
As always, when you're investigating a potential business opportunity, you'll want to gather all the information you can about the MLM company's products and operations.
Get (and read) written copies of the company's sales literature, business plan and/or marketing plan. Talk to other people who have experience with the MLM company and the products, to determine whether the products are actually being sold and if they are of high quality. Check with the Better Business Bureau to see if there have been any complaints about the company. And listen carefully when you're at that MLM recruitment meeting. Inflated claims for the amazing amounts of money you're going to make should set your alarm bells ringing.
Being part of a successful MLM company can be both profitable and fun, but unfortunately, some purported MLM opportunities are actually pyramid schemes designed to flatten both your wallet and your dream of running a business.
Showing posts with label Fraud. Show all posts
Showing posts with label Fraud. Show all posts
Sunday, July 25, 2010
Internet Business Opportunity Scams
Dot-Com or Dot-Con?
About Internet Business Opportunity Scams
There are many Internet business opportunities that exploit the novelty of the Web as a lure. If you nibble, they'll further bait you with promises of freedom, esteem, high income and the good life. For a fee, they'll set you up with a company-sponsored, duplicate Website, along with products or services to sell. But many will also offer you incentives to recruit others to pay the fee, which is really what these so-called opportunities are all about. They are among what the U.S. Federal Trade Commission cleverly calls Dot Cons.
The real business of these types of dot-cons is not wholesaling products or services. It's selling the concept of the scheme itself, and duping you into reselling it for them. But by law in most U.S. states, one can't profit from recruiting, with nothing changing hands but fees and commissions for the scheme itself. That's illegal pyramiding. To get around it, these dot-cons sell tangible, "distributorship" Websites on which to seemingly resell their products or services. But a closer look reveals that, what's really for resale, is the distributorship itself over and over again.
It's all just a guise for a relatively new twist on an old scheme called multilevel marketing (MLM) or network marketing. One of the latest twists is exact method marketing (EMM). It's touted as a revolutionary idea that eliminates the flaws in MLM. But it's little more than refurbished hype for the same ol' scheme. They all use some form of pyramiding to resell the scheme itself, some by exploiting loopholes in the law to recruit through a backdoor, others by breaking the law until they're busted. Regardless, they are often formulas for failure, except for the people who created them. They're at the very top of the pyramid, the only place to be―if you're going to run a scheme, that is.
Even if products and services are more than just a hook to resell the scheme, often the dot-cons are not really wholesalers as they might claim. They are extra middlemen between wholesale distributors and you, and you can bet they're taking an extra cut too. Another dot-con trick of the trade, is to "borrow" the reputations of well-known merchants, financial institutions and such, by offering referral (affiliate) deals with them. But affiliate deals are all over the Web, and just about anybody with a Web site can sign up for free. Again, the dot-cons are often unnecessary middlemen taking an extra cut. As a result of these tricks, you'll likely have to gouge absurd retail prices from your customers to earn any margin at all, share your meager referral commissions with unnecessary middlemen, or both.
Web-savvy shoppers would likely be hesitant to submit their credit card numbers to reputation-unknown shopping sites, especially those that also hype get-rich-quick schemes. Additionally, you'll be competing with hundreds to thousands of others who paid the fee too, and are attempting to sell the exact same products or services and the scheme itself, on identical, company-sponsored Websites. It sounds good on the surface when dot-con hype promises "free training" in marketing and sales techniques. But the fact of the matter is, those with duplicate Websites are your direct competitors, and they too are learning the same techniques.
Internet business opportunities also tend to hype the ease of online marketing and popularity of shopping on the Web (e-commerce). Granted, online marketing has a broader reach than most traditional methods. It's also true that e-commerce is a growing, multi-billion dollar industry. But that very reach and popularity makes the Web a highly-competitive place to do business, and it gets more so everyday. Many failed dot-coms will attest to that. Despite that some had millions in venture capital to finance far more marketing resources than home-based Internet businesses typically can, they failed.
Among the biggest dot-con hypes is getting "free advertising" in "hundreds" of search engines. When starting up a small businesses, you likely won't have much of an advertising budget. So, free advertising might sound good, and you can bet the dot-cons know it does. Because search engines are the "Yellow Pages" of the Web, it's true that they are the main source of Website traffic. But the reality is, there are only a handful that deliver significant traffic, such as Yahoo, Excite and Google. The rest of the "hundreds" are relatively inconsequential for marketing.To get a free listing of significance in the popular handful takes search-engine
savvy―a whole 'nother ballgame―and lots of hard work, such as keyword and meta tag optimization. If you don't know what a keyword or meta tag is when you pay the fee for an Internet business opportunity, you're already in trouble.
Again, if the dot-cons promise to teach you the techniques, remember that they're also teaching your direct competitors. Besides, no matter how much training a seller of duplicate Websites promises, many of the popular search engines won't list identical sites or those that are even close. Search engines call them mirror sites, and consider multiple submissions of same to be redundant. Some won't list get-rich-quick schemes either, for obvious reasons.
"Build it and they will come" doesn't work nearly as well as the dot-cons would love for you to believe, so they conveniently fail to mention these and other inherent flaws. Natch, it's to their advantage to make it sound far easier than it is. They'll say anything to get your fee, their main source of income.
The Bottom Line of Internet Business Opportunity
Often, after the people who buy into these dot-cons have tapped out their friends, relatives, neighbors, church comembers and everybody else they know, they soon realize that the so-called Internet business opportunity was not the piece of cake the hype made it out to be. According to an article about MLMs by Small Business Advisor, Dr. Judith Kautz, "There are countless stories of folks who have destroyed their social foundation through pressuring friends and family to buy their products."
After the product or service phase fails, the only way left for them to recoup their investments or make what little money they can, is to dupe others into paying the fee, the same as they were duped. But they soon realize that's not easy either, as it'll take a lot of dishonest, "network marketing" legwork. Those with a conscience usually just give up at this point, eat their losses and learn a lesson the hard way.
But there are some who still don't get it, even after they've ticked off everybody they know. Sadly, scam artists turn otherwise ethical people into scam artists too, whether or not the otherwise-ethical realize it. Dr. Kautz indicates that they are so brainwashed by the hype, it becomes a cultlike obsession. She says, "Members mouth company mottos with no conscious awareness of how ludicrous the claims may be."
You've probably seen their "Wonderful Opportunity" and similarly-titled posts in forums that allow it. (The Job Searching: Technical Forum doesn't.) Besides their typical ambiguous hype about all the "wonderfulness" with no mention of the inherent flaws and risks, the URLs they provide are one of the clues that they're duped "cultists" attempting to dupe others into an Internet business opportunity scam. The URLs terminate in tags that credit them with a chunk of your fee, should you bite the bait. For example,
http://www.getduped.com/?id=maryq123
Where ?id=maryq123 is the tag. They likely also get a cut of your future sales, as your "sponsors." In other words, you'll help them move up the "pyramid" at your expense.
Others are just unoriginal and lazy con artists, looking for an easy ride at your expense. They could care less about selling products or services and have joined several, dupe-others-in Internet business opportunities. They'll say just about anything to get their cut of your fee. Some will even act hurt or angry if you question their motives. But con artists really don't give a hoot what you think about them. It's all just part of their bait-and-hook campaign.
How to Avoid Internet Business Opportunity Scams
This is not intended to discourage you from starting up a home-based Internet business, but rather just to give you a heads up about the too-good-to-be-true, Internet business opportunity scams. There are legit small businesses that have successfully carved out or exploited Internet niches that are not yet saturated, one of the real "secrets" to success. But, as does just about any other entrepreneurial endeavor, it takes hard work, knowledge, dedication, cash flow and resources. (An understanding significant other helps, too.) There are few quick and easy ways to make money on the Internet, at least not honestly.
Granted, there are people who've had success with Internet business opportunity scams, if duping others in defines success. But for every so-called success, there are hundreds of people who aren't, because the hype misled them into believing that it was far easier than it really is. Don't be fooled by
• Testimonials
• Guarantees
• Documented "proof"
• Huge income potentials
And more hype, like "Get out of bed when you want to!!!" and "Work when you want!!!" Who among your customers will understand that you didn't ship their orders on time, because you chose to sleep in? How many people earn huge incomes by being lazy? To succeed at a dot-con, you must be selling, scheming and conniving all of the time. In fact, dot-con or not, Internet businesses take orders 24/7, which is pretty much the whole idea. So, you likely won't be sleeping in much or taking many days off, until you can afford a staff to take over. But how many years will that take, even for a legit Internet business?
It's all just bait conceived by con artists, who care only about parting you from your money. Ethics don't come into it. (For more about con-artist tricks, click Work-at-Home Job Scams in the sidebar.) The predators who run Internet business opportunity scams count on a new sucker being born every minute, and thrive on the naive, wishful and desperate. Stay-at-home moms, the elderly, and physically-challenged people who need money most are among their prime prey.
About Internet Business Opportunity Scams
There are many Internet business opportunities that exploit the novelty of the Web as a lure. If you nibble, they'll further bait you with promises of freedom, esteem, high income and the good life. For a fee, they'll set you up with a company-sponsored, duplicate Website, along with products or services to sell. But many will also offer you incentives to recruit others to pay the fee, which is really what these so-called opportunities are all about. They are among what the U.S. Federal Trade Commission cleverly calls Dot Cons.
The real business of these types of dot-cons is not wholesaling products or services. It's selling the concept of the scheme itself, and duping you into reselling it for them. But by law in most U.S. states, one can't profit from recruiting, with nothing changing hands but fees and commissions for the scheme itself. That's illegal pyramiding. To get around it, these dot-cons sell tangible, "distributorship" Websites on which to seemingly resell their products or services. But a closer look reveals that, what's really for resale, is the distributorship itself over and over again.
It's all just a guise for a relatively new twist on an old scheme called multilevel marketing (MLM) or network marketing. One of the latest twists is exact method marketing (EMM). It's touted as a revolutionary idea that eliminates the flaws in MLM. But it's little more than refurbished hype for the same ol' scheme. They all use some form of pyramiding to resell the scheme itself, some by exploiting loopholes in the law to recruit through a backdoor, others by breaking the law until they're busted. Regardless, they are often formulas for failure, except for the people who created them. They're at the very top of the pyramid, the only place to be―if you're going to run a scheme, that is.
Even if products and services are more than just a hook to resell the scheme, often the dot-cons are not really wholesalers as they might claim. They are extra middlemen between wholesale distributors and you, and you can bet they're taking an extra cut too. Another dot-con trick of the trade, is to "borrow" the reputations of well-known merchants, financial institutions and such, by offering referral (affiliate) deals with them. But affiliate deals are all over the Web, and just about anybody with a Web site can sign up for free. Again, the dot-cons are often unnecessary middlemen taking an extra cut. As a result of these tricks, you'll likely have to gouge absurd retail prices from your customers to earn any margin at all, share your meager referral commissions with unnecessary middlemen, or both.
Web-savvy shoppers would likely be hesitant to submit their credit card numbers to reputation-unknown shopping sites, especially those that also hype get-rich-quick schemes. Additionally, you'll be competing with hundreds to thousands of others who paid the fee too, and are attempting to sell the exact same products or services and the scheme itself, on identical, company-sponsored Websites. It sounds good on the surface when dot-con hype promises "free training" in marketing and sales techniques. But the fact of the matter is, those with duplicate Websites are your direct competitors, and they too are learning the same techniques.
Internet business opportunities also tend to hype the ease of online marketing and popularity of shopping on the Web (e-commerce). Granted, online marketing has a broader reach than most traditional methods. It's also true that e-commerce is a growing, multi-billion dollar industry. But that very reach and popularity makes the Web a highly-competitive place to do business, and it gets more so everyday. Many failed dot-coms will attest to that. Despite that some had millions in venture capital to finance far more marketing resources than home-based Internet businesses typically can, they failed.
Among the biggest dot-con hypes is getting "free advertising" in "hundreds" of search engines. When starting up a small businesses, you likely won't have much of an advertising budget. So, free advertising might sound good, and you can bet the dot-cons know it does. Because search engines are the "Yellow Pages" of the Web, it's true that they are the main source of Website traffic. But the reality is, there are only a handful that deliver significant traffic, such as Yahoo, Excite and Google. The rest of the "hundreds" are relatively inconsequential for marketing.To get a free listing of significance in the popular handful takes search-engine
savvy―a whole 'nother ballgame―and lots of hard work, such as keyword and meta tag optimization. If you don't know what a keyword or meta tag is when you pay the fee for an Internet business opportunity, you're already in trouble.
Again, if the dot-cons promise to teach you the techniques, remember that they're also teaching your direct competitors. Besides, no matter how much training a seller of duplicate Websites promises, many of the popular search engines won't list identical sites or those that are even close. Search engines call them mirror sites, and consider multiple submissions of same to be redundant. Some won't list get-rich-quick schemes either, for obvious reasons.
"Build it and they will come" doesn't work nearly as well as the dot-cons would love for you to believe, so they conveniently fail to mention these and other inherent flaws. Natch, it's to their advantage to make it sound far easier than it is. They'll say anything to get your fee, their main source of income.
The Bottom Line of Internet Business Opportunity
Often, after the people who buy into these dot-cons have tapped out their friends, relatives, neighbors, church comembers and everybody else they know, they soon realize that the so-called Internet business opportunity was not the piece of cake the hype made it out to be. According to an article about MLMs by Small Business Advisor, Dr. Judith Kautz, "There are countless stories of folks who have destroyed their social foundation through pressuring friends and family to buy their products."
After the product or service phase fails, the only way left for them to recoup their investments or make what little money they can, is to dupe others into paying the fee, the same as they were duped. But they soon realize that's not easy either, as it'll take a lot of dishonest, "network marketing" legwork. Those with a conscience usually just give up at this point, eat their losses and learn a lesson the hard way.
But there are some who still don't get it, even after they've ticked off everybody they know. Sadly, scam artists turn otherwise ethical people into scam artists too, whether or not the otherwise-ethical realize it. Dr. Kautz indicates that they are so brainwashed by the hype, it becomes a cultlike obsession. She says, "Members mouth company mottos with no conscious awareness of how ludicrous the claims may be."
You've probably seen their "Wonderful Opportunity" and similarly-titled posts in forums that allow it. (The Job Searching: Technical Forum doesn't.) Besides their typical ambiguous hype about all the "wonderfulness" with no mention of the inherent flaws and risks, the URLs they provide are one of the clues that they're duped "cultists" attempting to dupe others into an Internet business opportunity scam. The URLs terminate in tags that credit them with a chunk of your fee, should you bite the bait. For example,
http://www.getduped.com/?id=maryq123
Where ?id=maryq123 is the tag. They likely also get a cut of your future sales, as your "sponsors." In other words, you'll help them move up the "pyramid" at your expense.
Others are just unoriginal and lazy con artists, looking for an easy ride at your expense. They could care less about selling products or services and have joined several, dupe-others-in Internet business opportunities. They'll say just about anything to get their cut of your fee. Some will even act hurt or angry if you question their motives. But con artists really don't give a hoot what you think about them. It's all just part of their bait-and-hook campaign.
How to Avoid Internet Business Opportunity Scams
This is not intended to discourage you from starting up a home-based Internet business, but rather just to give you a heads up about the too-good-to-be-true, Internet business opportunity scams. There are legit small businesses that have successfully carved out or exploited Internet niches that are not yet saturated, one of the real "secrets" to success. But, as does just about any other entrepreneurial endeavor, it takes hard work, knowledge, dedication, cash flow and resources. (An understanding significant other helps, too.) There are few quick and easy ways to make money on the Internet, at least not honestly.
Granted, there are people who've had success with Internet business opportunity scams, if duping others in defines success. But for every so-called success, there are hundreds of people who aren't, because the hype misled them into believing that it was far easier than it really is. Don't be fooled by
• Testimonials
• Guarantees
• Documented "proof"
• Huge income potentials
And more hype, like "Get out of bed when you want to!!!" and "Work when you want!!!" Who among your customers will understand that you didn't ship their orders on time, because you chose to sleep in? How many people earn huge incomes by being lazy? To succeed at a dot-con, you must be selling, scheming and conniving all of the time. In fact, dot-con or not, Internet businesses take orders 24/7, which is pretty much the whole idea. So, you likely won't be sleeping in much or taking many days off, until you can afford a staff to take over. But how many years will that take, even for a legit Internet business?
It's all just bait conceived by con artists, who care only about parting you from your money. Ethics don't come into it. (For more about con-artist tricks, click Work-at-Home Job Scams in the sidebar.) The predators who run Internet business opportunity scams count on a new sucker being born every minute, and thrive on the naive, wishful and desperate. Stay-at-home moms, the elderly, and physically-challenged people who need money most are among their prime prey.
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