5X5 Episode 3

Multilevel Marketing and Pyramid Schemes
S: Hello, this is the SGU 5x5, five minutes with five skeptics. Today is Sunday, January 20th 2008. Our topic for this week is multilevel marketing or pyramid schemes. Now, Rebecca, I know that you're a long time critic of multilevel marketing.

R: I am indeed and to give those of you who might not know an idea: a pyramid scheme is basically on the outisde it looks like a company that sells a product but in fact nobody's making money off of selling the overpriced product. What they make money off of is by convincing people to pay for the opportunity to sell that product. For instance, you've got a big batch of, oh, I don't know, diet bars and to get them to be sold the company convinces you to buy a bunch of boxes from them which you then have to sell to your friends and family. You quickly realise that nobody actually wants to buy these overpriced things so in order for you to make money that means you have to convince your friends and family to do the same thing that the company did to you. In other words, buy the bars from you which they then sell to their friends and family. Very quickly it becomes obvious that nobody's going to make any money off of this except for the people at the very top of the peak of the pyramid.

S: Right, and that's called a pyramid scheme when it gets to that level which is illegal. Such a scheme should be reported to the FTC, in fact, the Federal Trade Commision in this country. But there's a fine line sometimes between multilevel marketing, which is not illegal, although I think they're dubious in my opinion though they're not strictly illegal, and a pyramid scheme. The government actually gives some guidelines if you're considering becoming a multilevel marketer and Rebecca named a few of them: Does the product have a market? Is it overpriced? Do you have to recruit sellers or other distributors in order to make money or are you going to make money by selling a legitimate product at a fair price? That's the basic thing you need to consider.

J: Some of these companies though, sure like Mary Kay is a good example, in order for you to move up in the organisation you not only have to sell product but you have to have more recruits underneath you. So every level, and I think they have about 15 levels that you can go through, every time you want to take a step to the next level you need three or four recruits underneath you that add to your network. So there is a grey line and I think Mary Kay's are just below the waterline of being a pyramid scheme even though, you know, they sound fairly inocuous and everybody knows of the company and knows who they are.

S: Yeah, you also have to ask yourself, "why is the company choosing to sell their product with this model?" They say it's because they want their sales people to also be users so they'll be believers but it's because they want their sales people to also be buyers and I know a lot of snake oil schemes operate this way and essentially with some of these companies the distributors are often barely making enough money from selling products to support their own habit, if you will, just to keep themselves in the overpriced supplement or snake oil that their buying.

J: Yeah, the goal is, and most people if you've talked to anyone or know anyone who's done this and if they're going to be honest with you, the real goal here is to get people underneath you. Because you won't get money until you get, it depends obviously on the particular company, but you won't make any real money until you have a large network underneath you generating sales for the company.

E: Yeah, a good website for our listeners to go and take a look at if they want to learn more about this www.pyramidschemealert.org, seems like a pretty good resource. They're good at making the public aware of the pitfalls and what the red flags are for companies that are pyramid schemes and illegal multivel marketers.

B: I'll throw one statistic out there, pyramid schemes are losing propositions for at least 90% of the people that get involved.

R: Yeah, basically...

S: That's pretty bad odds

R: ...one thing to look out for is if it seems like a deal that's too good to be true it probably is.

S: So I guess the bottom line of this whole thing is: when it comes to multilevel marketing be skeptical.

E: Well said.