Pyramid or Ponzi?
A pure pyramid scheme is one where one purchases memberships, which allow one to sell memberships. One is paid a commission on each membership one sells, and a commission on the memberships sold by the members to whom one has sold memberships. A true pyramid scheme actually pays the commissions. The most famous pure pyramid scheme was to sell mink oil, only there was never any mink oil. The members soon found, after about five layers of membership were sold, that everyone was already a member, so there were no more memberships to be sold, and no way for the bottom layer to recoup any of their membership fee. Most members found themselves on the bottom layer, because this is the basic geometry of all pyramid schemes.
A Ponzi scheme is one that promises investors a large return, and actually delivers the return for a short time, attracting many more investors. When the number of investors levels off, the Ponzi absconds with all the money that's left. The original scheme promised a return of 5% per month from arbitraging international postage stamps.
A 'legitimate' Multi-level Marketing (MLM or Network) scheme has both products for sale and memberships for sale. The promise is that members will earn large amounts of money selling memberships. The reality is that members can earn small amounts of money selling product.
Andy was 'hired' to help with accounts and marketing of what he described as a marvellous MLM scheme. It was so good, he agreed to work without a salary for a percentage of the profits, and the founder of the scheme made him a partner.
Memberships were US$250. After three months, members had sold 1,000 memberships. The initial US$250 went to the company, which promised to then pay commissions to the members. With 1,000 members, the company (obviously) had US$250,000 in the bank before commissions.
So the CEO absconded, taking the entire US$250,000.
As Andy said, if they could make US$250,000 in just three months, how much money could they have made had the CEO not absconded? And (like all pyramid schemes) month three had been much better than month two, which had been much better than month one as the members sold to their friends who sold to their friends.
Andy had co-signed the lease on the office for US$27,000. The CEO had paid the first quarter, but Andy was liable for the balance, plus the unpaid utility bills. In three months, the company had not provided him with a residence visa, nor with any share of the profits. The members all accused Andy of cheating them, thinking he was keeping the money they were owed for commissions.
At this point, Andy was desperate, and went to Farook, because he'd heard that Farook had flats that did not require a residence visa (they did, however, require a 50% retail mark-up on the rent). Once Andy got his residence visa, he quickly departed Farook's studio for a place that was much nicer and also cheaper.
Since Andy still thinks the pyramid could have succeeded had the CEO not absconded, I question the requirements to obtain a degree in accounting in his home country. Of course, I can say the same about the holders of advanced degrees from Harvard University, since one of them put his name on a book that promises that MLMs will be the businesses of the future. Probably, dot com MLMs at that (the book was written in 2000).
And I'm not sure if one should call the scam in which Andy was fleeced a pyramid or a Ponzi, since it doesn't meet the narrowest definition of either scam.
A Ponzi scheme is one that promises investors a large return, and actually delivers the return for a short time, attracting many more investors. When the number of investors levels off, the Ponzi absconds with all the money that's left. The original scheme promised a return of 5% per month from arbitraging international postage stamps.
A 'legitimate' Multi-level Marketing (MLM or Network) scheme has both products for sale and memberships for sale. The promise is that members will earn large amounts of money selling memberships. The reality is that members can earn small amounts of money selling product.
Andy was 'hired' to help with accounts and marketing of what he described as a marvellous MLM scheme. It was so good, he agreed to work without a salary for a percentage of the profits, and the founder of the scheme made him a partner.
Memberships were US$250. After three months, members had sold 1,000 memberships. The initial US$250 went to the company, which promised to then pay commissions to the members. With 1,000 members, the company (obviously) had US$250,000 in the bank before commissions.
So the CEO absconded, taking the entire US$250,000.
As Andy said, if they could make US$250,000 in just three months, how much money could they have made had the CEO not absconded? And (like all pyramid schemes) month three had been much better than month two, which had been much better than month one as the members sold to their friends who sold to their friends.
Andy had co-signed the lease on the office for US$27,000. The CEO had paid the first quarter, but Andy was liable for the balance, plus the unpaid utility bills. In three months, the company had not provided him with a residence visa, nor with any share of the profits. The members all accused Andy of cheating them, thinking he was keeping the money they were owed for commissions.
At this point, Andy was desperate, and went to Farook, because he'd heard that Farook had flats that did not require a residence visa (they did, however, require a 50% retail mark-up on the rent). Once Andy got his residence visa, he quickly departed Farook's studio for a place that was much nicer and also cheaper.
Since Andy still thinks the pyramid could have succeeded had the CEO not absconded, I question the requirements to obtain a degree in accounting in his home country. Of course, I can say the same about the holders of advanced degrees from Harvard University, since one of them put his name on a book that promises that MLMs will be the businesses of the future. Probably, dot com MLMs at that (the book was written in 2000).
And I'm not sure if one should call the scam in which Andy was fleeced a pyramid or a Ponzi, since it doesn't meet the narrowest definition of either scam.
posted by Dubai@Random at 6:55 pm
5 Comments:
We (Boss Man & I) have the book about the Ponzi scheme, but unfortunately have not gotten around to reading it yet. Having been to an Amway meeting (much like a fundamentalist Christian meet-up), this all sounds to me like a "grifter" deal - "a little bit of this and a little bit of that". And since, I'm not a "grifter" I can't say for sure. But, if I recall, someone else is always left holding the bag.
Vagabondblogger: Amway promises that, if you sell memberships, you can get rich with little effort (the people to whom you sell memberships will make you wealthy without working). The reality is that you can sell soap, and earn a decent (but not lavish) living.
Right, but I don't know anyone who uses Amway soap.
Actually under UK law it is illegal to pay commission on memberships, you can only recieve commission on sales of product. Some unscrupulous companies like Amway build in a small amount of product into membership to get around this but that is the way to distinguish between a scam and a legitimate network marketing company.
Amway is a brilliant company but you can only really understand it from the inside. There are just so many scams around that people tend to group all networking marketing companies together. This is the future of business and a company like amway which has moved with the times will always come through. There is no risk so its funny why people won't just join and investigate from the inside.... if you don't like it just stop. Its not about selling products its about changing the way you shop and growing buying power. With this leverage you turn you basic expenses into an asset... its as simple as that :)
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