Isn't This One of Those Pyramid Schemes?

That's a question or objection we've all heard too many times. The issue is that most people don't really know what a pyramid scheme is and that there is a difference between a pyramid scheme, a ponzi scheme, and a legal MLM or network marketing company. That is the purpose of this article, to give you the answers to handle this objection effectively.

First, I suggest that anytime a prospect asks if your business is a pyramid scheme, ask them what they mean by that. Generally, they don't know or they will refer to Amway or one of those deals where the people at the top make all the money. When they say the latter, I always respond, oh, you mean corporate America where the people at the top make all the money and the people at the bottom do all the hard work? This usually generates a laugh, but also makes a point.

Second, it's good to have authoritative evidence of the difference between the two illegal versions (pyramid and ponzi) and your legal network marketing business, so here is what the U.S. Attorney General has to say about the issue (http://www.ftc.gov/speeches/other/dvimf16.shtm):

"Pyramid schemes now come in so many forms that they may be difficult to recognize immediately. However, they all share one overriding characteristic. They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure. There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. Inventory loading occurs when a company's incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company's distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. The people at the bottom make excessive payments for inventory that simply accumulates in their basements. A lack of retail sales is also a red flag that a pyramid exists. Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.

A Ponzi scheme is closely related to a pyramid because it revolves around continuous recruiting, but in a Ponzi scheme the promoter generally has no product to sell and pays no commission to investors who recruit new "members." Instead, the promoter collects payments from a stream of people, promising them all the same high rate of return on a short-term investment. In the typical Ponzi scheme, there is no real investment opportunity, and the promoter just uses the money from new recruits to pay obligations owed to longer-standing members of the program. In English, there is an expression that nicely summarizes this scheme: It's called "stealing from Peter to pay Paul." In fact some law enforcement officers call Ponzi schemes "Peter-Paul" scams. Many of you may be familiar with Ponzi schemes reported in the international financial news. For example, the MMM fund in Russia, which issued investors shares of stock and suddenly collapsed in 1994, was characterized as a Ponzi scheme.(2)

Both Ponzi schemes and pyramids are quite seductive because they may be able to deliver a high rate of return to a few early investors for a short period of time. Yet, both pyramid and Ponzi schemes are illegal because they inevitably must fall apart. No program can recruit new members forever. Every pyramid or Ponzi scheme collapses because it cannot expand beyond the size of the earth's population.(3) When the scheme collapses, most investors find themselves at the bottom, unable to recoup their losses.

Some people confuse pyramid and Ponzi schemes with legitimate multilevel marketing. Multilevel marketing programs are known as MLM's,(4) and unlike pyramid or Ponzi schemes, MLM's have a real product to sell. More importantly, MLM's actually sell their product to members of the general public, without requiring these consumers to pay anything extra or to join the MLM system."

So, here is how I handle any comment about pyramid schemes. As I mentioned earlier, I ask what they mean and if I'm still not sure what they are saying, I'll ask them to elaborate. If they are just talking about a structure (pyramid shaped), I show them how it actually looks more like a computer network with the company in the middle and all distributors working directly with the company. If they are really talking about the illegal version, then share with them the information from the Attorney General, compare that to how your company operates, and ask if that answers his/her question. It almost always does and you can move on into a presentation of your business.

Now, when someone says: "Isn't this one of those pyramid schemes" you will have the answer.