All About Pyramid Selling and Ponzi Schemes

Introduction

If you are in a home business venture, invariably you will come across somebody who can’t walk and chew gum at the same time, telling you that what you are doing is either pyramid selling or a Ponzi scheme.

Network Marketing is often seen as cranky or a little freaky. The perception is that you have to sell bottles of washing up liquid to your friends, and drag people off to meetings behind closed doors. Happily, it’s come a long way since those days, and if you have seen it before, it’s time to re-visit it again. If you haven’t, you are in for a real treat. It could be the opening that you were looking for – yet to date, nobody has ever explained it to you properly!

For you to be able to understand it, we’ll give you a little potted history of how Network Marketing came about, and how some people make money from it

Quite simply, Network Marketing is a way of getting goods or services from a manufacturer or supplier and cutting out the middle-men.

The generous incomes that we often hear about are simply derived from the money that would normally have been paid to advertisers, wholesalers, etc. Therefore, it is an opportunity for any person in the country to start, and run a business for little cost, on either full or part time hours.

Here’s how Network or Multi Level marketing came about. It’s quite interesting when you get to understand it

n the USA, direct selling was a substantial industry by the 1920’s. Companies tended to have a number of branch offices around the country, which were central points for deliveries by the manufacturer and collection by that region’s sales people. An experienced salesperson in that area would run the office, co-ordinating the sales and recruiting and training new sales people. It was necessary for the companies to offer incentives to compensate the branch manager for the time spent on these activities instead of selling, and this was normally done by giving prizes and a percentage of the sales of the new recruits.

The first direct sales organisation to develop this principle into what we would today recognise as MLM or Network Marketing was probably developed by William Casselbury and Lee Mytinger. They had been selling products of the Page 16

California Vitamin company, Nutralite XX vitamins, since 1934. In order to give their salespeople an incentive to increase the company’s sales by finding and training more of them, they developed the C*M marketing plan in 1941.

Under this arrangement, salespeople were given a bonus of 3 percent of the sales of people they had personally recruited. As the Team grew, it became impractical for the original sponsor to deal with the wholesaling of large amounts of products, buying from the company and selling it on to the people he had recruited.

When a team had sold $15,000 dollars worth of goods, the head of this group was allowed to set up a breakaway wholesaling relationship with the Company, rather than his original sponsor. To encourage the formation of more breakaway groups, the company gave the original sponsor of the group an override royalty on the sales of the new breakaway group. The whole system was rather primitive by today’s standards, but it achieved the basic aim of rewarding distributors proportionately according to the contribution they made to the overall profits of the Company.

So now you know how Network Marketing came about.

From here on in it gets more interesting. The Company prospered into the late 50’s, then in 1959, two of the distributors, Richard DeVos and Jay Van Andel broke away and formed their own Company. You may have heard of it. The name of the Company was Amway. Another of the original distributors, Dr Forest C Shaklee, formed his own Company, which become famous too. It was called Shaklee. Ironically, several years after these breakaways, the original Nutrilite company was bought up by Amway, and now provides one of Amway’s bread and butter product lines

The success of Amway and Shaklee then inspired other direct sales companies to use similar sales techniques, and you may have heard of these too. Companies such as Mary Kay cosmetics, Tupperware, and Stanley Home products sprang up.

Some people still confuse Network Marketing with something called pyramid selling. You need to note at this point that Network marketing companies neither sell pyramids, nor do they operate outside the law, so it’s very important to understand the difference

You see, the continuing success of Amway, Shaklee and other companies was soon noticed by unscrupulous businessmen, who saw that the multi level concept (when manipulated outside the law) could be used to make money from people without bothering about actual retail sales of quality products or services.

That is how pyramid selling was born!

pyramid selling

Many people found themselves being persuaded into spending their life savings on entry fees, and enormous amounts of products. They soon realised that they were incapable of selling all the products that they had bought to customers at highly inflated prices, or persuading others to join the scheme and part with huge amounts of cash.

By the early 70’s pyramid selling found it’s way to the UK, and the publicity surrounding it prompted the government to bring in regulations to eradicate this dubious form of marketing. Since that time, stringent laws have almost eradicated the pyramid schemes, although at the time of writing this, we noticed that people on the Isle of Wight were frantically pouring tens of thousands of pounds into a pyramid type money game, in the hope of getting vast returns quickly. It soon collapsed. Some people allegedly made money; others are nursing their wounds and kicking themselves for having been so foolish.

So that’s given us a little insight into the industry.

Network Marketing clearly has the power to transform people’s lives, depending on how they do it, and who teaches them to do it. If some people want to throw their money away on hair brained, idiotic schemes, nobody can help them. If you are tempted to answer an ad in the paper that says ‘Join me and earn millions’, that’s your lookout, to be quite frank.

Network Marketing is not a get rich quick scheme. Its’ a get rich as fast as you want to plan, that can get you out of the 40 year Monkey Trap, and into a 3 –5 year financial freedom situation. Ah, that’s why so many people don’t make a go at it. They thought that it would change their fortunes overnight, and when it didn’t, they went off to find something else. Eventually, they end up as someone we call a ‘networking junkie’ off to get their next fix when they see someone else waving a bigger cheque than they are earning.

All about Ponzi Schemes

Charles Ponzi, born on March 3, 1882, was an infamous Italian-born swindler who became notorious for orchestrating one of the most well-known investment scams in history, known as the “Ponzi scheme.” His fraudulent scheme operated in the early 1920s and brought him short-lived wealth and fame before his eventual downfall.

Ponzi’s early life was marked by a series of misfortunes and criminal activities. Born in Lugo, Italy, he immigrated to the United States in 1903, eventually settling in Boston, Massachusetts. He held various jobs but struggled financially, which ultimately led him down the path of fraudulent activities.

In 1919, Ponzi discovered an opportunity to exploit the disparity in international reply coupons (IRC) prices. IRCs were postal coupons that could be purchased in one country and exchanged for stamps in another, usually at a higher value. Ponzi claimed that he could take advantage of this arbitrage opportunity and promised investors a 50% return on their investment within 90 days, or a 100% return within 45 days.

pyramid selling

To attract investors, Ponzi initially relied on word-of-mouth marketing and targeted immigrant communities. The scheme gained immense popularity as more individuals invested their money, attracted by the promise of substantial profits. The growing influx of funds allowed Ponzi to pay returns to earlier investors using the money from new investors, creating an illusion of legitimacy.

As the scheme expanded, Ponzi’s wealth and influence skyrocketed. He purchased luxurious mansions, owned a fleet of cars, and flaunted his success to maintain the appearance of a thriving investment enterprise. However, behind the scenes, he was struggling to sustain the ever-increasing demands of his investors.

In reality, Ponzi was not conducting any legitimate business activities. His entire operation relied on the continuous flow of new investments to pay off existing investors. As the scheme grew larger, Ponzi found it increasingly challenging to sustain the cash flow necessary to meet the mounting redemption requests.

The inevitable collapse of Ponzi’s fraudulent empire began in August 1920 when the Boston Post published an article exposing the flaws in his scheme. The exposé attracted the attention of state regulators, who launched an investigation into his financial activities. Ponzi was subsequently arrested and charged with multiple counts of mail fraud and larceny.

During his trial, Ponzi’s deceit and financial mismanagement were laid bare. It was revealed that he had been diverting investors’ funds for personal expenses and had accumulated massive debts. In March 1920, just before his arrest, his liabilities were estimated to be around $7 million, equivalent to approximately $89 million in today’s currency.

Ponzi was convicted and sentenced to prison. He served several years in various correctional facilities, including a federal prison in Atlanta. After his release, he faced additional charges related to another fraudulent scheme and served further prison time. Eventually, Ponzi was deported to Italy, his home country, in 1934.

While Charles Ponzi’s name lives on as a symbol of fraudulent investment schemes, it is worth noting that he was not the first nor the last person to operate such a scheme. The term “Ponzi scheme” itself emerged as a result of his high-profile case and has since been used to describe similar fraudulent schemes where early investors are paid with the money of new investors, rather than from legitimate investments or profits.

A more recent example of a Ponzi scheme involved a guy named Bernard Madoff, who you may have heard of.

Bernard Madoff, born on April 29, 1938, was an American financier and former chairman of the NASDAQ stock exchange. He gained infamy for orchestrating one of the largest and most notorious Ponzi schemes in history, known as the “Madoff investment scandal.” Beginning in the 1970s, Madoff defrauded thousands of investors, including individuals, charities, and financial institutions, by promising consistent high returns. However, in reality, he used new investors’ funds to pay off earlier investors without engaging in any legitimate investment activities. The scheme collapsed in 2008, revealing losses estimated to be around $65 billion, leading to Madoff’s arrest and subsequent conviction in 2009. He was sentenced to 150 years in federal prison, where he died on April 14, 2021. Madoff’s case serves as a stark reminder of the devastating consequences of financial fraud and the importance of regulatory oversight in the financial industry.

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So now you know. It is only ignorant people who say it’s pyramid selling, or ‘its a Ponzi scheme. Have confidence in what you are doing.

Here’s a couple of responses that you may like to give:

“No, they don’t sell pyramids as far as I am aware but I’ll see if I can get you one”

“what’s pyramid selling” or ‘what’s a Ponzi scheme?” Then listen as they trip over their tongues, uttering all sorts of garbage. Then say – “so how on earth does that relate to what I am doing?”

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