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Why Multi-Level Marketing Schemes Will Never Work

Financial scams are nothing new and have probably been around since the invention of money.  New scams pop up every year whether claiming to get you rich quickly, reduce your debt, eliminate or reduce your student loan payments.  The same is true for all of them, the only people they making rich are the people selling them.

Recently I did a podcast on buying a car and gave a lot of tips on ways to get a better deal on your next car purchase.  Now I don’t expect to make any friends in the car industry based on that information I gave out, but one thing from the podcast is extremely clear: they are not going to offer you those deals, you have to seek them out.  You have to be patient and diligent to get a good deal.

I had a friend come to my house one day, very excited about the new venture he was into, selling cologne.  Knock off cologne is simple to make and any cologne you buy at the store has a huge markup, which is why they spend a lot of money on lawyers to defend the brand.  The companies create a scent, trademark that scent and then prevent anyone else from calling it the same thing.  So when my friend was selling knock off cologne, I didn’t care that he was selling an illegal knock off, with a big margin there are going to be knocks off and selling those isn’t a big deal to me.  We grew up on bootleg movies and illegal music downloads.  What bothered me were the words he was using for why he was selling it.  It was a classic pyramid scheme sales pitch; he just didn’t recognize it.

Pyramid schemes are easy to detect if you know the language.  They are also often called multi-level marketing, which sounds more legitimate while being confusing and that is exactly what those on top of the pyramid want.  The scheme is usually simple, but it involves the seller first purchasing from the company to then sell their products.  That alone would cause alarm to any salesperson in an interview.  The idea that salesperson would first buy the product from the company and then sell it would never work.  Think of the salespeople you have encountered in your life selling you a TV at BestBuy or a car at the local dealership.  Do you think a car salesman would first buy the car from the dealership and then sell it to you?  Not a chance, and no reputable salesperson would take that job because they would recognize the language and know it is not a legitimate business.  A legitimate business hires a salesperson to sell their products, not purchase them to sell.

The pyramid scheme works by preying on people by telling them they are going to become salespeople.  The pitch usually goes something like this:  “Don’t you know 10 people that can use this product – just 10 people who buy cologne.  Of course, you do!  Everyone knows 10 people!!  And guess what, they know 10 people too.  So go to the 10 people you know and sell them, plus get a list of 10 people from each of them and now that will be 100 people, and just repeat the cycle, only 3-4 cycles in and you have 10,000 and then 100,000 and then 1,000,000 people you can sell to.  Who Doesn’t Need Cologne!!  See how easy it will be to grow your network!”  Then the scammers work on answers to all the reasons people will reject the idea of a purchase and get each new salesperson convinced they can sell the product.

Then they hit you with the best part, the part where you are really going make the big money.  All you have to do is train other people to sell for you.  Get 10 people under you selling for you and you get a cut of their sales, and anyone else they bring as well.  So, if you can train 10 people and they each train 10 people, then quickly, VERY QUICKLY, you could have over 100 working for YOU!!!  Easy right!  Go sell first and create your own network, then get people under you selling.  You know how much money the guys who trained me make??  Millions and millions and you can too, all you have to do is sell some yourselves and then get people under you.

Image courtesy of Wikimedia https://en.wikipedia.org/wiki/Pyramid_scheme

 It all sounds good unless you can do math.  Because as we showed in our pyramid scheme math, it only takes 11 levels before you reach more people than are on planet earth.  So how does this usually play out?  To top 2 or 3 levels are sales people selling new sales people, getting them to buy the products first on the belief they will sell them to many others very soon.  If you’ve seen the movie Boiler Room, it’s a few Ben Affleck’s out there pumping up the sales staff to sell bullshit stock with huge, illegal, commissions.  The illegal part doesn’t bother anyone because all these other people area selling it too, so it feels like strength in numbers.

There are usually some other sales tactics that are deployed, such as offering steep discounts based on the MSRP to keep these salespeople buying more products to try to keep their discounts.  And these discounts are relative to a price point that can’t be kept because the product they are selling is inferior and the actual sales pitch to customers is either based on value or pseudo-science.

These schemes come in a variety of fields, but health and wellness are usually the top schemes followed by financial products that promise to either reduce debt or make you a lot of money.  If you’re smart enough to dig into the offering then you will eventually see that its bullshit.

Of course the product hasn’t been through FDA trials to treat anything because it would fail and that would end the company.  Or of course these products are not available to the general public on public markets because the companies don’t exist.  So it’s much better for the scammers to just make claims of curing people or making them rich and since most people don’t understand the placebo effect, where people get results even when not actually given any drug, people who see results determine it to be a correlation.  So I tell you this new juice will cure your cough, you take it, your cough goes away and you assume it’s what I gave you when it likely had nothing to do with it.  I’ve just turned you into a salesperson for me as you believe it cured you.  No better salesperson than one who has personal experience and complete conviction that the product works.  They don’t need clinical trials because the know for sure it was that juice that fixed them.  And it can fix anything.

In the same way that if you want to know if someone is working in your best interest you can ask them directly, are you my fiduciary? You can know if any product is nonsense by asking for clinical trial information or trying to buy a financial product through your fiduciary.  Because the truth is that if the product does what they are touting then they would absolutely want to get it through FDA trials or onto public markets because then they would make billions!  Instead, most of the touting will not include direct claims to treat anything, only stories from people who individually claim it fixed them and none of those stories will be subject to the scrutiny of a control group and a real study.

You can get caught in these scams as their new salesperson or as a customer.  I’ve seen my mother get attached to products and because she happened to take it when something happened, she is 100% convinced of the correlation despite there being no scientific evidence to support it.  These products then last until the FDA shuts them down or enough customers figure out the correlation they believed in doesn’t exist.  This often happens when they keep taking it and get sick again.  How is that possible if it cured me before?  And finally the correlation is lost but not before spending a lot of money on it or in the case of financial scams, when they lose all their money or ask to get out of the investment.

Another area where these products and schemes run rampant is anti-aging.  Women especially will spend a lot of money on anything they believe will help them look younger.  My wife does it frequently, whether its microcurrent, microneedling, acid masks, facials, creams and serums -- anything that claims to keep wrinkles away sounds like a good purchase [wife/editor’s note: To clarify, not “anything”and everything sounds like a good idea, but if I do my research and can do certain things at home rather than go to a medi-spa/esthetician to save a few bucks, I will. ;) ]

So, when my friend came to my house selling me cologne, convinced he would soon be raking in millions, it was no surprise that he couldn’t be persuaded that this was not going to work.  He had been sold on the idea and wanted to believe it was true because it was a quick way out of his financial problems.  He was also very upset with me that I didn’t buy any cologne.  How could I say no?  It was the same scent at half the price.  But I really don’t wear cologne so I don’t buy it regardless of the price.  He told me I should be wearing it and I would see this was a legit business and he was going to make a lot of money.  Unfortunately for the other 10 people he started with, they purchased some cheap cologne and unfortunately for him, that list of 10 by 10 by 10 that was quickly going to be a million people fizzled out and he was left with 3 boxes of cologne he purchased from the company.  Non-returnable?  Who would have guessed? 

Let’s not pretend that none of us can be sold on these ideas, there are plenty of very wealthy people that Bernie Madoff took advantage of in a similar scheme that was just about money.  The promises of great riches and the allure of a deal that only you are let in make these sales pitches very compelling.  But the old saying is that if it sounds too good to be true it probably is.  Believe that!

I’ve been hustling my entire life and there is one universal lesson that applies to all of these scams as well as the great deal on a timeshare and the rest:  great deals don’t knock on your door, you have to seek them out and they are extremely hard to find.  If I’m out hustling trying to find the next deal how would it make any sense that someone would just knock on your door and offer you an ever better deal than all my efforts are finding?  It doesn’t and it won’t happen.

So how do we keep ourselves from these schemes?  Ask for the details.  For any products, ask for the clinical trials.  If they haven’t done them, then you don’t have proof they work so don’t buy or sell them.  When it comes to financial products, always check it out with a fiduciary, who by law has to work for your best interest.  The product that your fiduciary can’t help you buy likely doesn’t exist.  And remember, if it knocked on your door, it not a deal for you, it’s a deal for them, they are there to sell you, not help you.

Resources:

Don’t forget to also listen to the podcast we did on this, You can find it here.

Pyramid scheme math worksheet