SUBMITTED: Thursday, November 18, 2004
POSTED: Thursday, November 18, 2004
Hello to all,
I couldn't resist adding my two cents, because of the ongoing debate of whether PPL is a pyramid scheme, or not.
This test comes from the Pyramid Scheme Alert website, and I believe everyone should use the guidelines provided, to come to an informed decision.
To those who believe that because PPL sells a service, and therefore doesn't qualify as a pyramid scheme, I strongly urge you to read on.
The key to identifying the potential harm of a MLM program is to look for elements in the compensation system that creat extremely high leverage for the top persons in the hierarchy of participants. MLM leverage refers to the concentration of payments from the company to founding and other top-level distributors, who profit hugely from the efforts and purchases of a multitude of distributors beneath them, the vast majority of whom lose both time and money.
CHAINING
Question 1 : Does a participating distributor advance through a chain of multiple levels of distributors by recruiting other distributors, who in turn recruit distributors under them, etc. ?
Answer: (NO) - If there is no chaining of participants into levels based upon recruiting, and if a participant does not progress through those levels by recruiting others, then the program would not qualify as a pyramid scheme and is probably harmless.
Answer: (YES) - All MLM programs, as well as illegal pyramid schemes, and chain letters have this multi-level chaining characteristic in common. But be cautious about joining programs in which you are recruited into a chain of distributors (agents, representatives, etc.) which are organized into multiple levels, especially where the position of the chain is determined by timing of entrance into the program and by success at recruiting others. while a few earn substantial profits, most participants lose both time and money.
In theory, the use of person-to-person referrals is a very powerful maketing strategy. And with outstanding products, fast-talking promoters, and/or connections with famous persons or notable experts, it is easy to be taken in by their appeal.
It should also be noted that quality of products or services often becomes questionable when incentives are tied to recruitment. This would apply to such products and services as health products, investments, or internet services.
For most MLM's, income is dependant primarily on downline recruiting. As a general guideline, if you must recruit to be successful, or if a program's emphasis is on building a downline, it is a de facto pyramid scheme, whether or not it has been declared illegal by authorities. You may just be setting yourself up for wasting much precious time and money, depending on factors that can be identified by answering the following questions.
UNLIMITED RECRUITING
Question 2 : In any area, is unlimited recruiting of distributors allowed--and even encouraged?
Answer: (NO) - If reasonable territorial protection is offered to participants in a given area, the program would not soon collapse from market saturation. Recruiters would not be as likely to promote the illusion of an ever-expanding market and of the potential for very large incomes for vitually all new recruits.
Answer: (YES) - With unlimited recruiting, new recruits find it increasingly difficult to recruit more participants into the system. This is due to market saturation, wherein prospects perceive a diminishing opportunity to profit from participation.
To illustrate an approach more in line with maket realities, suppose the program were limited to one distributor for each 10,000 population in a given area or to one distributor within each one mile radius - much like the territorial protectionn of a retail franchise. The problem of saturation would not be significant.
But limiting the amount of recruiting or the number of distributors in a given area is uncharacteristic of MLM because that would lessen the illusion of the potential for very large incomes for new recruits. Such limitations would render a pyramid scheme impotent.
PAY TO PLAY
Question 3 : Are participants expected to make a significant investment, or to make ongoing purchases in order to continue qualifying for bonuses, purchase discounts, etc.?
Answer: (NO) - If the investment in the scheme is minimal and repeat investments are not expected, it may still be a pyramid scheme, but the harmful effects will be minimized.
Answer: (YES) - If you have to pay a fee or to buy products to get into a program -- and are then expected to keep on purchasing products, services, training, etc., in order to progress in the orginization, be wary. You paying ongoing fees to "play the Game",one of the earmarks of a product-based pyramid scheme. If you add the operating costs of selling and recruiting to the cost of purchases from the company, total expenses will generally exceed any payments to you from the MLM company.
Pyramid schemes masquerading as MLM's are often allowed to grow and flourish unchecked because they do not require a large up-front enrollment fee to sign up. Because recruiters generally do not profit from the initial enrollment fee of a recruit, it is often assumed the program is not a pyramid scheme.
In fact, nothing may be further from the truth. MLM programs typically incorporate escalating incentives to purchase products (some at initial signup, some later) to qualify for ever-higher levels in the distributorship hierarchy and/or for larger discounts on product purchases. As a result, MLM "distributors" often overuse products or give away a lot of samples. Others fill their garages with products they don't need, in spite of policies to the contrary. The argument that participants would have purchased the products from another source anyway, and that these purchases should not be considered an expense of doing business, simply does not hold water.
Also, because some compensation systems offer incentives for recruiting and retaining a certain number of distributors (or escalating incentives to recruit more and more distributors), many participants will recruit "dummy distributors" from friends and family members and buy products in their names. They are led to believe this will then qualify them for "the really big bucks". It is not until they leave the system that the more astute among them realize that they have in effect paid a very large fee (in the form of product purchases) for participation in a pyramid scheme. Often this amounts to many thousands of dollars over a period of months or years.
Such an amount paid at the start into a no-product pyramid scheme would immediately arouse suspicions by the public and by regulators of its constituting an illegal pyramid scheme. But since the money paid into an MLM program is paid for legitimate products and over a period of time, most participants (and many regulators) fail to see it as an investment in a pyramid scheme. However this "pay to play" feature of a product based distribution system should be seen as a red flag signaling an illegal pyramid scheme.
Many observers believe that MLM products are sold at a premium to support a large downline. If an MLM product were to be sold at a premium of $20 more than competitve products sold thru other outlets, the $20 premium could be considered the pyramid premium portion of the price, which would flow to the top of the distributor Hierarchy in typical pyramid fashion.
As suggested earlier, what is often not factored in to projections made at opportunity meetings is the expenses of conducting the business. In most programs, if products purchased from the company (which would not likely have been purchased if the person had not been a participant in the program) and operating expenses were subtracted from commissions, few-except for those at the top levels-would be making any profits. The vast majority would actually be losing money, only to enrich the MLM company and fatten the bank accounts of the top upline distributors, in the form of overrides from product purchases by downline participants.
DISPROPORTIONAL PAYMENTS
Question 4 : Would a distributor receive about the same payment from the company for a wholesale purchase--or for a retail sale--as distibutors several levels above him/her who had nothing to do with it?
Answer: (NO) - If the pay is spread out to all participants, or if no pay is received at all, it may be a pyramid scheme, but probably not harmful or worth enforcement action against it as an illegal pyramid scheme.
Answer: (YES) - MLM plans typically offer very small rewards to front line distributors who actually sell the products and services of the company. So the only way to achieve significant income is to rise to the top of the distributor hierarchy by recruiting a large downline of distributors.
Many MLM compensation systems lead to extreme inequality in payout (money paid by the company) to distributors, which means there are few "winners" --but a high loss rate (after subtracting all expenses) for the rest of the participants. Often these "losers" will invest considerable amounts of time and money and then quit, blaming themselves. But their "failure" is not due so much to lack of effort on their part as to a SYSTEM which is stacked infavor of a few at the expense of the many.
In other direct sales settings, it is not unusal for a successful commissioned sales person to receive more income than sales managers at local or even regional levels. this is because the person making the sale makes more in commissions per sale (often 20-40%) than managers two or three levels above him/her. But in many MLM programs, upline distributors several layers removed from the actual sale receive as much or more in total payments per sale (including commissions and bonuses) from the company as the person who actually sold the product - who may get only five or ten % from the company.
EXCEPTIONS: In some cases, MLM's depart from this pattern of paying front-line distributors no more per sale than upline distrbutors several levels removed from the sale. For example, for MLM's which provide financial services, companies have to meet certain commission requierments for sales by their agents. In cases such as these, one should look at the overrides beyond the agent commissions, which are paid to upline participants in the hierarchy. If overrides for participants several levels above the agent making the sale are the same as for the person who recruited the agent, the result will be an undue emphasis on recruiting and extreme inequality in company payout to participants.
As mentioned earlier, since the total payout per sale is limited, when upline distributors receive substantial overrides from the sale by downline distributors,this limits the percentage of commissions to the person making the sale. so the income of the front line distributors is extremely limited, forcing them to recruit a large downline to realize a significant income. Powerful incentives may then be at work to recruit a downline in order to "make the really big bucks" collecting small overrides on hundreds even thousands of downline participants. MLM promoters call this "leverage". When the leverage is extreme, the program should be considered an illegal pyramid scheme.
MLM companies usually suggest that distributors who buy at wholesale prices from the company can then sell them at an elevated retail price, such as happens in more conventional retail outlets, thus allowing a significant profit margin for the distributor. The problem is that suggested retail prices for MLM products are generally too high to be competitve with other outlets. So MLM distributors wind up purchasing large quantities for themselves and their families and/or selling most products at wholesale prices to downline participants in order to meet volume requirements for bonus or discount levels.
Also, extreme incentives to recruit a downline often lead to many of the attendant deceptions for which such programs are notorious - overstating income potential and/or product effectiveness, deceptive recruiting practices,etc. Doing less may not produce any significant income. This explains why many otherwise honest persons eventually mimic the deceptions of their upline and either rationalize or fail to see the fraudulence of their actions.
EXCESSIVE LEVELS
Question 5: Does the company pay overrides or commissions on more than four levels above the distributor making a sale or purchase?
Answer: (NO) - If no more than four upline levels are allowed above the distributor buying or selling the product, then the system may be quite harmless, since customers may be served without excessive upline remuneration. No upline distributors are likely to receive exhorbitant incomes at the expense of their respective downliners.
In fact, with a maximum of four levels, most systems would die out for lack of opportunity for top distributors to receive extremely large override checks. Blatant appeals to greed would be minimized.
Answer: (YES) - More than 5 levels in the distributor hierarchy enriches those at the top, at the expense of a multitude of downline participants, the vast majority of whom lose money.
For even the largest of conventional distributor arrangements, the entire U.S. can be covered by a maximum of four supervisory levels in the distributorship hierarchy; e.g. branch managers, district mgrs., regional mngrs., and national sales manager -plus an international manager if one is needed for foreign markets. More than that is superflous and bloated, driving up product prices and making sales at a competitive retail markup unprofitable and unrealistic.
When several levels are allowed in an MLM hierarchy of distributors, there is seldom any functional justification for doing so other than to encourage recruiting and the illusion of very large potential incomes to more participants than is mathmatically possible -- a hallmark of many pyramid schemes. Only those distributors at the top of the hierarchy of the participants realize any significant income.
Also, with an upline of many levels, the top-level distributors may be profiting to an extreme degree from the losses (including products that would not have been puchased had the investing distributors not gotten involved) of those beneath them. Such exorbitant incomes result from reaping of huge commissions, overrides and bonuses from the combined efforts and investments (in the form of product purchases) fo the hundreds or even thousands of downline participants.
This is what MLM enthusiasts often refer to as "leverage" or "residual income" -- large company payouts disproportionate to effort expended, resulting primarily from the purchases of downline participant. Leverage can be illustrated by adding up a downline of participants that is extended to six levels -- although many programs allow for many more levels. But for the purpose of illustration, assume that a "distributor" recruits five active distributors,each of whom recruits five more, and so on through six levels of distributors. Lets assume a $5 commission on each sale. The exponential growth of the pyramid becomes evident:
LEVEL 1: 5 distributors X $5 in commissions & bonuses = $25 a month
LEVEL 2: 25 + 5 = 30 total Distributors X $5 in commissions & bonuses = $150 a month
LEVEL 3: 125 + 30 = 155 total distributors X $5 in commissions & bonuses = $775/month
LEVEL 4: 625 + 155 = 780 total distributors X $5 in comm. & bonus =$3,900/month
LEVEL 5: 3,125 + 780 = 3,905 distributors X $5 in comm. & bonus = $19,525/month
LEVEL 6: 15,625 + 3,905 = 19,530 distributors X $5 in comm. & bonus = $97,650/month!!!
If each "distributor" (or "participating consumer") were to buy enough products each month to yield an override of $5 in commissions and bonuses to the original upline distributor, then with a five-level downline, the upline distributor gets $19,525 per month, while with a complete six-level downline the same distributor gets $96,650 per month. The incentive to recruit to move up a level becomes very great.
Of course it seldom works out that way, but these are the type of figures that are often presented to prospective new recruits at MLM opportunity meetings. This example illustrates why so much emphasis is placed on recruiting, as opposed to selling products to persons outside the pyramid. $97,650 is much more appealing than $100 that might be earned by a level 1 distributor for selling the products at the full retail price (assuming $20 markup on products sold to each of five customers - before expenses). In comparison with recruiting, retailing products at full retail price becomes a waste of time.
WARNING!!! WARNING!!! WARNING!!!
If the answer to all five questions is "yes" then the MLM program should be considered a harmful pyramid scheme in concept, structure, and effects -- regardless of quality of products offered, type of compensation system (binary, breakaway, matrix, unilevel, etc.), company policy regarding recruiting, or any other efforts by company officials to make its program appear to be legitimate. The primary emphasis will be on deriving income from recruiting with insufficient incentive to retail products or services.
Also -- if all five of the above are true, then the likelihood of a distributor earning a significant income is so infinitessimally small that it would be misleading to say that any significant income could be realized from it, even with dilligent effort. If a recruiter then suggests that a high percentage of participants can earn a significant income from such a program, a case can be made for misrepresention of earnings or deceptive sales practices. And if a sizable investment of products is encouraged to "jump start" the business, it may be appropriate to ask if the recruiter has registered as a broker-dealer of securities.
While none of the above five yes responses in and of themselves costitutes a pyramid scheme, a combination of four(the first four) or all five most certainly indicates a high enough degree of exploitation to be considered very harmful(and probably illegal) pyramid scheme, if properly understood. In actuality many participants are not "distributors" at all, but unwitting investors in a pyramid scheme.
The effects of such a system can be measured by requiring existing MLM companies to release data on payout to all participants (not just active ones) by percentiles after subtracting average purchases for gross income before operating expenses. It will then be seen that very large incomes accruing to the top distributors in the hierarchy are financed by the losses on the part of the vast majority of participants.
Is PPL a pyramid scheme? Will any representatives of PPL take the test, and answer the questions honestly? It will be interesting to see, yes?
Best regards,