How Multi Level Marketing (MLM) schemes with Pyramid Structure works ?

POSTED BY Jagoinvestor ON October 29, 2012 9:30 am COMMENTS (196)

Today we are going to talk about MLM or Multi Level Marketing Schemes which have a pyramid kind of model. For years and decades, these kind of schemes are active and a lot of people get trapped in these Pyramid Schemes and lose their hard earned money. In this article, we will see the common mechanism they work on and their characteristics. We will also create a dummy Pyramid scheme to show you the traps & pitfalls. Before we move ahead, get this fact that we are talking about those pyramid schemes which also have different levels of people one on top of other and where one guy pays money which gets passed on as reward to another.

Multi Level Marketing Plans

How Multi Level Marketing schemes work?

Multilevel marketing schemes are generally network based marketing schemes, in which a person has to add more people under him. The people obviously pay some money to “join” the business and then they add more people under them. In almost all the schemes, the person is incentivized for adding more people under them.

You all must have heard about the AMWAY business model, which is nothing, but a great example of Multi Level Marketing, while the business is legitimate and there is no fraud in it, still it also falls under a pyramid model. Even I have attended its meetings once when I was novice child :). The business model looked so easy, just pay Rs 5,000 to join the business and then keep adding more people to “business” and you get some percentage from the entire sales under your Tree. There are various ranks like Silver, Gold , Diamond etc., and the higher your rank, the more you make. Lot of people make money in it through legal way, and more you work harder , the money you can earn, but the point is , people who get in early make more money and the people at bottom struggle a lot.

Why most people lose money in Fraud Pyramid Schemes?

Guess what?!  A lot of people make money in these Multi Level Marketing business models, and they become the ambassadors of the business. They flaunt the cheques and the money they make and believe me, some of them are real!. They really do make money and we will quickly see more on that, but the point is, that the majority of the people lose lot of money and struggle in these kind of get rich quick pyramid schemes. And that happens, because there is a limit to adding people. You can’t add more people in the tree after a certain point and when the tree becomes bigger, than it’s trouble point, it’s reaches a  kind of saturation level when the biggest chunk of people who are at bottom lose all the money. Here is an example graph which will give you a good idea of what I am talking about.

How MLM or Pyramid Scheme Works

Example of SpeakAsia

You must have heard about the latest craze called Speak Asia Online! I will really not be surprised if you tell me that you were part of it! I will not be even surprised if you tell me you made lot of money too! That might happen if you started earlier! Because then, the scam was still in the making! If you joined at the end, you were at the bottom of the tree you lost your money. This is how it worked!

A person can join SpeakAsia by paying Rs 11,000 and becomes a “panelist.” He then starts getting 2 surveys per week and getting Rs 500 for filling up each of them. That’s around Rs 4,000 per month and 48,000 per year and that was how Speakasia was promoted by its member to lure other members. This was at the start and though the amount of money  coming IN was less than the amount of money which went OUT, and the whole model was unsustainable in long run, it was definitely sustainable in short term. Just think about it! Is it not easy to pay 10 smaller bakras if 100 bigger bakras join the next batch?

And after all that, it crashed! But still there are innocent people out there who claim that it was genuine and it worked for them. They are not wrong! It really worked for them and they made money, but that was part of the game. They wanted you to make lots of money so that you can bring more people in and then one fine day when they make a really big pile money that they can just vanish! Poof!

Breaking Relationships !

The biggest other bad thing about these pyramid schemes are how the relationships become sour and messed up when the person who is part of MLM tries to add all their friends and relatives into the MLM, suddenly they start looking at humans as “targets” , Here is one incident which happened with Shantanu 

I know about this as I faced these offers couple of times from my very close friends and relatives. And I know how hard it was for me to tell them “I am not interested”. Those who is a very extrovert in nature and also convince people more, like insurance agents can get success. But most people are in the other side only. In fact one of relative faced very tough challenge later on when people found his scheme a scam. Anyway, I think after such articles also these schemes will come in future and again many will trap in them also.

In one other incident, one of the Fraud scheme called as “Japan Life” made someone lose his girlfriend

Long time back in 2000, my girlfriend got stuck up in a similar scheme called “Japan Life”. They used to take 80,000 Rs. and will give you a magnetic mattress. She tried to get me in as well and I was almost about to get trapped but sanity prevailed and I escaped, however since I did not join, I lost my girlfreind forever. I remember this fraud came up in Star News and I could see so many people getting cheated. This was around New Delhi and surrounding areas

Some other popular Multi Level Marketing and Pyramid businesses which were actually a scam were GoldQuest, StockGuru , UniPay2U etc etc (add more name in comments section if you are aware about them). Moneylife has also done this story on Multi Level Marketing companies in Forex trading, Have a look at it.

Jagoinvestor MLM Scheme – Lets create a SCAM Plan right now

Let me know you how simple it is to create a pyramid scheme and it will look so attractive . You all know I have written a Personal Finance Book called “Jagoinvestor – Change your Relationship with Money.”

Now here is a scheme

  • Pay Rs 1,000 and become a member of the scheme
  • You get the book FREE on signup
  • Make a person join the pyramid scheme and get Rs 250 for each person
  • You can add any number of people to this scheme

You realize that if you add 4 people to the group, you will get a 1,000 bucks and a Free Book! So it’s extremely easy for you if you join the scheme early.

Let’s say 10 people join under me.

Level 1 – Add 10 people

So 10 people will pay 1,000 each and I will make Rs 10,000 total , and I will send back a FREE book to all the 10 people. I incur Rs 5,000 expenses and make a cool profit of Rs 5,000.

Level 2 – Add 100 people 

Now let’s see… Each of these 10 people persuade 10 more people under them, and 100 more people join the scheme. They will pay Rs 1,000 each to me;, that means Rs 1,00,000. I will spend Rs 50,000 for the 100 books , and I will be left with Rs 50,000. But out of this 50,000, I need to give a share to each member at level 1, for 1 person the incentive is Rs 250 , so for 10 people, the incentive is Rs 2,500 for each person at level 1, and because there are 10 people at level 1, I will have to pay Rs 2,500 to each at level 1, and I will have to share 50% out of 50,000, that’s Rs 25,000. But I still keep Rs 25,000 with me.

So now you can see, I made a total 5,000 from 10 people at level 1 and Rs 25,000 from 100 people at level 2. And each of the 10 person at level 1 made cool 2,500 from 10 people they added under them, they not only recovered their 1,000 back, but also got extra Rs 1,500 and a FREE book! Wow! This business model is amazing!

Level 3 – Add 1000 people 

So the business is expanding and the word is spreading and my book ambassadors are in the market advertising this scheme and showing the kind of money they are making and the free book they get! Dude! They also have a valid cheque with them! No fraud! . So the word has spread like wildfire now and everyone wants to join this business.

Now, lets say each person at level 2 adds 10 more people under them again, because the word is spreading about this awesome business. There will be 1,000 people at level 3, paying 10 lacs to me and I will incur 5,00,000 expenses. I will pay 2,500 to each person at level 3,  that means 2.5 lacs in total, but I will still keep 2.5 lacs with me.

Level 4 + 5 + 6 

Can you see, how it’s growing? And how people are making money? From 1 person to 10 people, and from 10 to 100 and them from 100 to 1,000? But what next? Level 4? Level 5? Level?

When this reaches level 6 , there will be 10 lakh people under this scheme and they will be paying 100 crores to me! . You guys are going to hate me at that level! . Because you will never see me again! . Neither will I send any more books to anyone!, Nor will I send any share to anyone. I will just run away and you wont be able to trace me! . Any person who would have joined in at the start would find it easy to grow and spread the business. But people at bottom will just not be able to do anything, they are the last batch of fools!

Real Life Examples related to Fraud Schemes

Krishna shares

During my College days there were 2 such schemes ( 7000/- & 1200/- each) introduced to me by my friends & asked me to join them. I explained them that they are highly unsustainable by using simple exponential formula (2^e). But still they thought i am a fool & not making money out of this wonderful Golden “Pyramid”. Thanks to God for that!!!. I just want to say that “User Pure Maths” before entering or dealing with any thing with your hard earned money. Be on your foot not on air.

Sam shares

In 2007, one of my good friend called me when i was out of station. “Sam, i have something great to share with you, when are u coming back? i cant wait to meet you etc etc”. I was kinda surprised and was very curious what he is gonna talk about. He took me to this office where many others showed cheques explained business model, asked me to buy some product and become a member. People were so promising that they will help me , let me grow & earn lots of money and all.. It was ‘Gold Quest International’. That day i made the biggest mistake of my financial life. They made me buy some Gold & Silver coin for Rs.38000 rupees using my credit card. After i joined i tried to reach out to some people in my circle and most of them are already part of it & others are not interested. To pay this credit card bill, i had to take a small personal loan. It was the initial days when i got into job and all these incidents made my financial position worst.

Sachin Shares

I lost 20 K in this MLM bullshit … it was with the name Cossets in Delhi . They arranged a huge pomp show in Siri Fort to show off the happiness of the people who had made money and became millionaires. There were multiple stores in Delhi where u cud purchase if u were a member Then some Ex army also got fooled joined in and invested smthng like 4-5 Lakhs his life savings got duped and then he made a case on the company . Phew Cossets was like GAYAB.

Suhas Shares

My brother was a victim of it late in 2002 in scheme(scam) called netkhazana.He lost around 17k at that time.And from that time I have got recommendations from freinds(?) and relatives(?) in to hell lot of schemes but never got into any because of the first bitter expereince. I suppose this schemes are gr8 if you have selfless people involved but that does not happen as the corpus grows to crores of rupees and people at top tempt to cut the goose.

Other Models of Scam

There are many other multi level marketing scams, which are not in a pyramid model, but they ask for money for some awesome investment based on some logic and then they really give back awesome returns to handful of investors, who spread the word about the scheme and them more and more people join the investment scheme and once it becomes very big, the person who started that scheme vanishes. The Govt is going to take some tough measures on these kind of fraudulent schemes. Here is a nice video which explains more about this.

Beware of these Get Quick Rich models

There are a hell of a lot of schemes and businesses running which show promises of making awesome returns from gold, stock market, real estate and many other kind of investments. They mostly will look really attractive and credible, but always remember that if someone is offering you anything better than bank fixed deposits, there is no doubt that there is some of the other risk involved. The bigger the potential return, bigger the risk.

Disclaimer : Note that we have just discussed how Network Marketing works and the basic mechanism. There might be various businesses and models which are making money, and might be good. This article just wants to bring awareness among people on the concept of pyramid schemes and they fool and loot majority of people in our country .

If you come across any Business like this, first make sure you check that its a member of India Direct Selling Associationwhich kind of gives a legitimate name and also they follow certain code of ethics. If its not part of this, I would say better stay away from it. Amway is part of it. So, not all Multi level marketing models are fraud, a lot of them are genuine also. Here is what Sunil shares about this

A Multi Level Marketing is different from Direct selling. Any company selling directly to the customer, removing all the supply chain management commissions behind, will be governed by Indian direct selling association, https://www.idsa.co.in (within India) and world federation for direct selling association, https://www.wfdsa.org . There are many companies like Avon Cosmetics, Amway, Oriflame, Herbalife, Tupperware etc.. registered under these federations. These companies work under the ethics defined by the IDSA or WFDSA and are very harsh on the people who dont adhere to these ethics. Many people reading this article will agree that the quality of the products they produce are amongst the best in the world. Many people are under the impression that these companies are similar to the other ponzi schemes.

Let us know what do you think about the concept of Multi Level Marketing and associated businesses. What is the biggest reason you think people fall for them and get trapped?

196 Replies to “How Multi Level Marketing (MLM) schemes with Pyramid Structure works ?”

  1. anil says:

    Hello I want to know according to govt law 2016 for mlm pyramid sceam is not legal .then Amway or vestige is doing work pyramid sceam .what is right .

    1. Give the link for that law

  2. Karam says:

    Hi Manish, Thanks for sharing your thoughts on MLM. Can you tell me what i can do as i am looking to start a MLM Business. Can you help me to design a plan or can you share any company who is doing great in a MLM Business.

    Regards
    Karam

  3. abhishek says:

    Dear Manish,

    I am a big fan of yours. Always learnt a lot from you…BUT

    You are wrong here. Not a single point which describes the “characteristic”of a Network Marketing Company is correct. I have been a part of this for 4 years now and not made a single member! Not convinced anyone. Not forced anyone. Never lost on relationships. Yet earned tonnes of money!

    The issue is that middle class people do it the wrong way. They are dominated by greed. Also, if you check the people who have failed in network marketing business have generally never done great anywhere else also because THE WAY YOU DO ONE THING, THE SAME WAY YOU DO EVERYTHING.

    Also, before making an opinion about NM through google, please check the authenticity of the website which google returns on your search and the authenticity of people writing the blogs.

    Anyways, I am still a big fan of yours,

    Regards,

    Abhishek Singh, I.E.S.

    1. Hi abhishek

      Which line is incorrect, please point that to me . Also which business are you doing in MLM , can you share ?

  4. u.s.bharti says:

    I want mlm plan

  5. Deepak says:

    Hi Manish,
    Nice article although old, its still valid in many respects.
    Recently I have been approached by one of my close friend for joining QNET (previously Goldquest, QuestNet..)
    Any idea if this is legitimate. There products are highly priced and so is the joining fee.
    Thanks.

    1. I suggest against it . BEtter not join !

  6. R.H +ve says:

    did you see this list where strategy india has declared 1200 + companies as scam ??? has anybody noticed ?

    1. Can you share that link with us ?

  7. Concerned says:

    Hi Manish,
    I have recently been contacted by my friend’s acquintance, who is trying to lure me into joining his moneychain system operating out of Bangalore.

    I have clearly expressed my disinterest in the business, but now I also want to report this to govt/police. Since I have not joined the business, I have not lost any money.

    What is the best way to report this without getting entangled in the legal aftershocks.

    Since I am in the IT industry, I don’t want to get pulled into any court cases related to this.

    Thanks !
    Concerned Citizen.

  8. Sandeep Patel says:

    I have a little different perspective on this one …. Let us bring them under the ambit of the law and monitor their activities. There are opportunities for regulating this business and bringing back some money to our country ……

    All IR’s (customer-distributors) in service tax parlance, with an annual income of over 10 lacs should be paying service tax for advertising and promotional services which they provide to Qnet as well as to the common public for promoting and distributing Qnet’s products… Is that happening ??? … needs to be checked by the IRS, RBI, DRI etc and the defaulting parties should be penalised. As one knows and from the various articles and pages published on social networking sites, the income generated from kthe business is huge for the top 20% of the members of the pyramid and there exists the potential of a revenue loss for the Government in case the IR’s or Qnet or Vihaan or Vanamaala any of their subsidiaries (with multiple cross holdings) fail to submit / pay the requsite taxes. one needs to understand that all IR’s themselves are business entities and need to have certain registrations as mandated by law. The bifurcation (if any) of the TDS for commision payouts to IR’s by Vihaan/ Qnet needs to be checked.

    Having worked in the area of Excise and Service tax as a professional one basic premise I have learnt – Ignorance of the law is not an excuse for not following the law and the above mentioned rule on service tax applicability for customer-distributors have been in existence since 2006… Lot of money for our Government especially from the top 20% of the earning members of Qnet or could be more …

    I am not saying that the business is illegal, however, within the existing framework of the law the above needs to be checked and Vihaan’s financial records and payouts to all IR’s should be verified.

    The policy and procedures of Qnet clearly state that an IR is a contractor and not an employee of the company… Therefore QNet themselves declare that IR’s are outsourced agents who are promoting their products and services via word of mouth … earning a commision for doing so and are therefore individual business entities ….

    Some interesting facts to be noted:

    Also a point to note that while Vihaan is registered with the MCA since Oct 2011, they have yet to file their balance sheet with the ROC at Bangalore. While the e-filing status is active, the digital signature certifacates have expired. One of the directors also holds a position of a director in another company where the same phenomena can be noticed. Understand from colleagues who are CA’s that while DSC’s are not mandated by MCA it brings about a transparency in the manner in which a company operates.

    I was also little surprised to see that one of the directors of Vanamaala tourism (as listed in the MCA company master data) is also an employee of QVI club… A first glance seemed to be a conflict of interest… QVI earns money from the services it sells to IR’s, the director also earns money from the services rendered by Vanmaala (takes home a neat profit) …. but who pays for it … all the IR’s. After all the IR’s are the only customer this company has….

    Prana health resorts – a QVI club resort is owned by one of the members of the management team of QNet… So while an IR utilises the package and also pays Prana Health resort for occupancy, also pays Vanamaala (owned by an employee of QVI) for availaing the services and the yearly usage fee … I am not sure any more as to what pay backs are happening in the entire system …

    All this has been gathered from the internet … are facts based on actual links and photos from various forums and I have validated the same with a couple of IRS officers who are known to me… I would like to use this forum for the “MOTIVATED IR’s” to check and see for themselves as to how deep the water is before making any further comments … The social media truly is the 9th wonder of the world….

    1. Thanks for sharing so many facts on this issue .. I am sure there is a lot of to be done by income tax department to unearth things ..

  9. Namit says:

    QNET is a fraud company plz don’t go in it.

    1. Thanks for sharing your view on that

      1. saurav bhaskar says:

        is secure life is genuine or froud mlm company?

  10. Venki says:

    Few of the readers opinion is to support network marketing (or form of MLM). I know few companies distribute their products based on MLM. For some time my sister family used a well known company products. Their bad, the products are pretty costly and by committing to be in the network they missed to gain the price advantage due to competition in the market. I mean, we will get the same quality product in market at better price.

    They are people (mostly marking guys) who convince that these are best products at any cost.

    Retail investors should take call on such products.

  11. amol says:

    Such MLM schemes are also there in USA. I have saved 3-4 times in getting into this trap. Some indians introduced themselves by hook or crooks and later follow to become their member.

    1. Thanks for sharing that Amol

  12. Manish says:

    Network Marketing concept is really good, if we work on this with member companies of IDSA with ethics then it will really benefit us. Middlemen expenses, marketing expenses will be eliminated. Elimination of these costs will benefit to consumer only. I would recommend to read Robert Kiyosaki’s books “21st Century Business” & “Business School” which throws light on network marketing concept.

    1. Thanks for your comment manish

  13. Chetan Thakur says:

    it was 10 cr a day ..pardon my typo

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