The unsustainable geometric progression of a classic pyramid scheme, from Securities and Exchange commission report on pyramid schemes.
In reviewing my last couple posts, (What does it take to be a Successful Direct Seller?, Ethics and Direct Selling) you may be thinking that they have a lot more to do with direct sales, instead of the social media part of this blog. But that’s not entirely true. You see, with social media, the word about our industry gets around. People with opinions can put them forth as fact, and others believe them. Thus, it becomes even more important that we get the facts right about our industry, so the internet is filled with the truth.
And that brings me to the topic of today’s post, which is Pyramid Schemes.
Last week I mentioned that it’s illegal to pay people for the act of recruiting. And I got some questions about that. Not because any of you are being paid for recruiting. But because we may not understand what we are actually getting paid for.
So let me explain.
Here’s what Wikipedia has to say about Pyramid Schemes:
A pyramid scheme is a non-sustainable business model that involves promising participants payment, services or ideals, primarily for enrolling other people into the scheme or training them to take part, rather than supplying any real investment or sale of products or services to the public. Pyramid schemes are a form of fraud.
So a pyramid scheme is when you get a payment for recruiting someone. It’s based on something YOU do, and not something the person you recruit does.
You will sometimes hear people confuse pyramid schemes and legitimate direct selling businesses, because in direct sales you do enroll people. However the important difference is that, in legitimate direct sales and network marketing, you are compensated for the sale of PRODUCT. You do not get paid for the act of recruiting. You only get paid when somebody sells something.
When I tell people I’m involved in direct sales and they say, “Isn’t that a pyramid scheme?” my standard answer is, “No, pyramid schemes are illegal.”
Every direct selling company that complies with the DSA Code of Ethics agrees to compensate its sales force ONLY when product sales happen. This is part of how we ensure that our business model complies with the law, and protects the rights of consumers.
So the next time someone asks you if your business is a pyramid scheme, you can say no, and tell them why.
Authored by Jennifer Fong 4/2011
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