I have a business opportunity for you. For the most part, you’ll be a salesman. You’ll sell overpriced, mediocre products to your friends and co-workers, people already in your trust network, with whom you can use their guilt and their desire to maintain happy relationships.
The truth is the products don’t matter. It can be jewelery, kitchen tools, or beauty products. What you’ll really be selling is the system, because you earn money when those you recruit to the system earn money. The scheme itself earns money by selling the tools that allow you to participate, but participants earn money by recruiting. While using guilt to sell products to your friends and co-workers, it’s much more difficult to convince people to become sellers — especially when there are start-up costs to contend with. As a result, almost all who participate in pyramid schemes never earn a profit.
Amway, a pyramid (multi-level marketing) system that fits this description, has recently agreed to settle a class action lawsuit by paying $55 million to members who lost their own money through this particular business opportunity. Two important points were raised in the lawsuit:
- Amway (which now goes by the name Quixtar) offered a “typical income” from its program in its marketing materials, but this income measurement was the mean, which means it is skewed by the few big earners at the top.
- The company used gross income in its figured, not profit, and by not making that clear, misled recruits into believing they would earn more than they did.
Part of me wants to fault recruits for allowing themselves to become victim, but I understand that the quest for income can be desperate sometimes, and it’s worthwhile to consider every opportunity. Slick marketing materials help mask the truth. While some research is all it takes to avoid these programs, but cognitive bias plays a role, too.
It bothers me that multi-level marketing schemes have become such a force on the internet, as well. Rather than hard items, the products are digital, like e-books. Customers are asked to recruit other customers and paid to do so. The product is irrelevant because the income opportunity is in the recruiting. If you read between the lines when your friend offers you an “opportunity” and see there’s more money to be made by convincing your friends to be part of your team than there is substance to the product, then turn around and walk away.
And tell your friend to stop trying to make money off you.
Hat tip: @EverydayFinance
Updated June 24, 2016 and originally published November 5, 2010.