Personal Finance

Don't get buried under a pyramid

Anand Kalyanaraman | Updated on August 06, 2011 Published on August 06, 2011

‘Easy money' being an oxymoron, here's how to save yourself from schemes promising you the same.

Now caught in the thick of a raging storm, Speak Asia, the referral marketing company (as it claims itself to be) seems to find itself tongue-tied. Critics accuse the company of launching a fraudulent pyramid marketing scheme by luring investors with the promise of unrealistic returns (for the seemingly simple task of filling out online surveys) and offering reward points (redeemable for cash or gifts) for new referrals. With its COO arrested and authorities in investigation mode, it remains to be seen whether the company manages to come out of the woods anytime soon.

Meanwhile, many of the around 2 million participants in the scheme (each of whom was expected to invest Rs 11,000 upfront for an e-magazine which would train them on how to fill the surveys) wait and watch with bated breath.

The final outcome of this particular case notwithstanding, the matter has again brought to limelight the perils of get-rich-quick schemes. Despite ‘easy money' being one of the finest examples of an oxymoron, many people have time and again found themselves succumbing to its seductive charm. Unsustainable business models

Among the many shapes which ‘easy money' schemes take, ‘pyramids' rank high in the popularity charts. Broadly, pyramid marketing schemes require members to make an initial investment, which is expected to be recovered (purportedly many times over) through more recruitment.

This way, a chain resembling a pyramid is developed with the number of members at each next level increasing in geometric progression (1, 2, 4, 8, 16.. or 1, 3, 9, 27, 81..). Fresh investments by the new recruits end up benefitting the entire chain above.

Conspicuous in such schemes is the emphasis on additional recruitment to keep the show going, and absence of any worthwhile product or service that could sustain the business model. Products or services, even if available, do not justify their high price, and are merely an alibi to enlist new members . They also serve as a legal smokescreen, given that pure-play pyramid schemes have in most cases ended up on the wrong side of the law.

Pyramid schemes are inherently unsustainable because there is a mathematical limit to the number of people who will bite the bait When the recruitments ebb , such schemes unravel. Most investors, except a few at the top who have made their money, end up holding the can. In this respect, pyramid schemes are similar to Ponzi schemes, though in the latter, it is usually one person or a small group which deceives a large number of people into making investments with the lure of extraordinary returns.

Since recruitment of new members is not insisted upon, a Ponzi scheme acquires a many-to-few form and not a pyramid structure. Nevertheless, like in the case of pyramid schemes, new money is rotated to make the initial high returns, which in turn entices additional money into the scheme. The scheme unravels when there are no new joinees and the music stops.

Pyramid schemes and Ponzi schemes have been banned in many countries across the world, including India. However, lackadaisical implementation of the law in the country means that such schemes continue to proliferate, causing losses to a large number of gullible investors, before authorities finally crack the whip. Investors would do well to use their discretion and not yield to temptation in such cases.

Pyramid schemes are different from genuine network marketing schemes which are also known by other monikers such as multi-level marketing (MLM) schemes. In such schemes, the focus is on the sale of products or services which are genuine and have value, and not on the recruitment of new members.

Genuine network marketing

Network schemes may encourage recruitment of new members to increase the earning potential of the members and also that of the chain. However, new enrolment is usually neither a necessary nor sufficient condition for earnings to accrue to members, which in most cases is contingent on actual sales of the product or service.

Also, such schemes usually limit the number of rungs above, which benefit from the sale. Besides, in most genuine network marketing schemes, sales are made predominantly to customers outside the chain, though members are not precluded from making purchases.

Network marketing schemes have their ardent supporters who highlight the benefits including the ‘earn independently' empowerment provided by such programmes, and the potential to make good profits in a legal way. However, they also have their trenchant critics who say that only a few (mostly at the top) actually benefit, and that the earnings for most members are quite meagre and often do not cover costs.

Some critics also allege that while network marketing schemes and MLMs may be legal, they are nevertheless in the nature of pyramid schemes, with a few gaining at the expense of the majority.

Red Flags

Also, some pyramid schemes masquerade as MLMs, and caveat investor (investor beware) applies in good measure in such cases.

To separate the wheat from the chaff, potential investors need to watch out for a few obvious red flags. Does the scheme emphasise recruitment over product or service? If yes, you would be better off walking away.

Does the product or service have any real value and is the price being asked for worth it? Other factors to check is the track record of the company , and the remuneration structure (is it fair and not lop-sided?). Also, does it suit your skills and pocket? If not, you should be looking for more viable options. Don't yield to temptation and hard-sell before ascertaining all the facts. If it's too good to be true, it probably is.

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