How Deep Can You Pile It? Pyramid Schemes

Last time we looked at the Ponzi Scheme, where a con man takes your money, and  pays it back to you over time, convincing  you, and others, that he has invested it.
There is another very common sort of scam, and that is the Pyramid Scheme.  In it’s simplest form, a Pyramid scheme depends on multiple layers of sales or distributorships; someone has a product that is supposed to set the world on fire, and starts signing up people to sell it.  That’s fine, so for as it goes. But instead of the manufacturer selling directly to the salespeople, or via a distributor, that is, someone who the manufacturer sells the product to wholesale, and the distributor marks the product up somewhat and then sells in turn to the salesmen, it involves multiple distributorships; each time the product is marked up.
Understand, there is nothing wrong with distributorships; many, many companies operate on a distributorship model; nearly all Firearms manufacturers will not sell directly to a gun dealer, but will sell to various distributors who in turn sell to gun dealers. Likewise, years ago, the Big Three Car Companies in this country used to operate through a distributor system; Cadillac in particular; Cadillac would sell to regional distributors, East Coast, Southern, Midwest, and such, who in turn would distribute the cars to the dealers after marking them up. And, it is my understanding that at least some Foreign car manufacturers still work on a distributorship model. Many manufacturers like this model because they don’t have to deal directly with either the consumer or the sales people; the distributor is normally responsible for paying the manufacturers bill, for dealing with returns, seeing that the supply is equitably distributed and otherwise handling the headaches.  All the Factory has to do is make the stuff, sell it to the distributors and get paid by them.
However, what sets a pyramid scheme apart are multiple levels of distributorship and the fact that they are usually more interested in selling distributorships at various levels than actually selling product. As an example, you may have manufacturer who sells to a national distributor who sells to a regional distributor who sells to a state distributor who sells to a county distributor who sells in turn to the sales force.  Each time the item is marked up.  Additionally, the distributors are typically charged a lot of money for the right to distribute to the next lower level of distributor.  And the sales pitch rarely focuses on the item being sold; it usually focuses on how much money you can make by becoming a distributor.  Sometimes these are called “multi level marketing”.  The Federal Trade Commission has information on these sales schemes here:

FTC Website

It is really very good advice.
Not all multi level marketing is necessarily a pyramid scheme, but all pyramid schemes involve multi-level marketing.  They’re called Pyramid Schemes because a lot of people are at the base, paying money upward, to an ever decreasing number of people, and the people at the top are usually the ones who make all or most of the money.
What can you do to protect yourself?
First, is the product really something you will be able to sell?  And sell at a rate enough to recover any fees you have to pay?Is this a recognized brand? What sort of support will  you get in advertising, selling and marketing?  As an example, Baskin Robbins, the well known Ice Cream store, charges $25,000 as franchise fee; for the right to sell Baskin Robbins ice cream.  There are a number of other costs associated with the franchise, but the basic right to sell their ice cream costs $25,000.  Baskin Robbins has national and local advertising, is an extraordinarily well known brand, has a proven track record, and they will provide considerable training and support; they will teach you what you need to know to run a Baskin Robbins.  $25,000 is not a particularly small sum of money, but you are getting something for that money.
What do they want to charge you for the right to sell the item?  What sort of training do they have? What sort of national and local advertising of the product is there?  Have you ever heard of it? And, do they seem to be trying to ‘upsell’ you to other, higher levels of distributorships?
If you’re approached about this sort of investment, think about it. Talk to people you trust; friends, family, professionals such as lawyers and accountants. Take a very close look at the FTC website above and ask those questions.

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