The term MLM (Multi-Level Marketing) has been thrown around since decades ago, and is, till this day, associated with scams and cast in a negative light. The real question is, are all MLM companies operate based on a lie or do they have something genuine to offer? What about all those world-famous, million-dollar giants like Herbalife, Amway, Mary Kay, Tupperware, Avon to name a few – companies that actually offer quality products and income from direct selling?
Now as we all should know by now, (if you don’t, that’s why you need to read on) MLM companies work on a pyramid scheme basis – no matter how much they try to sugar-coat their business model. There are also a variety of pyramid scams out there, but the most common ones are the ‘naked’ and product-based pyramid scams. How do they work? Read on.
The ‘naked’ pyramid scam
Ever heard of skim cepat kaya or get-rich-quick schemes? That is exactly what the ‘naked’ pyramid scam is all about. This method used to rake in millions for the top people in this pyramid scheme – otherwise known as the ‘up-liners’ – revolves around two words, ‘franchise’ and ‘investment’.
It starts when the founders of this scheme, who use honeyed terms like ‘fail-proof investment’ or ‘fast-growing investment’ to recruit, say, 10 people – also known as ‘down-liners’ – to sign up for the investment plan. Each of them will need to pay RM1,000 (example) to the recruiter in order to join the program.
Once YOU have joined, you then need to find another 10 people to sign up under you in order to make a profit of RM9,000 (RM10,000 – RM1,000 that you’ve invested in earlier). Your 10 ‘down-lines’ will then need to find 100 more people to make their own profit, and those 100 will need to recruit 1,000 people, and the cycle continues, thus the term ‘multi-level marketing’.
No products are involved, just the promise that as long as you keep recruiting and selling the ‘franchise’, you will keep making profits. Sooner or later the downlines will run out of people to recruit, and only the people at the top will reap the benefits of this scheme.
So ask yourself, how on earth does this even sound sensible, let alone legal? It’s as if you’re signing up to drag your friends and family into giving away their money (and yours) to people who have offered you nothing in return except for the empty promise of taking other people’s money in return!
Thankfully the Malaysian authorities are cracking down on these questionable companies and more of us are now wary of these skim cepat kaya programs. For more information on these companies or websites in Malaysia, do check out the Financial Consumer Alert by Bank Negara Malaysia here.
The product-based pyramid scam
Consider this scenario; someone whom you haven’t talked to in ages asks you out for a cup of coffee to ‘catch up’. Now, you’ve known this fellow for years and you know for a fact that this person wasn’t born rich, but out of the blue he’s now openly flashing out wealth and obviously trying to impress you out.
He then invites you to a ‘business presentation’ which is actually a seminar that claims you can earn up to RM300,000 per month! All you need to do is come up with an upfront payment a.k.a. investment of RM36,000 for a starter pack that contains revolutionary and ‘fast-selling products’.
At this point you may be thinking, ‘Wow, is this an MLM scheme? They have solid products and a posh office. Maybe it’s worth a try? It would be nice to be my own boss’. The question is then, HOW exactly do you make a profit by this scheme?
- You recruit 5 other people who each pay RM36,000 for a starter kit filled with products to sell.
- You get a certain percentage of each sold kit, and a percentage of whatever your downlines sell, including starter kits.
- The more people you recruit, the more you earn from the starter kits and the higher the percentage you gain from the sales that your downlines make.
The thing is, most product-based pyramid scheme companies (except the giants mentioned at the beginning of the article) often come out with products that are too good to be true, and 9 out 10 are usually more expensive than commercial brands.
Hardly sound like the best qualities for them to appeal to the mass market, and what can you do with such a limited amount of products in the first place? Besides, you won’t be getting a large profit margin unless you manage to sell the products in bulk. The bottom line is that schemes like these are merely well-camouflaged pyramid schemes that thrive on people’s greed and hope – much like gambling.
The fact is, the products are just a front to convince you that the program is not an MLM scam. The real money comes from recruiting more downlines so that you can earn more percentage out of them. Knowing this, don’t you ever wonder how much the people at the top of the pyramid make off you?
- You pay RM36,000 to join the scheme, and you need to recruit 5 people under you to get your ROI (Return of Investment), therefore RM36,000 x 5 = RM180,000.
- You get 30% out of the RM180,000 as your ROI (capital + profit) which amount to RM54,000, so you profit RM18,000 from all your hard work of getting 5 people to part with their RM36,000.
- The remaining sum of RM126,000 will then be divided among your 4 ‘senior’ up-lines according to their ranks and levels.
In short, RM126,000 out of the RM180,000 that you’ve worked so hard for goes to the people who did absolutely NOTHING, other than perhaps offer some moral support. Of course, they will need to always keep you hyped up and energetic because they make money off you. They were not the ones who had to fork out the money for petrol and transportation, tolls, phone bills and the cost of entertaining your prospect down-lines. That being said, HOW MANY people do you have to entertain and convince before you meet the needed quota? Still think you should give it a try?
While there are legitimate MLM companies (which involve actual direct selling than ‘franchise promotions’ and ‘membership recruitment programs’), there is no way to become a millionaire as easily as the MLM scams would have you believe. It’s a far better choice to invest in legitimate investments such as unit trusts, fixed deposits, bonds and even stock investments.
Remember that if your goal is to run your own business, there are no shortcuts on the road to success. If you’re not prepared to start your own business and just looking for something to earn commissions, consider being a salesperson for cars or properties, or be an online salesperson. There are plenty of alternative means to earn a living legitimately.
See also: The Best Small Business Opportunities
Be smart when investing and don’t get caught up in all the temptations of the world. Remember, if it’s too good to be true, it probably is. Don’t let greed cloud your judgment and make a hasty decision that you will come to regret in the long run.