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Economics, Politics, Legalities, Ethics and Sociology of Pyramid Schemes / Multi-level Marketing.
Better Business Bureau Avoids Key Question in Charging iJango of Pyramid Scheme Fraud
In its warnings about the multi-level marketing company, iJango, the BBB's pyramid charge seems to focus on iJango's product. IJango sells a web portal that claims to offer discounted products and generates web traffic that it claims will produce income. Consumers are solicited to pay $149.95 upfront and $19.95 a month to become sales reps. Then, as they recruit a "downline" they receive a percentage of the revenue generated by the new recruits. Each new person can continue building and expanding the "endless" chain, with each level given the same incentive to expand it - forever.
Scores of other MLMs operate this way, but the Wisconsin BBB complains that iJango's product "has no track record."
So, is introducing a new product a sign of a pyramid scheme to the BBB?
The Phoenix BBB warns consumers that "potential clients are paid for the recruitment of registered customers and the recruitment of others to do the same, a clear sign of a pyramid scheme."
Can the BBB find even one other MLM where this is not also true? Isn't paying consumers who recruit other consumers who also recruit the very hallmark of MLM? So why is iJango different?
BBB Avoids Key Pyramid Question: "Where Does the Money Come from?"
The BBB seem to fear that most iJango reps will gain commissions primarily from the $149.95 sign-up and $19.95 monthly fees, not from the purchase of products through the portal. The BBB implies that if most of commissions came from revenue from web-based purchases, iJango would not be a pyramid. The trouble is, the BBB does not specify who would make these web-based purchases. Is it only the salespeople or is it retail customers (consumers who are not in the pyramid pay plan)?
The BBB seems to believe that if all the commissions are filtered through product purchases - even if the salespeople are the only ones doing the purchasing - the scheme is legit. This is false and misleading.
If the only people to buy through iJango's web portal are its own salespeople, then the only way a "salesperson" can make a commission is by recruiting more new salespeople? Right? No one makes an income from making purchases themselves. They have to recruit others "downline." Recruiting more salespeople is the only means to make money. Where else would the "commissions" come from?
The problem with the "buy and recruit" plan - which the BBB seems to endorse - is that it can't be done! No chain can expand forever. Markets have limits. The "last ones in" are doomed to financial loss and failure. And, the "last ones in", that is, those at the bottom, will always be 90+% of the total involved.
Just as Bernie Madoff's Wall Street scheme was fraudulent because it required getting more and more new investors, which is impossible, the MLM Main Street scheme is similarly a fraudulent proposition. Saturation levels are quickly reached, after which the bottom levels are doomed. And if a large downline is needed for anyone to be profitable, then only the top few people can ever be profitable, whether saturation is reached or not. Everyone can't be a the top. Even a lot of people can't be at the top. Only a tiny few can. So any promises of income for many people are false.
Amway, BBB's "Corporate Partner"
The BBB is in a dilemma. Sitting on the BBB's roster of "corporate partners", which financially support BBB, are Amway, the kingpin of all MLMs, and Amway's lobbying organization, the Direct Selling Association.
Amway reps famously tell consumers, "Just buy from yourself and recruit others to do the same." Buy from yourself is Amway-talk for not having any retail customers. Insiders who are suing Amway for operating a pyramid scheme claim that Amway has virtually no retail revenue; that Amway products are too high priced to be sold to the public; that more than 90% of all revenue comes only from the salespeople; and the only way to make money is to recruit more salespeople.
So, the BBB, on the one hand, endorses and takes money from Amway, a BBB "corporate partner", but then, in the case of iJango, has to find a way to state the obvious, that iJango is a pyramid scheme. This requires gymnastics of logic and rhetoric.
Incidentally, BBB gives Amway an A+ rating.
MLM Realities the BBB Avoids
* All MLMs charge a fee for the right to recruit.
* Many MLMs sell products which "have no track record" or are ridiculously overpriced, or are promoted with absurd claims of health benefits or which are never purchased by anyone in the open market.
* Most MLM sales people, who are MLM's only customers, stop buying the goods in less than a year, after they fail to make money, and never buy them again! To get in on MLM pay plans, consumers must buy products. This bogus method of inducing "purchases" is standard across the whole MLM "industry."
* Most MLMs require that the new recruit buy a quota of products each month in order to get commissions from recruits, who must do the same, etc. The required annual purchases add up to thousands of dollars.
* Then, 40-50% of those high prices are passed "upline." This "margin" is the pyramid money.
* 50-80% of all the money goes right into the pockets of the top 1%. This is standard MLM practice.
* The MLMs that sell products that cannot be jacked up 300-800% in price, i.e., phone service, utilities, travel services, etc., (iJango fits this model) charge larger sign-up fees and monthly fees. Those fees provide additional cash for the pyramid commissions and bonuses to reward recruiting. This is standard MLM practice. IJango is typical.
BBB Lets Pyramid Operators Define Pyramid Schemes and Avoids the Legal Definition
The test that the United States Federal Trade Commission (FTC) has used and which federal courts have upheld is not whether the product has a "track record" but whether the commissions come from payments made primarily by the recruits, rather than retail customers.
The BBB avoids this test. Perhaps this may be because, by this test, most MLMs fail, as would the BBB's "corporate partner", Amway. Instead, the BBB appears to use criteria presented by one of its "corporate partners", the Direct Selling Association, the voice of the MLM industry. DSA claims that as long as money comes from purchases - regardless of the product's price or absurd claims, and regardless whether only the salespeople buy them - the scheme is legal.
When evaluating an MLM, the questions for a consumer to ask include:
1. "Who pays in the money that the upline gets in commissions? Recruits or retail customers?
If the answer are (1.) Recruits and (2.) Recruiting it's a pyramid scheme, whether the BBB admits it or not.
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