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Economics, Politics, Legalities, Ethics and Sociology of Pyramid Schemes / Multi-level Marketing.
MLM, IJango, Called Pyramid Scheme by Better Business Bureau in Dallas (but there's more to the story)
Consumers familiar with the multi-level marketing will find nothing especially different about IJango, except perhaps it has not gotten its cover story set up well enough. It claims to offer consumers a "business opportunity" based on sales and traffic generated on its web portal. However, little of this is in place now, and the BBB has found discrepancies in IJango's claims about affiliations with vendors.
In the meantime, consumers can sign up to pay about $150 and $20 a month for the "opportunity". Opportunity to do what? To sell the opportunity, of course, just like hundreds of other MLMs. The information developed by the BBB shows that there will be little money to be earned from "web traffic and sales". The main money will come from the consumer investments in the "opportunity." This is certainly no different from dozens of other MLMs.
BBBs and Pyramids
Better Business Bureaus around the country have steered clear of treating MLMs as pyramid schemes. As long as a tangible product is offerred even if the salespeople never actually sell it, but only buy it themselves BBBs tend to give MLM's a clean slate. They do not follow up to check on retail sales or on the loss rates of the distributors who are solicited with claims of "extraordinary income potential." In short, the BBB gives a pass to schemes that engage in practices that the FTC has called fraudulent. Many consumers who are leery of an MLM will fall into the trap after they find that the scheme is a member of the BBB!
In its report on IJango, the Dallas BBB posts a warning from the FTC about multi-level marketing. It states,
"In pyramids, commissions are based on the number of distributors recruited. Most of the product sales are made to these distributors - not to consumers in general. The underlying goods and services, which vary from vitamins to car leases, serve only to make the schemes look legitimate."
If this defines a "pyramid" then virtually all MLMs should be given an "F" by the BBB. Unfortunately, the FTC only warns consumers of such "non-retail" frauds, but it does not protect consumers from them.
The lack of FTC law enforcement, which effectively legalizes pyramid schemes, may be the reason the BBBs seldom alert consumers about pyramid selling schemes. Just like ordinary consumers they may also fear lawsuits from the schemes. In 2006, the Dallas BBB had to defend itself in a lawsuit brought by the MLM, Advantage Conferences, which it also questioned as a possible pyramid scheme. The MLM scheme sued the BBB for even questioning the company's legitimacy.
Advantage Conferences offered a two-day seminar led by "Christian millionaires," who shared their "secrets to success." The cost to attend: $10,000. However, attendees could also try to sell others the same package. They would receive $7,000 commission. $7,000 commission on a $10,000 seminar? The trick was that the commission would only be paid after the the third recruitment was achieved. and then there were more commissions on future sales made if that third new recruit brought in others too.
The pay play make two sales and then get a huge commission on the third, and then huge overrides on the sales made by that third enrollee is called the "Aussie Two-Up" plan. It is used by other MLMs. It is merely another variation ont he endless chain trick, a fraud by another name.
IJango's Link to Excel
So, what is special about IJango to draw this attention of the Dallas BBB? In addition to its incomplete and questionable product, its founders also have questionable backgrounds.
One of them, Cameron Sharpe, was previously affiliated with Ultimate Introductions Inc., aka Ultimate Singles, aka Social Spark. The BBB gave Ultimate Introductions Inc. an "F" rating for multiple consumer complaints.
The other founder of IJango, Steve Smith, was a top marketing executive of the now defunct MLM, Excel Communications. He is touted by the company for being responsible for Excel's extraordinary fast growth to in the 1990's. In a short time and only for a very brief period Excel grew to become the 4th largest long distance phone service in America. (#4 was a still much smaller than the top three). The founder of the company became an instant billionaire when Excel's stock went public.
The true story about Excel is that it achieved its amazing growth and its founder became rich from the financial losses and misguided efforts of millions of consumers and investors. This story might bear on the future prospects of IJango recruits.
As it turned out, one-forth of all Excel "customers" were also its salespeople! Like many MLMs Excel charged consumers a large fee to become distributors about $200 and then paid commissions when they signed up others. It also sold the distributors expensive marketing "tools." More than 25% of its revenue came from the extra fees and purchases of the salespeople themselves.
Like any pyramid plan, the vast majority of salespeople were at the bottom where they could never build large downlines. So, Excel turned out to be a huge churning machine of failed distributors. When they quit, their friends and relatives quit using the service too. The New York Times reported that in 1995, nearly 500,000 people applied to become Excel sales reps but in the same year, the percentage of representatives who chose not to renew was a huge 86 percent. Customers of Excel often the salespeople's relatives also were quitting in high numbers, 48 percent a year.
However, though millions of people were losing money as "sales reps" for Excel, Excel's managers were making money on each new one they brought in. Stephen R. Smith, Excel's executive vice president of marketing, and now co-founder of IJango, which the BBB is calling a pyramid scheme, earned nearly $4 million from an arrangement by which he received $5 for every new representative or trainer who signed up, according to the NY Times.
To cover this massive attrition rate and to finance the costs of replacing all these "quitters and losers" Excel used questionable accounting methods. It spread out the costs of commissions it paid to acquire new subscribers over a period of 12 months rather than deduct them immediately, as expenses. In 1995, the New York Times reported, this accounting trick reduced the company's marketing-service costs by $51 million, an amount equal to two-thirds of Excel's total operating income.
So, predictably after the stock offering in 1996, Excel's sales and reps began rapidly declining to one-half their peak. Then, the company merged with Canadian telecommunications company, Teleglobe. Teleglobe's stock plummeted more than 50% in short order. Teleglobe, which included Excel, was then acquired by Bell Canada Enterprises. Shortly thereafter, Excel was sold off for just $250 million a 90% drop in value from when the scheme went public to a privately held company, VarTec Telecom, Inc. At this point, the contracts with all the remaining MLM distributors were terminated. Soon, the company was put into bankruptcy.
So, not only did millions of "distributors" of Excel lose money, but so too did hundreds of thousands of shareholders: a cautionary tale for consumers planning to join IJango.
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