Illegal Aspects of MLM (Multi-Level Marketing) Business in Bangladesh Acknowledgement Some of the top experts on MLM’s and pyramid schemes have been consulted in the preparation of this paper. Table of Contains Name of the TopicsPage no. 01. | Report Abstract| 03| 02. | Introductory Discussion of Relevant Terms| 05| 03. | Types of MLM compensation plans| 09| 04. | A simple analysis of a pyramid scheme based binary compensation plan| 10| 05. | Difference between Legitimate Multi-Level Marketing Plan and Pyramid Scheme| 12| 06. How to identify product-based illegal pyramid schemes (illegal MLM)| 14| 07. | Critical Hypothetical Analysis of Multi-Level Marketing Binary Compensation Plan – An Ultimate Pyramid Scheme| 16| 08. | Why Pyramid Schemes are Popular? | 31| 09. | Disadvantages of illegal MLM as A Business Model| 32| 10. | Destructive Effects on the Lives of MLM Participants| 34| 11. | A Brief Case study on Destiny-2000 Ltd. | 36| 12. | Government Regulation and Recommendations| 39| 13. | Conclusion| 41| 14. | Reference| 42| Report Abstract
One of the most problematical of business models is multi-level or network marketing (MLM). Many MLM programs show all the effects and characteristics of a pyramid scheme, but the MLM industry has nonetheless been allowed to continue and flourish in Bangladesh. The MLM participants are considerably suffered by the tricky and corrupting influence of the MLM companies, and the financial and social harms. Unfortunately, victims of these programs seldom complain, blaming themselves for their failures.
This problem is compounded by limited resources available to the enforcement agencies in Bangladesh, faced with MLM companies which are operating using both Naked Pyramid Schemes (NPS, where no products are offered actually) and Product-based Pyramid Schemes (PPS, where products are offered but using illegal pyramid scheme). Due to inadequate definitions of what constitute a pyramid scheme, insufficient resources, corruption and lack of prosecutorial wills in enforcement of existing laws, enforcement agencies often fail to catching the fraud MLM companies, but letting them go free.
The consequences are enormous—millions of consumers are being cheated out of billions of money each year. A pyramid scheme, as currently defined as are plans which (1) “concentrate on the commissions you could earn just for recruiting new distributors” and which (2) “generally ignore the marketing and selling of products and services. ” The above two criteria have proven to be inadequate for determining whether any given MLM program is a pyramid scheme or not.
Legislators, courts, and consumer protection agencies would serve consumers better if they improved their methods of determining whether an MLM business fits the definition of a pyramid scheme or not. At least, it is needed to point out that an MLM program is not a pyramid scheme, when in fact it is more likely a Product-based Pyramid Schemes that has managed to escape corrective action. However, in Bangladesh some 62 registered Multilevel Marketing (MLMs) companies are now operating in the country and most of them are following Product-based Pyramid Schemes (PPS).
In this report it has been tried to discuss on the illegal aspects of MLM business, and how to determine a MLM business as illegal Pyramid Scheme along with discussing the disadvantages of illegal MLM business. A brief study on the largest MLM Company in Bangladesh, Destiny-2000 Ltd. , has been done here from the legal perspective. This report has recommended for banning of illegal MLM business in Bangladesh. Introductory Discussion of Relevant Terms
As a long-time critic of MLM programs, I was curious to know why so many otherwise intelligent and capable persons were involved. The growth of MLM amazed me; since it seemed obvious it was just a disguised pyramid scheme. Yet several persons whom I trusted and respected tried to recruit me into their downline. They tried to convince me that I may have misjudged the industry and that MLM may have a real future as a viable and ethical business model.
Finally, I decided to investigate MLM for myself—to prove for myself whether or not my original objections to MLM were valid. There are about 62 so-called MLM companies in Bangladesh and most of them are using Pyramid Scheme in disguise of legitimate MLM business which is illegal. Let’s see the definition of some relative terms to understand the illegal aspects of MLM business. Multi-level marketing program (MLM for short, also referred to as ? etwork marketing), as defined as— Any marketing program in which participants pay money to the program promoter in return for which the participants obtain the right to (1) recruit additional participants, or any other person into the program participant’s downline, tree, cooperative, income center, or other similar program grouping; (2) sell goods or services; and (3) receive payment or other compensations; provided that: (a) the payments received by each program participant are derived primarily from retail sales of goods or services, and not from recruiting additional participants nor having additional participants placed into the program participant’s downline, tree, cooperative, income center, or other similar program grouping, and (b) the marketing program has instituted and enforces rules to ensure that it is not a plan in which participants earn profits primarily by the recruiting of additional participants rather than retail sales. In Multi-level marketing the sales force is compensated not only for sales they personally generate, but also, secondly, for the sales of others they recruit, creating a downline of distributors and a hierarchy of multiple levels of compensation. Pyramid Scheme
As its name indicates, the pyramid scheme is structured like a pyramid. It starts with one person – the initial recruiter – who is on top, at the apex of the pyramid. This person recruits a second person, who is required to “invest” $100 which is paid to the initial recruiter. In order to make his or her money back, the new recruit must recruit more people under him or her, each of whom will also have to invest $100. If the recruit gets 10 more people to invest, this person will make $900 with just a $100 investment. Fig: Pyramid Scheme Now if the 10 new people become recruiters and each one is in turn required to enlist an additional 10 people, resulting in a total of 100 more people.
Each of those 100 new recruits is also obligated to pay $100 to the person who recruited him or her; recruiters get a profit of all of the money received minus the initial $100 paid to the person who recruited them. The process continues until the base of the pyramid is no longer strong enough to support the upper structure (meaning there are no more recruits). The Fraud The problem is that the Pyramid Scheme cannot go on forever because there are a finite number of people who can join the scheme (even if all the people in the world join). People are deceived into believing that by giving money they will make more money (“with an investment of just $100, you will receive $900 in return”). But no wealth has been created; no product has been sold; no investment has been made; and no service has been provided.
In MLM, Pyramid scheme as currently defined as plans which concentrate on the commissions you could earn just for recruiting new distributors/participants and which generally ignore the marketing and selling of products and services. The main characteristic of an illegal Pyramid Scheme is that participants only make money by recruiting more members, and the results of pyramids are inevitable and obviously predictable. All Pyramid Schemes eventually collapse and fail. In order for everyone to win under a pyramid scheme, the recruiting would have to go on forever which is impossible due to saturation of the market. Although illegal, pyramid schemes remain popular because the promise of quick, easy money lures people.
The following chart illustrates how difficult it is for those who are not at the top of the pyramid to expect payment. Since many people know pyramids are illegal, so they need to convince other new people that what they are involved into a pyramid scheme. As a result, pyramid schemes today are being described in different terms, such as clubs or gifting groups. Pyramid scheme operators attempt to convince people they are involved in a club to make an investment or to raise money by making “gifts” to help someone else. Different kinds of pyramid schemes The two most basic types are Product-based Pyramid Scheme (PPS) and Naked Pyramid Scheme (NPS).
Naked Pyramid Scheme refers to an obvious pyramid scheme that is easy to detect because no products are offered, but merely a participation fee or investment. It is a continuous chain of? participants or ? investors? is recruited, in which each pays a fee to participate and receives money by recruiting others into the system. A product-based pyramid scheme (PPS) is a pyramid scheme that in most respects resembles a naked pyramid scheme, except that products are purchased by distributors at higher cost. Such product purchases often combined with other incentives, qualifies distributors for commissions in ascending levels in the distributor hierarchy.
A product-based pyramid scheme is the same concept disguised as a legitimate direct sales opportunity. Here’s how it works: 1. A distributor recruits 10 salespeople who each pay $500 for a starter kit of products to sell. 2. The distributor gets 10 percent of each starter kit that’s sold. 3. The distributor also gets 10 percent of each product that any of his recruits sells, including more starter kits. 4. The recruits are told that the fastest way to make money isn’t by selling products, but by recruiting more people to buy starter kits. 5. The people at the top of the pyramid get commissions from everyone in their downline, the many levels of recruits below them on the pyramid.
Several MLM programs generate goods or services for just show – not of real value to its members. These are completed just to tick the authority and eye-wash legal police. Network marketing—a term devised by the MLM companies to get around the implications of? multi-level marketing? —which sounds too much like a chain distribution or pyramid form of marketing. Downline—all of the MLM distributors who are recruited under a given distributor and from whom are generated overrides on product sales. Upline—the direct line of distributors who are above a given distributor in the MLM distributor hierarchy or pyramid scheme and who receive overrides from his/her sales or purchases.
Scheme—A plan or program of action, especially a crafty or secret one, that can be a systematic or organized framework?. Compensation plan – a structure which determines how distributors are paid from their own sales and earn residual income from the sales of the distributors in their downline. A binary compensation plan uses a network marketing structure, which means the company pays a specified amount or percentage based on a specified sales volume regardless of the number of levels needed to achieve it. This is in contrast to a multi-level compensation structure, which pays a specific percentage based on a specified level up from the person originating the sale, regardless of the sales volume. Types of MLM compensation plans Unilevel plans:
This type of plan is often considered the simplest of compensation plans. As the name suggests, the plan allows a person to sponsor one line of distributors, called a ? frontline.? Every distributor the person sponsors is considered to be on that sponsor’s frontline and there is no width limitations, meaning there is no limit to the amount of people one can sponsor in the frontline. The common goal of this plan is to recruit a large number of frontline distributors and then encourage them to do the same. This is due to the fact that commissions are normally paid out on a limited depth, which typically means sponsor can earn commissions on sales between 5 and 7 levels deep. Matrix plans:
This type of plan is similar to a Uni-Level plan, except there are also a limited number of representatives who can be placed on the first level. Recruits beyond the maximum number of first level positions allowed are automatically placed in other downline (lower level) positions. Matrix plans often have a maximum width and depth. When all positions in a representative’s downline matrix are filled (maximum width and depth is reached for all participants in a matrix), a new matrix may be started. Like Uni-Level plans, representatives in a matrix earn unlimited commissions on limited levels of volume with minimal sales quotas. Binary plans: A binary plan is a multilevel marketing compensation plan which allows distributors to have only two front-line distributors.
If a distributor sponsors more than two distributors, the excess are placed at levels below the sponsoring distributor’s front-line. This spillover feature is one of the most attractive features to new distributors since they only need to sponsor two distributors to participate in the compensation plan. The primary limitation is that distributors must ? balance? their two downline legs to receive commissions. Balancing legs typically requires that the number of sales from one downline leg constitute no more than a specified percentage of the distributor’s total sales. A simple analysis of a pyramid scheme based binary compensation plan Suppose there are only 15 people in this world and the market is fully saturated.
Now if we do a simple hypothesis then we will understand that how the people of the bottom level in a pyramid scheme will never get money as per the people in above 2 levels in a pyramid. Pic- 01 Here there are 8 people in the bottom level which is 53% of total people in the pyramid (8/15 = 53%) and the market is completely saturated. Now if those 8 people want to earn, then each of them has to recruit, at least, 2 new people into their downline which is the minimum condition to be paid. So, conditionally, they will need 16 new people to recruit to be paid but there are no new people to join. Pic- 02 Now, even, in an ideal situation, if those 7 distributors (15-8 = 7) in above levels want to join below the 8 distributors in the bottom level, then only 2 people will be able to earn money. Because 16 people are needed to be paid for 8 people, but only 7 people are available in above 2 levels. So we can see in bottom level in picture-02 that only 2 distributors out of 8 distributes will be able to earn in an ideal scenario, that is, only 25% distributors will be paid only once and 75% people will not be paid ever in the bottom level. Now sometimes the scam artists claim that, still, those 25% people in the bottom level can be able to be paid more than once if those newly rejoined distributors from the above levels buy their own products again and again.
But in that case, those newly rejoined distributors must buy their own products again and again at higher price than the usual market price to benefit those 25% distributors in the bottom line which is impractical and losable. So it is simply not possible to pay those 25% distributors in the bottom line without buying own products again and again at higher price by the newly rejoined distributors because of market saturation and other factors. Difference between Legitimate Multi-Level Marketing Plan and Pyramid Scheme | Legitimate Multi-Level MarketingPlan| Pyramid Scheme or other illegal PPS| Business Focus| Sales of products and services to end- users (NOT other distributors)| Recruiting new members| Profits| Primarily based on the sales of products and services by the distributor. Perhaps some percentage of income from sales by downline recruits. Primarily membership fees paid by new recruits or ? bonuses? for meeting recruitment goals. | Products or Services for Sale| Household goods or services that consumers typically use in everyday life. Goods and services are priced competitively with traditional retail outlets. | Often a thinly-veiled and poorly-made? miracle? product or service that few consumers want or need. Merchandise is typically priced well above comparable products sold in retail stores. | Start-upCosts| Low or none at all. | Substantial, often involving recurring? membership? fees or expensive? educational,? ?training,? or? advertising? materials that can easily be found free of charge elsewhere. SupportSystem| Low-pressure, eager to answer questions about the business and provide detailed information in writing upon request, such as a business and marketing plan| High pressure, with a constant focus on recruiting new members of the scheme. Hard to reach when questions arise. | Employee/ customer References| Eager to provide references who provide honest evaluations of the viability of the MLM plan and the work necessary to succeed. | Unwilling or unable to provide references or only provides references who themselves attempt to recruit a caller. | Sales Pitch| Provides detailed information about the work involved. Offers no promise of easy riches. Does not use high- pressure sales tactics. Involves promises of large profits with minimal work, often in high-pressure seminar environments. Uses phrases like? limited time offer,? ?can’t missOpportunity,? and ? guaranteed income.? | InfoAvailable? | Has a good report with the Better Business Bureau (BBB) and consumer protection agencies and is registered with the local Chamber of Commerce. Provides detailed information on their Web site AND provides hard copies of annual or quarterly reports, business plans, and marketing materials on demand, for little or no charge. | Not registered with the BBB or local Chamber of Commerce. Information about the company is scarce or limited to a Web site. MerchandiseBuy-Back| Buys back unsold merchandise at 90% or more of purchase price. | Refuses to buy back merchandise at allor buys back at significantly less than the wholesale price| Getting out of the Business| Easily accomplished and accompanied by a reasonable merchandise buy-back program. | Difficult, with high-pressure tactics used to keep participants in the scheme, possibly accompanied by pitches to spend more money on ? training? to improve performance. | How Long the Business Will Last| Sustainable, based on repeat sales of products and service| Doomed to collapse| How LikelyYou’ll Profit| Profits are based on time and effort devoted to selling goods or services to consumers. The vast majority of participants lose money. | The BottomLine| It’s a legal business opportunity that may or may not be a good fit for you. | It’s illegal. Don’t waste your money. | How to identify product-based illegal pyramid schemes (illegal MLM) * Those pyramid schemes that offer money for simply recruiting people. This money can come as a commission from the sale of a starter kit or as a recruiting “bonus. ” * Avoid any MLM that puts much more emphasis on recruiting salespeople than selling the actual product. * Pyramid schemes charge steep startup costs for joining, including mandatory training, a starter kit and a non-refundable membership fee. Beware of any MLM that allows five or more levels of distributors to collect commissions on a single sale. * Make sure that the products being sold have real value and a competitive price. Are they reputable brands? Have the manufacturers been involved in recent lawsuits? * Avoid MLMs that only sell lists of sales leads to other MLM salespeople. This is most likely outdated information that has made the MLM rounds several times before. * Avoid signing up for an MLM as part of a high-pressure motivational event. Consider the information carefully and take it home to think about it. * Be wary of anyone who tries to sell you on an MLM by displaying their personal wealth. Realize that many of the people who claim to have made millions through MLM have actually made their money selling books and videos on how to make millions through MLMs. * MLM companies charge for in-house seminars and sales materials—a source of revenue unique to the industry. * As the direct result of relative vertical equality in MLM company compensation systems, extreme horizontal inequality (EHI) is seen in payout to the entire network of distributors. * Demand is distributor-driven, not market-driven. * The distinction between the consumer and the seller of the product becomes unclear in MLM programs. * Emphasis when prospecting is on the ? pportunity, rather than on the value of the products. * The illusion of virtually unlimited financial growth opportunities masks the mathematical reality of limited advancement opportunities. Charts of compensations systems in MLM programs often show an almost limitless opportunity for financial growth by advancing geometrically through levels in the hierarchy of distributors to extraordinary incomes at the top levels. Recruiters imply that such income can be reached by anyone. Such promises of extreme financial opportunities often mask the reality that very few could actually make the top level. * Very small rewards are paid to distributors by the company for retailing the products. Net profits from MLM participation are rarely sufficient to be reported by distributors. * The acid test for success as a MLM distributor is whether or not significant profits remain after all expenses and product purchases from the company were accounted for—enough to actually report a profit on their income taxes. * Products are promoted through MLM that are unique, emotionally appealing, and consumable or renewable—to perpetuate the pyramid. MLM products have been characterized as ? notions, potions, and lotions.? For example, personal care and nutritional products have for years been the staples for MLM companies. More recently, MLM founders have promoted telecommunications (long distance), internet services, or other new technologies, which in the public mind represent almost unlimited —even magical—opportunities for growth. * Intangibles,? such as investments, buying clubs, and travel opportunities have also been promoted through MLM companies because they are renewable and allow for repeat business. * MLM promoters engage in extensive deception and self-deception—probably more so than with any other distribution system. Critical Hypothetical Analysis of Multi-Level Marketing Binary Compensation Plan – An Ultimate Pyramid Scheme Binary means 2. Thus, each sponsor can have only 2 distributors in their immediate downline.
The downline is the term used for those recruited distributors who are placed beneath you. The Sponsor is the distributor who is immediately above you. However, the number of levels in the downline is infinite in binary compensation plans. This creates a pyramid that looks like 1-2-4-8-16-32-64-so on… when each level is added up. The first number (1) is you. In this example, when you add up all the distributors in your downline, you would get 2+4+8+16+32+64+etc… = 126+ so on… In a binary compensation plan, the distributor must ? balance? their downline. The downline is divided into two sides; one is the LEFT side and another one is the RIGHT side. The sides are created due to the binary structure.
Binary compensation plans are infinite in levels because group sales volume points are added up and max out at 5000 points on each side generally. You can have 1000 distributors in your first Business Center (1-BC) possibly giving you 25,000 sales points, but since the maximum you can calculate for commissions on each side of your downline is 5000 points, you max out at 10,000 group sales points. If you have 5000 group sales points on your left side but only 250 group sales points on your right side, then your commission payout is calculated based on the lower of the two sides. In this case, you add up 250 group sales points from each side giving you a total of 500 group sales points. The remaining 4750 GSP (Group Sales Points) on the one side rolls over to the next month.
Only a maximum of 5000 points can roll over. If you had 20,000 points on your left side, it is first readjusted to 5000 points, and then calculated for commissions. Whatever is left over that rolls over later. If you manage to collect 5000 points on your left side and 5000 points on your right side, you max out your business center. In the event this happens, you receive a Re-Entry Certificate. This certificate allows you to create a new Business Center at the bottom of your current business center. This gives the distributor the chance to try and max out another business center, and so on. Each business center can collect up to two Re-Entry Certificates.
This allows the distributor to maintain an inevitable balancing act for those earlier business centers created, and continues the incentive to recruit more distributors. This happens because you can get 2 re-entries per business center. You put one of the new business centers on the left side of the earlier business center, and place the next business center on the right side of that earlier business center. So now you are essentially balancing your stacking business centers. The following examples will demonstrate. But first, here is the commission payout table. Now suppose, in an ideal situation, if I have one business center which each distributor purchases 25 sales points worth of product each week. Suppose I have 126 distributors in your downline (2-4-8-16-32-64) making 6 levels.
Level 1 has 2 distributors while level 6 has 64 distributors. Here, the total sales points are calculated by adding together the left and right side of the downline including your own sales points: (Left Side Points + Right Side Points + Your Own Points). Your own points can be applied to either side of your downline’s group sales points when calculating commission payout. Scenario 1: In the above example, everything is equally balanced. But what happens if I get a re-entry certificate and begin a new business center at the bottom of the previous one? I will place a Business Center #2 at the bottom left side of my Business Center #1. Scenario 2:
Business Center 1(gray) – The table here represents the distributors who pass the sales points from one business center to the top of the other. These distributors are represented in the gray blocks in the image above. Now the calculation is showing that in the 2nd level in Business Center 1, after adding the Business Center 2, one distributor (right side) gets 1575 SP (Sales Points) and the other distributor (left side) gets 4750 SP (3950+775+25). So I will get 6350 SP (4750+1575+25) in total after adding Business Centre 2. In the example above, I have two business centers. You can see that after I built my second business center, the first business center changed and became highly unbalanced.
You notice that each level contained 1 distributor that carried on the sales points from the business center underneath them. I will call this anomaly the Line Connecting Business Center Distributors. In the graphical images, these distributors are represented by the gray blocks. This line of distributors passes the total sales points from Business Center 2 on up to the top of Business Center 1 to benefit the same distributor for a second time. As you can see, the distributor on the 6th level whom I placed my second business center underneath inherited 3175 SP! But this doesn’t mean the distributor will collect any commission. You can see that while the distributor collected 3175 SP on their left side, they collected 0 SP on the right side.
The best thing that this distributor could do is to apply his own points to the right side for the commission calculation. Thus, the distributor will have 3175 SP on the left side and 25 SP on the right side. The commission pay out chart shows that the first commission payout comes when you collect at least 250 SP on both sides! At this current rate, it will take 10 weeks for this particular distributor to make $40 in commissions. So just because I started my new business center at the bottom of my previous business center does not necessarily greatly benefit those Line Connecting Business Center Distributors. Now, even I have an unbalancing problem.
While my Business Center #2 is quite balanced (1575+1575+25), this is not the case for my Business Center #1. Business Center #1 is unbalanced and looks like (4750+1575+25). However, this can be fixed. This is the reason the Binary Compensation plan allows for TWO re-entry certificates PER business center. Let’s see what happens when I put a new business center at the bottom of the right side on my first business center. Now I will have 3 business centers. They will look like the following: Scenario 3: Thus, in total, I will get to calculate my commission payout as the following: BC-3 = 1000 SP left + 1000 SP right = 2000 SP total = $200. 00 commissions. BC-2 = 1000 SP left + 1000 SP right = 2000 SP total = $200. 00 commissions.
BC-1 = 4000 SP left + 4000 SP right = 8000 SP total = $800. 00 commissions. So in this example, I would make $1200 in commissions for the week. Total amount of distributors in my downline to achieve this is 379 (127+126+126). As you can see, the first business center now gets 9525 SP (4750+4750+25). Build a couple more business centers like this and it causes an inevitable balancing act for distributors who have several business centers. Does the fact that I re-entered a new business center at the bottom of a previous business center greatly benefit those who are part of the Line Connecting Business Center Distributors? Absolutely not.
Why the majority of distributors in the downline cannot succeed So what is the reason the majority of distributors in my downline cannot succeed? One reason is because they cannot recruit anyone else. If I travel to a distant town and recruit 100 people into my downline, these 100 people try to recruit a friend or neighbor and maybe each one of them succeeds in recruiting 1 person. Now there are 200 people recruited in my downline in a given town and saturation builds. If everyone is a distributor, who is there to sell the product to? Who is there left to recruit? The only way for these new recruits to succeed is to now travel to other towns that are untapped.
Problem is, the top distributors in the company have already spread out to every corner because they got placed in the pyramid when it was born. Secondly, the majority of distributors in the example I provided do not collect enough sales points. They are at the bottom couple levels of the pyramid and do not have enough distributors underneath them to provide them with group sales points. It is their job to seek out ways to make those sales points, which is why recruiting is the only way. But because of saturation, they don’t have a chance. The inflated cost of MLM products is another reason they don’t have a chance to succeed. Almost all of competing brands’ products are less than half the price of MLM’s products.
This in affect makes the distributors themselves the only customers. While some distributors convince their friends, family, and co-workers to purchase some products, there are virtually no customers outside this triangle. Now there are more to this binary compensation plan to discuss. At first, when you enroll yourself as a distributor, you must choose between a 1-Business Center plan or a 3-Business Center plan. The difference is: the 1-BC plan is just what it says, one business center as we saw earlier. However, the 3-Business Center plan puts YOU in the first two spots in the first level. This looks something like (1(you)-2(both you)-4-8-16-32-64-128).
This 3-BC causes you to build two business centers at the same time and then adds the sales points from those to calculate the total sales points for the very top business center. Let’s see what a 3-BC looks like. Scenario 4: Thus, in total, I will get to calculate my commission payout as the following: BC-3 = 1000 SP left + 1000 SP right = 2000 SP total = $200. 00 commissions. BC-2 = 1000 SP left + 1000 SP right = 2000 SP total = $200. 00 commissions. BC-1 = 3000 SP left + 3000 SP right = 6000 SP total = $600. 00 commissions So in this example, I would make $1000 in commissions for the week. Total amount of distributors in my downline to achieve his is 253 (1+126+126). Now compare this enrolling 3-BC plan to the original example of 1-BC plan of having three separate business centers tied together with re-entry certificates. The 1-BC Enrollment with the 2 Re-Entry Business Centers the number of distributors is 379 (127+126+126), and the Commissions I make is $1200, but in the 3-BC Enrollment the number of distributors is 253 and the Commissions I make is $1000. The difference is that enrolling with the 3-BC plan versus the 1-BC plan supposedly allows the distributor to make more commissions faster. So the 3-BC appears to be more attractive when choosing what to enroll with.
So most all distributors end up with choosing the 3-BC plan, however, enrolling with the 3-BC puts the distributor deeper into debt and more unlikely to ever recover the expense. Illegal MULTIPLE business centers in pyramid scheme Now when you enroll with the 1-BC plan, you must purchase a minimum of 100 Sales Volume Points every 4 weeks to qualify for collecting commissions. When you enroll with the 3-BC plan, you must purchase a minimum of 200 Sales Volume Points every 4 weeks to qualify for collecting commissions. Now if you signed up with a 1-BC but then managed to get a re-entry certificate and begin a new business center, you now have MULTIPLE business centers. Once this happens, the 200 Minimum Sales Point rule applies just as if you started with the 3-BC plan.
These minimum purchases every 4 weeks are known as “Pay to Play”. However, this pay feature of a product-based distribution system is often a clear indication it is in fact an illegal pyramid scheme. In SCENARIO 4 there are 255 distributors. However, in the 3-BC plan, the top three distributors are the same person. So there are really a total of 253 different distributors. Of these distributors, the following payout in the example pays out as the following: This example’s structure has sales points perfectly balanced. Rollover amount will apply to both left and right sides. I will also apply the distributors own purchased sales points to put half of it on the left and the rest on the right.
Carrying this on for 52 Weeks (1 Year) the final results are the following for EACH DISTRIBUTOR within each level: All Levels – 253 Distributors (1+126+126) – $204,440 of total commissions paid out. Top – 1 Distributor (ME) – $33,000 commission each or 16. 14% of total commissions paid out Level 1 – 2 Distributor (ME) – $16,400 commission each or 8. 02% of total commissions paid out. Level 2 – 4 Distributor – $8100 commission each or 3. 96% of total commissions paid out. Level 3 – 8 Distributor – $3760 commission each or 1. 84% of total commissions paid out. Level 4 – 16 Distributor – $1560 commission each or 0. 76% of total commissions paid out. Level 5 – 32 Distributor – $720 commission each or 0. 35% of total commissions paid out. Level 6 – 64 Distributor – $280 commission each or 0. 14% of total commissions paid out.
Level 7 – 128 Distributor – $80 commission each or 0. 04% of total commissions paid out. Remember, in the 3-BC enrollment plan, I am the TOP distributor AND the 2 distributors in the first level! These totals up to the following figures for a 1 year period: 253 distributors contribute to the $204,440 in commissions paid out. I make $65,800 in commissions or 32. 19% of the total commissions paid. I purchase only 3900 sales points,whichaccount for $390 of the $65,800 I collected. The next distributor beneath me makes $8100, or 3. 96% of the total commissions paid out. The Bottom 128 distributors make $80 each, but paid for $33,280 (51%) of my $65,800 in commissions.
It is very clear who is earning all the benefits from the majority of the distributors who are not making enough commission to recover their expenses. In a binary compensation plan, there are about 50% to 66. 6% of distributors who are on the bottom of the pyramid. This is because at the most basic level, one distributor with one distributor in the left side of the downline and one in the right side of the downline, the total amount of distributors in this pyramid is three. 1-2, One on top and two on the bottom (2 in the bottom of 3 distributors). Thus, 66. 6% of the distributors are at the bottom. As the pyramid grows, the number of distributors on the bottom approaches to 50%.
An example of a pyramid structured as 1-2-4-8-16-32-64-128 (=255), there are 128 distributors at the bottom of this pyramid, which accounts for 50. 2% of the distributors. The bottom distributors can never make enough to recover their expense. The only solution is to recruit. However, a distributor that turns to recruiting must understand that the more people they recruit into the pyramid, the higher the number of distributors at the very bottom becomes. Fig: Pyramid Scheme: the bottom line which accounts for more than 50. 2% of the distributors Even those distributors one level above the bottom are not recovering their expenses. The percentage of distributors at the very bottom two levels ranges from 85. 7% to 75%.
Like the previous example, when at the most basic form of this pyramid, 1-2-4, the bottom two levels account for 85. 7% (6/7) of the distributors. As the pyramid grows, the number of distributors on the bottom two levels approaches 75%. This is shown by a pyramid like 1-2-4-8-16-32-64-128, there are 192 distributors at the bottom two levels which account for 75. 02% of the distributors. Now some people claim that this isn’t really a pyramid scheme because the person underneath you could be making more money than you. This is misleading because the only way this is true is when a distributor creates a new business center after maxing out their previous one, and they put the new business center at the bottom of their previous one.
This can be demonstrated in the following example. My Business Center 1 has six levels in it with 127 distributors in it including myself. I achieve two re-entry certificates and put two new business centers at the bottom of my first one. They each contain 126 new distributors in them. I put one on the left most end and one on the right most end of the first business center. Each distributor’s own sales points are either split into half or added to the left and right side of their group sales points, or they are all given to whichever side is lacking the most points. This allows for the most effective and efficient method of benefiting from your own sales points.
Each distributor purchases 25 sales points every week. I purchase 25 sales points myself for each business center, totaling 75 sales points each week. Study the above example carefully. Sales points travel up from the very bottom of Business Centers 2 ; 3 and travel all the way to the top of Business Center 1. After 1 year (52 weeks), the figures come out to the following: TOTAL – 379 distributors (127+126+126 in all three Business Centers) – $289,120 in total commissions ME – 1 distributor – $79,600 Commission – 27. 5% of total commissions paid out Level 1 – 4 distributors (0+2+2) each make $8100 or 2. 80% of total – 2 distributors each make $8300 r 2. 87% of total. Level 2 – 10 distributors (2+4+4) each make $3760 or 1. 30% of total – 2 distributors each make $3940 or 1. 36% of total. Level 3 – 22 distributors (6+8+8) each make $1560 or 0. 54% of total – 2 distributors each make $1640 or 0. 57% of total. Level 4 – 46 distributors (14+16+16) each make $720 or 0. 25% of total – 2 distributors each make $800 or 0. 28% of total. Level 5 – 94 distributors (30+32+32) each make $280 or 0. 10% of total – 2 distributors each make $400 or 0. 14% of total. Level 6 – 190 distributors (62+64+64) each make $80 or 0. 03% of total – 2 distributors each make The recruiting pyramid scheme is quite clear.
Even those 12 distributors, who are part of the connecting line (designated in gray in the image of the pyramids) from the top of one business center to the top of the other, are still not making much. Although, those 12 distributors in those lines have a better chance than the ordinary distributor in the same level and usually consist of the top distributor’s family and friends. These commission figures are GROSS income. The distributor still needs to subtract their expenses for the year to get their NET income. For most distributors in this pyramid scheme, the figure is depressing because they are usually in the negative. Most distributors never recover their cost of taking part in this pyramid scheme. We have only considered “active” distributors in these examples.
As you can see, the bottom layers perform very poorly, and because of this, most distributors drop out. In order for the top distributors to keep making their millions, they must continually recruit new distributors to replace those who drop out. If they do not keep recruiting, the pyramid scheme collapses while the top distributors make out with all the money by defrauding all the losers. Why Pyramid Schemes are Popular? Now after analyzing above the pyramid scheme, asking why pyramid schemes are popular is very legitimate. Greed is the only answer of this question. Scam artists know how greed works and all it takes is one con man to get the thing started.
Most pyramid people don’t envision themselves anywhere near the bottom layer of the pyramid. Even the greediest person on the planet would probably see that if one is near the bottom layer of recruits it will be very hard to get new recruits. They have to see themselves near the top in order to envision the immense wealth from minimal effort that is going to come their way. Disadvantages of MLM as A Business Model Limited “Warm Market” MLM programs generally have you start by marketing to your so-called “warm market”. Your warm market is basically everyone you know: friends, family, colleagues, advisers, teachers, doctor, lawyer, neighbors, acquaintances and so on.
Takes Effort, Energy and Motivation Not only must you actively recruit your own direct downline, you must stay on top of them to ensure that they are actively recruiting and supporting THEIR downline. Remember, this is the way you make money in this industry. It’s all about leveraged income. So understand going in that this is a business that will require real effort on your part and sustained effort at that. But what in life that’s worthwhile doesn’t, right? Also, plan to have to motivate yourself. Ideally, you should be being “worked” by your upline to keep you on track but motivating yourself is YOUR job. Don’t expect someone to do it for you.
There are too many other motivated people out there for your sponsor to be working with. No territorial protection to prevent market saturation Though not normal for MLM’s, if reasonable territorial protection is not offered to participants in a given area, the program will ultimately collapse from market saturation. Recruiters promote the illusion of an ever-expanding market and of the potential for large payouts for virtually all new recruits. With unlimited recruiting in a given area, new distributors soon find it increasingly difficult to recruit more distributors. So unlike other corporate and small business arrangements, most MLM distributors wind up losing money. “Pay to play” feature
A related problem occurs when a distributor buys enough products to achieve a certain level of payout qualification and has to continually buy a certain minimum quantity of products to maintain that level. When they find they can’t sell them and finally quit, they are left with a garage or basement full of products. I and other observers have found this to be a common problem with MLM’s. As mentioned, MLM companies typically incorporate escalating incentives to purchase products (sometimes at initial signup, sometimes later) to qualify for ever- higher levels in the distributor hierarchy and/or for larger discounts on product purchases. It is sometimes referred as the ? ay to play? feature of a (product-based) pyramid scheme. Financial Commitment More likely than not, you will have to commit to purchasing a certain volume of product each month to remain eligible to participate in the program. Be sure you understand your monthly financial commitments going in. And, while you’re at it, make sure that what you’ll be buying is a quality product that you have a genuine interest in purchasing. Breakage Breakage is commission on sales volume that the company does not have to pay usually because a distributor has not met a specific qualification or there are not enough levels of uplines to pay out the full commissions, etc.
It has been said that companies with binary compensation plans live on breakage. All compensation plans have some breakage, but because binary plans usually only pay out on the weakest leg, there is almost always a lot of breakage. Many smaller distributors may never earn any commission if they have one very weak leg. Various qualifications can further increase breakage. This does not mean that the company does not pay out any commission on the sales volume. In a binary plan, your sales volume is usually also the sales volume of several people above you. The breakage simply helps the business builders to keep earning more commissions.
Profit centers Profit centers are like having distributorship more than one. It happens if any distributor opens either a 3-Business Centre or gets re-entry certificates to open new Business Centers. Usually each profit center must be qualified and you earn commissions as if they were separate. Since your other profit centers are placed in your downline under your first profit center, you can earn multiple commissions on the same sales volume. You may be thinking that sounds good. It is and it is one of the things that network marketers like about binary plans. However authorities don’t like this feature. There are no specific laws against it.
Authorities don’t see a need for one person to have more than one profit center, other than just to make more money. For some reason, authorities think that is a bad reason. Authorities think that one person should work on only one distributorship. Weak leg pay Most companies pay the commission based on the leg with the least amount of sales volume. Destructive Effects on the Lives of MLM Participants MLM Pyramid Schemes (PPS): The largest and most widespread of the pyramid schemes are those that disguise themselves as legitimate “Multi-level Marketing” (MLM) businesses. These schemes cause the greatest harm, affect the most people, and steal the largest amount of money.
They can involve millions of people, swindle billions of money. Because they mask themselves as “sales and distribution businesses” they unfairly compete with legitimate business. * MLM pyramid schemes require high levels of recruiting; they entice people to defraud their own families and friends. Consequently, the social harm can be greater, even greater than the financial damage. Your sponsor will probably ask you to make a list of 200 or so of these people and have you contact each and every one of them about your MLM program. Reactions to such an approach will vary. Close friends and family will probably humor you even if they have no intention whatsoever of joining your program.
Others who don’t know you well may be dismissive or even downright hostile to your approaches. Some MLMers have reported people crossing the street to avoid them when they see them coming! So you need a thick hide in this business. And think also about what happens if someone you care about DOES proceed with your program and loses money. Close relationships have been destroyed as a result. * More importantly, compromising with your own self-respect by promoting something you just don’t believe in. Not only will you be lying to your downline and prospective downline, you will also be lying to yourself. In the long-run, no amount of money can buy back your self-respect once you’ve sold it down the river. MLM pyramid schemes pretense as “independent business” they play upon and distort important values such as independence, initiative, entrepreneurship, and personal freedom. * MLM pyramid schemes make promises of extraordinary wealth to the participants, people can be induced to spend all their earnings, lose or quit their existing jobs, neglect their families and other relationships and take on great debt in the pursuit of the elusive “dream” they have been deceptively sold. * MLM pyramids operate as private “networks” outside the mainstream of business and normal social life. They are strictly hierarchical with uplines, downlines and charismatic “leaders. * They require loyalty and large commitments of time, and they persuade participants to avoid anyone (“negative”) who questions or critiques MLM. Consequently, MLM pyramid schemes can gain the power of a cult over people’s lives. * Such programs lead to inflated and unrealistic promises and inevitable market saturation. So pyramid schemes allow a few opportunists to take advantage of the ignorance and vulnerability of an unwitting populace—who fail to see that mathematically, only a few can succeed at the expense of failure and losses of the masses recruited into any given program. A brief case study on Destiny-2000 Ltd. Destiny-2000 Ltd. is one of the largest multi-level marketing companies of the world, and the largest in Bangladesh.
About 5 million Distributors have joined the company since its inception in December 2000. Having its corporate office in Dhaka Bangladesh, it has branches all over the country. This company was formed in 2000 by Rafiqul Amin, who worked in Canada for many years before he came back to Bangladesh in search of better fortune. Before assessing the viability of this MML Company, let us try to know certain things, which might have been still unknown or untold to Bangladeshi people and of course those who already put millions of Taka in this company. Any business venture is surely destined in making profit. This is the priority for any business unless the initiators of the project have any ulterior motive.
Destiny though is also continuing to collect millions of Taka from Bangladeshi people by showing their ‘Tree Plantation Project’ or similar other projects, it is extremely important now for everyone to assess what is going on with the public money this company has been receiving for years. Destiny started a vernacular daily newspaper few years back with the investment of few million takas. According to latest information, each month Destiny is losing at least 10 million Taka in this newspaper venture. In other words, annual loss in this project is exceeding Taka 120 million. The same group has recently purchased a satellite based television channel, which is again incurring loss of at least Taka 30 million per month. Annual loss in this venture will also cross Taka 360 million.
If someone will raise question as to why the promoters of Destiny are draining out public money in such losing projects, the reply will be simple! They want to use these media outlets as mere shields. Naturally the next question is, if Destiny is running legitimate business, why they need any shield at all? Destiny collected money from the people with the promise of significant annual profit. Now the question is does Destiny make huge profit every month, so that they can afford to waste millions of Taka in media? The reply is NO! Since there is no government monitoring of the activities of the Multi-Level Marketing companies in Bangladesh, no one really knows how much money any MML is collecting from the people and how much they are either investing or simply spending in bad projects.
Destiny has at least collected Bangladeshi Taka equivalent to US$ 500 million in past 10 years from the people, mostly by selling the idea of tree plantation at Chittagong Hill Track area in Bangladesh. If they have at least promised to give 10 per cent annual incentive to the investors against the amount of their investment then every year Destiny will owe Bangladeshi Taka equivalent to US$ 50 million to be paid to its ‘Customers’. On the other hand, it is also important to investigate the size of land, Destiny might have already purchased at Chittagong Hill Track area. According to experts, less than 300 trees can be planted on a land measuring 1 acre. It is learnt that the company has so far sold more than 2 million trees. Now the natural question is, does Destiny own at least 6,666 acres of land at Chittagong Hill Track area?
It is important to note that, average maturing period for a tree is minimum 12-15 years. So, even if Destiny starts paying incentives to the investors in the tree project from 2015, it will take at least few years finally to realize the fact of scam, if any. It is clear that, none of the investors of the tree plantation project were shown the documents of land purchase by Destiny, when the investors put their money in such alluring projects. It may also be mentioned here that, the agents of Destiny immediately received their ‘commission’ money from the company right after they succeeded in receiving any from the investor. And, as I said, any company, offering upfront payment of commission to its agents is at risk factor.
It is understood that, most of the MML companies are using the money in unauthorized money lending business against monthly interest of 2-3 per cent, while some of them are even engaging in illegal money laundering activities. It is even alleged that, some of the promoters of MML companies are putting their money in drug and arms dealings with the hope of making huge profit. I am not sure, if Destiny is also engaging in any such activities. But of course, one thing is clear. Destiny is wasting money is media projects for its own protection, which evidently give a wrong signal to everyone about the legitimacy of its activities as well as its very trustworthiness.
What happens to those people who invested hundreds of millions of Taka in this company, if the promoters will simply disappear in one fine morning? It is important for all those Multi-Level Marketing companies in Bangladesh to publish their annual report with specific information of how much money they collected from people and under which project. Then it should also be shown, how and where this investment was used and how much profit was accrued in every year. The companies should also show clearly the amount they are wasting in various promotional projects including media etc. There should also be clear indication of current assets [liquid and solid] of the companies.
This company follows hybrid-50-50-balance-binary-compansation plan which also is a pyramid Scheme according to our earlier discussion. Destiny-2000 Ltd. uses Binary Plan to distribute the commission among the distributors. Suppose you have sold two products to Mr. SAM & Mrs. SUE. Now they have become your distributors because of the system. So if they sell any product, then you will get the commission. Same thing will also happen to both of them. Most of their products are overpriced and not up to standard level of other regular brand products in the market. Nowadays they are selling books and CDs of Marketing training in overpriced rate for marketing their own products which is a clear sign of non-productive pyramid scheme.
They also have tree, real-estate and other business products which are declared as illegal products (those products cannot be sold by MLM companies) by the government recently. You can see their product list here: www. destiny-2000. info/price-list/1. html Government Regulation and Recommendations Millions of people have been harmed. Enough! Families and friends have been divided, communities disrupted. Enough! Billions of moneys in savings have been lost. Enough! Considering the illegal aspects of the continuing MLM business in Bangladesh, now the government has considered to move for better regulate MLM companies in Bangladesh. The commerce ministry has taken initiatives to increase accountability of business operations of multi-level marketing (MLM) companies.
The ministry has sent a letter to the Securities and Exchange Commission recently, asking for its opinion on multi-level marketing act – Direct Sales Law-2011 – in a bid to increase accountability of MLM business. The Bangladesh Bank early this year warned against investing in MLM companies that offer abnormal profits in a short span. The ministry also sought opinions from Bangladesh Bank, Institute of Chartered Accountants of Bangladesh, Institute of Chartered Secretaries of Bangladesh, Institute of Cost and Management Accountants of Bangladesh, Office of the Registrar of Joint Stock Companies and Firms, banking division of the finance ministry and the home ministry.
A draft law on the marketing strategy has already been formulated with provisions of prison, fines and cancellation of licenses if the MLM companies are found engaged in 21 types of businesses. In line with the draft proposal, the government will form a department, which will be known as ‘Direct Sales Directorate’ and a secretary will be appointed to regulate the businesses. * The MLM companies will have to be enlisted with the Registrar of Joint Stock Companies and Firms. * The secretary will have power to suspend licenses of the MLM companies and also halt their business if they are caught on charges of any wrongdoing. * The MLM companies will be allowed to pursue businesses under electronic marketing, pyramid selling scheme, networking marketing, tele marketing, door-to-door sale and mail order sale. If any company bypasses any provision of the act, they will be penalized and the board of directors of the company will face a jail sentence. * The MLM companies should not be engaged in 21 types of businesses including those of land, flat, shops, office space, insurance, leasing, cooperative, trees and lotteries. * If the license of a company is suspended and it is found operating business or engaged in sales of products, the government will freeze the company’s bank accounts as per the recommendation of the High Court. In another source of news in bdnews24. com, it is said that some 62 registered Multilevel Marketing (MLM) companies are now operating in the country, the commerce minister tells parliament.
Faruk Khan, in reply to a question from Abdullah-Al-Kaiser at the question-answer session on Sunday, said the Multilevel Marketing (Control) Act 2011 will soon be enacted in order to regulate the MLM companies’ activities. Mentioning the name of the registered MLM companies, the minister said the number of clients of only one of them, Destiny-2000, could be known, which is around 4. 5 million. It said investors can get deceived by these companies that come up with schemes offering 10 percent or more profits a month upon investments in gold markets abroad or foreign exchanges. On the following day, the commerce minister said a guideline to regulate the MLM firms will soon come into effect. ?An investigation is underway as we’ve got some complaints against some companies.? he added. Conclusion
In the report I have tried to show when an MLM company be considered as an illegal pyramid schemes using different information from different sources, and we already know that Pyramid schemes are illegal in many countries including Albania, Australia, Brazil, Bulgaria, Canada, China, Colombia, Denmark, the Dominican Republic, Estonia, France, Germany, Hungary, Iceland, Iran, Italy, Japan, Mexico, Nepal, The Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Romania, South Africa, Spain, Sri Lanka, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom, and the United States. Here my observation, after analyzing various legal and ethical aspects, is that to be successful in most MLM’s, a person must first be deceived, maintain his/her own self-deception, then involve in deceitful recruitments and then deceive with downline participants.
In a typical MLM company, greed and the desire for time-freedom are the primary motivators of the serious participants; magic and uniqueness are the necessary ingredients in the products; and deception and duplication are the mechanism for growth of the pyramid. So considering the all disadvantages and various relative points discussed above, I must recommend for the banning of MLM business in Bangladesh, because most of them are offering illegal pyramid scheme in disguise of MLM businesses. Reference 1. When Should an MLM or Network Marketing Program Be Considered an Illegal Pyramid Scheme? By Jon M. Taylor, Ph. D. , 2000, Consumer Awareness Institute. 2. www. thedailystar. et/newDesign/news-details. php? nid=192708 3. bdnews24online. com/2011/02/06/bangladesh-govt-works-on-policy-to-regulate-mlm- companies/ 4. www. atg. wa. gov/pressrelease. aspx? &id=4496 5. en. wikipedia. org/wiki/Pyramid_scheme 6. www. dip-pro. info/23094waleem=id-scheme 7. www. coachrovel. wordpress. com/2009/11/11/multi-level-marketing-mlm-binary- compensation-plan-–-pyramid-scheme 8. www. destiny-2000. info/ 9. moneyterms. co. uk/pyramid-scheme/ 10. money. howstuffworks. com/pyramid-scheme3. htm 11. www. facebook. com/group. php? gid=116569834487 12. www. youtube. com/watch? v=XZP1UAXfeWg 13. www. weeklyblitz. net/1011/mml-or-multi-level-fraud#comment_submit