How do pyramid schemes scam you?

I realize, or rather recognize, that one should never get involved in a pyramid “scheme”, but my conviction is based mostly on horror stories, and on the grounds that one just shouldn’t make unregulated investments, especially ones that promise big money in a short time for little effort. (When I hear or read a sentence beginning “All you have to do…”; I run.)

Anyway, I was just wondering about the mathematics of it: the reason why so few people get anything for their investment. I’m not explaining this very well, but perhaps it’s because I don’t understand what it is I don’t understand.

Also note, I’m not talking about scams that sell you a junk product, or where someone is talked into buying junk products, hoping to sell them and make a product. I’m just talking about the basic principle of “Send a dollar and add your name to the list”, and asking why that won’t work.

A pyramid scheme relies on new people joining to pay off existing members. Basically, the person who joins pay the person who joined before him, who in turn pays the people who joined before them.

They are illegal, but if you start one or are an early member, you will make lots of money. Everyone who joins after you, will pay you.

If you join late, it can become hard to find suckers to join. You may not make enough to cover what you had to pay to join. Then you lose.

The math is that everyone needs to get 1 dollar from x people (say 10 people to keep this really simple). As the letter/scheme starts out around the world, each mailing requires 10 recipients for the previous level to get their payback.
So the first mailing gets 10 people
the second gets 100 people
the third gets 10,000 people
the fourth gets 100,000 people
5th, 1,000,000
6th, 10,000,000
7th, 100,000,000
8th, 1,000,000,000

Whoops! by the seventh mailing almost one third of the people in the country are involved.

On the eighth mailing, we need 1,000,000,000 recipients to send money for everyone to get their \$10, but there are only 282,000,000 people in the country. The only way for everyone in the 8th mailing to get back the money they sent out is for a whole bunch of people who have already participated to get second and third and fourth letters asking them to pony up again. You could go ask everyone in the world for a buck, but at the rate we are expanding, how long will it be before all 6 billion people have already handed out their dollar and are now being asked for ore money? On the eighth mailing we already have 1/6 of the world’s population–with just a single mailing beyond that, 40% of the world will have to give out \$2 to keep the scheme moving.

No thread about pyramid schemes would be complete without mentioning Charles K. Ponzi, whose name has become synonymous with pyramid schemes.

http://www.mark-knutson.com

Thank you!

Of course, no discussion of pyramid schemes would be complete without a note and a nod to what happened in Albania.

An official Federal Trade Commission discussion of pyramid schemes, including the Straight Dope on Amway (still technically not an illegal pyramid scheme).
http://www.ftc.gov/speeches/other/dvimf16.htm

All the dollars being mailed around have to come from somewhere. In the simplest possible terms, the only way one person can make a dollar in these schemes is for someone else to send them that dollar. In an ideal pyramid scheme, everyone would end up receiving the same amount of dolaars they sent out (and being out their mailing costs). But in virtually every real world pyramid scheme, a few people collect more money then they send out and most people send out more money than they collect. And unless you’re one of the original crooks in the scheme, you’re much more likely to be in the latter group than the former.

The key problem with pyramid schemes is that there have been a few that worked for some people, like those of Avon and Tupperware and Shaklee. The fact is that even then most people lost a lot of labor for nearly nothing in return.

But the fact that they have stuck around makes all the others seem reasonable.

Actually, a Ponzi scheme is different from a pyramid scheme. In a Ponzi scheme, you take the money from the new investors to pay off the older investors. The older investors think you’re on to something, so they invest more.

For example, Investor A gives you \$100. The next day, Investor B gives you \$100. You take the \$200 and give \$150 to Investor A, saying the investment succeeded. Investor A now gives you \$1000. You use that to pay Investor B. Investor A and Investor B tell their friends and you’re off.

Of course, the key to suceeding with a Ponzi scheme is to get out of the country before the investors (and cops) find out.

With a pyramid scheme, the money is given to the investors one level above you. With a Ponzi scheme, it all goes through Ponzi’s hands.

DDG:

I should tell you that I am not an active Amway Distributor. But, I have been around the block a few times. I don’t want to whoop up a holy war or get this thread moved, but to say that Amway’s Sales and Marketing Plan is “technically not an illegal pyramid scheme” is like saying that Social Security is technically not an illegal Ponzi Scheme.

From the article you cited:

As a matter of fact, Amway’s Sales and Marketing Plan is currently the model the FTC uses to evaluate Multi-level marketing plans. They ask, “Is it illegal, or is it like Amway?”

The folks over at Amway may be hokey, trite and annoying, but they have a business model that works.

RealityChuck: Another important difference between Ponzi’s and Pyramids is that Ponzi’s have no product, while Pyramids do (according to DDG’s article).

You can have a pyramid scheme without a product - the chain letter idea of “send a dollar to the person who sent you this lettter, and send the letter to two more people” is a pyramid scheme.

The reason why pyramid schemes often do have a product involved, is that it helps to pass it off as a multi-level marketing scheme - but it’s usually just window-dressing.

[QUOTE]
*Originally posted by sdimbert *
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I suppose, but having paid for a few Amway products out of the desire not to disappoint a friend the main claim to fame Amway should be noted for is convincing people to pay
insane, far above retail prices for good to average consumer products. Products, that are not any different in quality or function than those available at a fraction of the cost in grocery stores.

I know people who are involved in Quixtar (an online offshoot from Amway) and a substantial portion of the money that changes hands is spent on materials to improve their sales skills, not on products. This is stuff like \$50 brochures, \$150 whiteboards, etc. They all claim to be making a lot of money on it, but I have my doubts.

Found a previous thread about Amway. I find this an interesting subject and I read the report in DDG’s link. I never even heard of Amway until the early 1980’s when I was in the military (the military seems to have it’s fair share of Amway-Tupperware-etc. prople). Their website, in the “information center” section, takes great pains to deny the “cult” thing. http://www.amway.com

Pyramid schemes work for very charismatic, group-oriented speakers. Y’ever notice how the rich ones can talk their butts off? They’re really slick. Basically they talk to large groups, selling an idea or a product that in itself is usually pretty decent. They SELL you the idea, that if you buy into their pyramid, the product will sell itself - you just need to show people, and those people need to show other people, etc etc ad nauseum. What you don’t realise is you’re a schmuck who couldn’t ‘sell’ a free vacation to Maui to an Alaskan. So the product doesn’t sell itself like you were led to believe, you get maybe two or three people to join up under you (which bolsters the big guys up top, but not you) and you eventually get tired of it and leave.

So to sum up, pyramid schemes work for people who can work a crowd. We can thank my dad for knowing this (you would think after the fifth or sixth time in a pyramid he would take a hint…)

broccoli!

The reason I am somewhat cynical about Amway is because my father-in-law and stepmother are Amway distributors (or “up-lines”), and I have plenty of opportunity to observe their “multi-level marketing” plan close-up. There is almost total emphasis on signing up new people for your “down-line”, who then give you a percentage of their proceeds. These new “down-line” people are then strongly encouraged, by word and example, to focus on signing up their own down-line, instead of on selling soap. My actual observation is that very little soap gets sold, that everyone spends all their time focusing on signing up new people to be their down-line, and “oohing” and “aahing” over the perks that their “up-lines” are receiving as rewards (trips to Hawaii, etc.), not for selling a lot of soap, but for signing up a lot of down-lines.

I have also had a bad first-hand experience with an otherwise nice and sensible church friend who only wanted to sign us up to be her downline, and ever since we declined, she hasn’t really spoken to us. It’s her problem, I know, but I think it’s the overwhelming corporate emphasis on this aspect that is troubling, and that gets them the DDG snide remark about “technically still not illegal pyramid schemes”.

My dad sold Amway door-to-door back in the 1960s, back when it was still just soap, and the company has become almost unrecognizable since then.

And my father-in-law, the Better Half’s dad, can work a crowd like nobody’s business. They’ve been to Hawaii twice.

sdimbert wrote: “…but to say that Amway’s Sales and Marketing Plan is ‘technically not an illegal pyramid scheme’ is like saying that Social Security is technically not an illegal Ponzi Scheme.”

Unfortunately, Social Security and Medicare do resemble Ponzi schemes in that money paid in by today’s workers is used to pay benefits to retirees. Their reserves are negligible relative to their long term liabilities. That was fine when the work force was rapidly increasing. In the last 40 or 50 years, the number of employed has probably doubled, since most women today have jobs.

Now that the number of workers has stabilized, future assessments will not be enough to cover the future payments. Something will have to give – either we will have lower benefits, higher assessments or substantial money will need to be taken from the general fund.

I hate to nitpick, but what you are describing is, as you said, “their” version of Amway’s Sales and Marketing Plan.

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No.

I’m sorry, DDG, but that is simply not the way the program works, for two reasons.
[list=1]
[li]You speak of a heavy emphasis on building a downline to the exclusion of retail sales. Amway’s rules include the “Ten Customer Rule.” It says, basically, that no distributor can make any money at all for any month in which he or she fails to sell product to at least ten different customers.[/li][li]You say that downline distributors “give a percentage” of their incomes to thier upline. Again, that is simply not the way the program works. Not a penny of the money earned by any distributor goes to their upline. Period.[/li][/list=1]

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Again - that is simply inaccurate. Upline Distributors get no awards or recognition for sponsoring new Distributors. Awards and recognition are given based on volume of product moved. That’s it. Period.

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That’s awful Your “friend” isn’t much of a friend. But, you can’t blame the corporation for the actions of an individual. And, your statement is inaccurate: there is absolutely no undue “corporate emphasis” on building a downline. All the corporation cares about is moving product. Any emphasis placed on building downline comes from upline Distributors (individuals) not the Amway Corporation.