What’s Wrong With Pyramid Schemes?

As I boarded my flight to Chicago Sunday night, I noticed a rather large contingency of travelers that were in a strangely good mood. As each one got on the plane, they were greeted with smiles and high-fives as they walked down the aisle to find their seat. Inevitably, one of them sat next to me and over the course of a 90-minute flight, they proceeded to tell me what all the fuss was about.

As it turned out, all of these travelers had come from a weekend conference and they were all affiliated with a company called ACN.  ACN—short for American Communications Network—is a multi-level direct sales organization.  Direct selling is a method of sales whereby one person directly sells a product or service to another person. The types of products sold are often everyday items, some of which cannot be purchased in the retail marketplace. For those that are available in the retail marketplace, buying them through direct sales can sometimes save you money but not always.  Many of us have had experience with direct selling (think Tupperware) and I’ve even done some direct selling in the past when I used to sell cutlery to help pay for college.

Multi-level sales organizations typically pay their salespeople in one of several ways. First, salespeople are paid a commission for every product they sell. Second, salespeople are paid a commission on every product that is sold by someone they recruit into the organization. This is sometimes referred to as multi-level marketing (MLM), but you probably know it better as the “pyramid scheme.”

What attracts some to this type of selling is the independence and flexibility that comes with it since you are technically your own boss. But for others, it may be the promise of extraordinary wealth, especially for those at the top of the pyramid. It’s certainly not instant wealth since you have to build your base over time but if you stick with it long enough, you can slowly build up a residual income stream that can continue for many years into the future—or so they claim.

Now pyramid schemes often get a bad rap but aren’t most companies structured as a pyramid in which most of the work gets done at the bottom while most of the wealth gets captured at the top? For example, when I was a financial advisor, I used to sell retail mutual funds.  Whenever I sold a fund, I would receive a commission and as long as my client kept money in those funds, I would receive residual income from 12b-1 fees.  The more assets I held under management, the more residual income I received but I wasn’t the only one receiving income from my book of business.  As my book of business grew, so did the revenue of the company I worked for.  The greater the revenue was, the greater the bonuses paid out to the top executives.  When you compared my income to theirs, who would you say is at the top of the pyramid?

I guess the point I am trying to make is that there really is nothing inherently wrong with this type of system but like most things, there are pros and cons.  For example, getting financial advice from an investment professional can help you build up wealth over time but paying for advice you don’t use can end up costing you money.  In the same way, buying something you use often at a discount through a direct-sales associate may be a good value but paying too much for stuff just because someone you know is selling it might not be.  Consider carefully what the person is selling before you pass judgment.  While I might not need another Pampered Chef spatula in my kitchen drawer, getting unlimited talk, text, and data for $47 a month might be just the ticket.

Here’s the bottom line: the next time someone invites you to a Southern Living, Stella & Dot, Amway, Herbalife, or Melaleuca party, don’t be such a hater.  The worst thing you’ll get is an opportunity to buy something you may not be able to get anywhere else (or at least not at that price).  At best, you may find a way to generate supplemental income while working from home. Now is that so bad?

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