# lawBlawg Legal news, opinions and analysis about MLM, pyramid schemes, ponzi schemes and other suspect investment "opportunities."

## Sunday, August 29, 2004

### Scamology 101: Introduction to Pyramid Scheme Math

Take a look at the following numbers. They represent the breakdown of levels in the 6x matrix shown in many MLM plans - such as Quixtar. At the end of the bottom line of each pyramid, I have included the number of persons that make up the bottom level and (in parentheses) the percentage of the whole pyramid that the bottom level makes up.

1
1 1 1 1 1 1 = 6 (85.7%)

1
1 1 1 1 1 1
6 6 6 6 6 6 = 36 (83.7%)

1
1 1 1 1 1 1
6 6 6 6 6 6
36 36 36 36 36 36 = 216 (83.4%)

1
1 1 1 1 1 1
6 6 6 6 6 6
36 36 36 36 36 36
216 216 216 216 216 216 = 1,296 (83.3%)

1
1 1 1 1 1 1
6 6 6 6 6 6
36 36 36 36 36 36
216 216 216 216 216 216
1296 1296 1296 1296 1296 1296 = 7,776 (83.3%)

1
1 1 1 1 1 1
6 6 6 6 6 6
36 36 36 36 36 36
216 216 216 216 216 216
1296 1296 1296 1296 1296 1296
7776 7776 7776 7776 7776 7776 = 46,656 (83.3%)

Mathematically, this progression could continue to infinity with the bottom level always consisting of approximately 83.3% of all distributors. Some might expect me to make some argument about those larger numbers at the end of each pyramid such as "the pyramid would outstrip the population of the world by the thirteenth level." I'm not making that argument. It isn't necessary. The reality of a pyramid scheme is that it is irrelevant whether it is possible to have exponential growth that would exceed the world's population. That clearly would never happen. By far the most important numbers in the above progression is the constant percentage that the bottom level of a pyramid scheme makes of the whole scheme - no matter how many levels you go and regardless of whether you look at the whole scheme, or any individual's particular downline - the percentage of the whole distributor organization made up of distributors on the absolute bottom level remains at least 83.3% in a 6X matrix and certainly the vast majority of participants in any pyramid scheme or MLM.

Here is the issue: since 83.3% of a 6x pyramid occupy the bottom level, one can determine whether an MLM is legitimate and ethical simply by determining whether - by doing what they are shown by their upline - a bottom level distributor will obtain a net loss or a net gain (after all expenses). If new distributors are taught to spend more than they earn from the scheme, then as a matter of mathematical certainty, at least 83.3% of all scheme participants will lose money. If, on the other hand, those at the bottom level are shown a way to make a net profit after expenses, then participants will generally make money.

The numbers prove the following maxim: An ethical and legitimate MLM will provide a system in which the bottom line distributor will show a net profit (gross income from sales of products minus all expenses).
And its corollary: An MLM system in which the bottom line distributors do not show a net profit is unethical and a cover for a pyramid scheme because participants can only recoup their investment through recruiting and the vast majority of participants will lose money.

Thus, the guiding measure in an MLM system is to minimize expenses and maximize gross income from sales for the newest distributors. These rules have a few ethical and business principles that naturally follow from them:

(1) An ethical and legitimate MLM never charges new distributors for training. If indeed selling the product can be profitable and the training works to increase the sales of products, then the MLM and the upline must be content to profit from their share of the increased sales - not from the purchases of training materials by the bottom line distributors. This will decrease expenses and help increase the net profit for the bottom line distributors (remember, they are always the majority of the sales force).

(2) An ethical and legitimate MLM always places the emphasis of its plan presentation and training on the retail sales of products to persons who are not participants in the "income opportunity" rather than on recruiting new members. This affects the other side of the balance sheet. Only by selling products (or services) to non-IBO retail customers can the bottom line show a net profit. Without the money coming primarily from retail sales, recruits will only be able to recoup their investment through recruiting. That is why retail sales are absolutely necessary for an MLM to be considered legitimate under the law. Ideally, the company's plan should be set up to give substantially greater rewards to those retailing the products than to their upline recruiters to emphasize sales over recruiting.

(3) An ethical and legitimate MLM will encourage its recruiting distributors to focus recruitng efforts on those potential recruits who have the desire and aptitude for retail sales and marketing. Of course, some people who don't belong will always get involved. That is not an excuse to take advantage of them, however. Nor is it an excuse to blame them if they fail. The blame falls on the MLM and its promoters for their failure in recruiting them in the first place. Remember, if you don't care who is recruited for the bottom line, then the vast majority of your MLM's distributors could end up being people who have no business in retail sales - to their detriment. Who is to blame when that happens?

YOU ARE!

• Absolute required reading for those involved with MLM and those that may be looking at MLM. Nice Work.

• Very nice article. I'm recommending this read to everyone getting into MLM. Thank you.

• I would disagree with the following comment:

You said, "The numbers prove the following maxim: An ethical and legitimate MLM will provide a system in which the bottom line distributor will show a net profit (gross income from sales of products minus all expenses). And its corollary: An MLM system in which the bottom line distributors do not show a net profit is unethical and a cover for a pyramid scheme because participants can only recoup their investment through recruiting and the vast majority of participants will lose money."

I would agree with both of those statements if they said "CAN show a net profit" and "CANNOT show a net profit".

In other words, whether someone makes a profit or not is not the litmus test for a pyramid scheme. The proper question is, "Do they have the OPPORTUNITY to make a profit."

Additionally, the math at the beginning of the post is based on the false assumption that a network marketing organization is triangle-shaped. If someone has built a downline of even 20 people in their group, they can tell you that -- in real life -- organizations aren't triangle-shaped. They're diamond-shaped.

In other words, a triangle-shape assumes that level two has 36 people one month....and then POOF -- they instantly have 216 the next month. Such garbage math doesn't show the natural progression that occurs as the bottom-most level is built.

In real life, an organization of 30 people will probably have 5-6 people on the front line, 10-20 people on the second line and then a handful on the third line.

And that's where the 83.3% figure blows out the window. It never exists other than on paper.

Overall I like the post and it was particularly well-thought out. I just don't agree with the assumptions that are presented as facts.

Tony Rush
http://www.RecruitMorePeople.com

• Thanks for the comments, Tony.

I agree that it would be more accurate to say that they "can" make a profit if they do what they are taught (rather than "will"). You first point is well-taken.

With regard to the hupothetical model for a pyramid, we always find ourselves between a rock and a hard place. These schemes are promoted with idealized, hypotheical examples so if you talk about how they are really structured (as opposed to how they are promoted) you get the response "well, that's not what the plan shows." So I dissect them based on what they tell people they should do. In reality, you'll see all kinds of shapes for pyramid schemes. In Quixtar LOS "Team of Destiny", it even looks like a straight line. That doesn't change the essential dynamic of the money flow that creates the problem. The problem remains that if it takes more than one person under you to offset your losses fromdoing what you are told to do, then it is guaranteed that MOST participants will lose money. Period.

• "The problem remains that if it takes more than one person under you to offset your losses fromdoing what you are told to do, then it is guaranteed that MOST participants will lose money. Period."

REPLY: I don't disagree. Which is why most companies have retail opportunities built in; so they never have to have ANYONE in their downline in order to make money.

Tony

• HOLY SMOKES! Yuo can't imagine how big idiot I am feeling, having mathmatics as my passion all life and yet I overlooked such a basic thing and got sponsored in Quixtar. I'm out but this is an eye opener.

Let me know if you need some photoshop help. I may gladely convert this into a graphic diagram.

• Feel free to use this model, I did a quick table of ur model.

http://imranaziz.net/mlm.html

Copy it, modify it, it's yours.

• I like the post titled 'Scamology 101: Introduction to Pyramid Scheme Math' because it exposes the ignorance of people who don't understand the basics of business.

Business owners don't expect they have a 'right' to make money. Instead, they understand that they have an 'opportunity'. And they know that comes with risks of loss as well as hope of profit.

Made up models of a failing business, or for that matter made up models of a successfully structured business, don't address legality no more than does a model of the universe explain ice cream!

The post rt raises some great issues, but there's an underlying idea which I think causes many non-business types to get confused.

Whether someone does or doesn't make money has nothing to do with whether a business is legitimate. There is no connection.

I think many people in America have swallowed the idea that they have a right to things when it's really an opportunity that's offered, not a 'right' to it.

No one has a 'right' to make profit, but everyone in a free republic like the U.S. economy should, and does, have the opportunity. I hope it stays that way, but that's a whole other topic, and a serious one, too, but i better stay on track here.

If someone joins an organization of people who use the Quixtar model to make money, they have no 'right' to income, but they certainly have the opportunity to make some money.

In the '6 who sponsors 6 and so on' model explained here the point that 83% will not make money is an interesting point, but it's flawed in that ALL of those people have the opportunity, but none have the 'right' to make money.

I know many people in Quixtar who make a profit before they sponsor anyone. Without this fact, a reader of this post could jump to the errant conclusion that all new IBOs lose money, but that's false.

The 6 X 6 X 6 example is a theoretical model and there are an infinite number of models that could be created out of thin air and put into a blog or on paper, but what's that have to do with reality?

Maybe quite a bit if it helps explain something, but it certainly doesn't explain whether a pyramid is legal.

It's based on the error that a lone IBO can't profit which is wrong, so the whole model is just that, a model of a team of people in which 83% are losing money.

It could just as well have been a model of 100% of them making money. Neither one would prove the legality of any organization or type of business. It's not the structure that creates income, although it certainly would help to increase the chances. Still yet, it's not THE determining factor.

Most people who enter college don't "make any money". In fact they spend a lot of money and time. Does that mean college is an illegal pyramid? No.

College is a place where you can invest years of your life and thousands of your dollars to learn mostly theory. Perhaps we should look at college as a scam?

Few succeed with what they learn there. Over 80% of graduates end up working in a non-related field to which they got their degree(s) in. I think there would be plenty of evidence to convict the college deans of a scam, don't you?

My bottom line is this: finding lots of people who failed in any business model has NOTHING to do with it's legality. I'd say it has more to do with someone's hurt ego because they failed at a business and now they want to keep others from trying it.

I often wonder why these naysayers attack legitimate businesses like Quixtar with illogical scenarios like this one.

One idea that's crossed my mind is that they failed at a similar business in the past and they can't accept the blame. So, they try to attack the business instead of accepting the blame themselves for their own failures. Or maybe they've confused Quixtar with the team they were with.

I believe their failure has more to do with either their own bad business decisions or the people they were mentored by than it does with a company that makes products and gives points out for purchasing them.

I'm at a loss as to why they might try to stop others from trying to succeed. I've considered the idea that they think they're warning people, but I can't believe that because they don't try to warn people about other systems which are full of large failures.

They're not warning people about the college scam, or the high per centages of people who fail at a job or who don't make it into the major leagues or the NFL, etc.

I don't see them down at the Little League field warning those kids who have a dream of one day playing in major league baseball that they should quit now while they can.

I don't hear them saying things like, "Avoid that kid, it's a scam! Why, do you realize your odds of ever playing with the NY Yankees is very low?"

Anyone have any ideas on why they would attack a legitimate business like Quixtar if it's not because of my guess? It's certainly not because of all the good the owners, the DeVos and Van Andel families, have done to give back to society.

It's certainly not because their products are bad. It can't be because they've had a positive impact on tens of thousands, if not hundreds of thousands of lives over the past 45 years.

What reason could there be for these attacks? Please, someone tell me.

Kurt

• Just curious, is it a right to take part in the profits of the Tool Business or is it an "Opportunity"?

By Dan, at 9/03/2004 09:34:14 AM

• "Just curious, is it a right to take part in the profits of the Tool Business or is it an 'Opportunity'?"

I don't know. I suppose it would depend on the tools system. If you get a contract that says you get to take a share of the tools profits then you might have a contractual "right" to them. Up until then, I think you'd be building your business with the hope of meeting the requirements so that you'd be given such a "right" to earn money from the tools.

• "What reason could there be for these attacks? Please, someone tell me. Kurt"

Massive evidence of financial loss for almost everyone involved in it and the claims made to them about how "NON-RISKY" this is, to get them involved. These on top of all the appalling violations of people's needs, hopes, dreams, and faith in trustworthyness of others...
(Check out some links provided above)

First of all, if you will allege that 80% of the people who graduated from college do something else, you need to tell your source.
Let's assume this is correct. What does it mean? It hardly means that college graduates who do not practice in their formal field of education absolutely fail to make a living. College education teaches you a certain discipline and a set of transferrable skills. So what if a mechanical engineer is planning production, which is a job formally for an Industrial Engineer? Does that mean the ME education was a waste of time and money? Or did it help this person make a living, and have a satisfying, DIGNIFIED career. It mostly guarantees that you'll be better of with a degree, any degree, later on in life than if you didn't have it. So it actually is an investment with a good chance of return.

Amway, on the other hand, gives you false hopes, deceives you, then takes your money.

A tiny example from the Amway IBO Guide (I have the Turkish version, this might not be the actual name for the US IBOs guide):

It says that you don't need any special skills to succeed. Then it goes on to tell you to approach people you don't know, in hopes of making them a sale, or recruiting them some day. Then tells you how you need to read peoples body languages during your demonstrations and presentations (Never mind that public speaking is a skill, or that it in itself is an enourmous challenge for many people) . You need to keep detailed, well-prepared records of your transactions (another set of skills). You have to educate your IBOs (not everyone can teach), reherse presentations with your sponsor, then help your subordinates rehearse (coaching). The list goes on and on.

So.

• I would just like to make two simple points, since I am a current Quixtar IBO.

1. The math you provide is logically correct, but unfortunately were not dealing with logic, were dealing with people. People are unpredictable, which is the challenge.

How can I prove to you all, that Alticorp/Amway/Quixtar are not pyramids?
EASY....

The guy that gets sponsored below me 20 deep, can make 10000 times more money than me. This FACT right here make all arguments about pyramids MOOT. END OF DISCUSSION.
You can't do that in a pyramid.
Take for example a guy working for a traditional company, the janitor, cannot reach the pay of the ceo based on his efforts, unless he spends 100,000[this doesn't include continued education] dollars on an education, and about 20 years of his life for the experiance that would be necassary to attain such a postion.

I will spend about 2000 a year on tools, and seminars, buy only products I need, and sell some retail also. IF I get off my patoot and WORK this business I will have a 100,000 income in 3-5 years, and not just income, but residual income...ooooh...new word...Whats that mr. FiredUpIBO? that means one day I am making money wheter I like it or not...ahhhh freedom...

2. I am in business with not only my best friend, but just about the best bunch of people I know. It is ok to have your hypothesis, but until you get sponsored, and WORK the system, you'll never know for sure.

Do you honestly think that all the major companies affilitatd with Alticorp[IBM, Gateway, circuit city, craftsman, etc..hundreds more...] would be in business with a sham???....use your head people.

This business oppurtuniy[I can't speak for any other oppurtunity MLM] will give you one gaurantee, and that is you will be rewarded according to your effort.

Peace of the Lord be with you all, and just "good luck" if your an atheist, and I wish you all the success you earn.

• "The guy that gets sponsored below me 20 deep, can make 10000 times more money than me."

This is probably the millionth time I've heard that particular bit of tapespeak. And this is the millionth time I will issue the same challenge in response: show me one statute, FTC opinion, appellate or federal court legal opinion that suggests that a "pyramid scheme" is defined by whether you can make more money than the person who sponsored you. Let me save you some time. There aren't any. On the other hand, this site is stocked full of legal auhorities for what actually is the definition of a "pyramid scheme." I suggest that, instead of spewing what your upline told you, you read what the law actually is for yourself.

"You can't do that in a pyramid."

Of course you can. Especially in a pyramid scheme with a "breakaway" compensation plan like Quixtar's.

"Take for example a guy working for a traditional company, the janitor, cannot reach the pay of the ceo based on his efforts, unless he spends 100,000[this doesn't include continued education] dollars on an education, and about 20 years of his life for the experiance that would be necassary to attain such a postion."

Got a source for the cost and time to become a "CEO"? Didn't think so. Moreover, what does that have to do with pyramid schemes?

"I will spend about 2000 a year on tools, and seminars, buy only products I need, and sell some retail also. IF I get off my patoot and WORK this business I will have a 100,000 income in 3-5 years, and not just income, but residual income"

Really?! What pin level would you be at that point? Diamond? If that's "residual income" why do so many diamonds fall out of qualification or quit? And while we are on the subject, how many North American diamonds started in Amway/Quixtar AFTER the name changed in 1999. I'll save you some more time - NONE - NOT A ONE! So your 3-5 year plan to riches has not been successfully accomplished by anyone in Quixtar despite having over a million people give it a try since 1999.

"2. I am in business with not only my best friend, but just about the best bunch of people I know. It is ok to have your hypothesis, but until you get sponsored, and WORK the system, you'll never know for sure."

Wrong. I will know for sure that it's a pyramid scheme regardless of whether you successfully recruit a lot of suckers into your downline. How will I know this "Mr. FiredUpIBO"? Because, unlike you, I know the legal definition of a pyramid scheme.

"Do you honestly think that all the major companies affilitatd with Alticorp[IBM, Gateway, circuit city, craftsman, etc..hundreds more...] would be in business with a sham???"

Uhhhh . . . dude, Quixtar is just an "affiliate" of these reputable businesses. They couldn't care less whether Quixtar is a sham. What they care about is the army of zombies coming to their sites through Quixtar links.

"This business oppurtuniy[I can't speak for any other oppurtunity MLM] will give you one gaurantee, and that is you will be rewarded according to your effort."

Baloney. Odds are, if you have the talent to make it in this cesspool of a business, you can make a lot more money doing something else with your talent and drive - hopefully, something honest.

"Peace of the Lord be with you all"

And also with you.

• Hi there!
I just happened to drop by your website and found that you're a quite an expert of MML.

I just joined a Binary MML this Monday, and found that recruiting people to the company isn't an easy job. I'm a newbie o this industry. Friends are scared off after knowing that i'm a network marketer... I didn't regret joining MML though, because I really believe it's gonna work someday, but definitely not now.

I now try no to be too excited to recruit people around me, because they might just think that i've become so brainwashed by the company. I'll just talk with people who have dreams, you know, just like me. And if they aren't interested, I'll go and promise wouldn't bother them at all.

Thanks for listening =) My name is 0516, I'm from the Philippines. Nice to meet you!

• I don't know if anybody reads/posts here anymore, but I felt compelled to write in my opinion, or better known as tapespeak. I've been a Quixtar IBO for several months and I can truly see the benefits of WORKING in MLM through this very reputable company. Now, LawBlog, the defnition of a pyramid scheme (since you never posted it) is "A fraudulent money-making scheme in which people are recruited to make payments to others above them in a hierarchy while expecting to receive payments from people recruited below them. Eventually the number of new recruits fails to sustain the payment structure, and the scheme collapses with most people losing the money they paid in." Wow, that's a mouthful. Now read up. In quixtar there are NO REQUIRED payments to any upline. The tapes and CD's are there for the IBO's benefit and yes, the up-up-up-up-up-upline does benefit from the sales but you know what, they deserve it. These guys have put together businesses through quixtar that create incomes of millions per month...these guys know what they're doing, and they have a right to share that information for money. Maybe we should complain about Donald Trump for selling books on how to be successful. That's all it is, a system that an IBO can use if he/she is unsure of how to build a stable business. Previous comments (I didn't remember the name of who) are extremely true, you will profit in proportion to how hard you work, and nobody below you is paying YOU anything but their respect.

MLM marketing will always be touchy, and as long as quixtar's around, there will be debate...but while it's here, I'm going to buy my toilet paper through them and make money doing it. This is not tapespeak, this is an opinion.

• SCANGER SAID "In quixtar there are NO REQUIRED payments to any upline. "

YOU ARE DEAD WRONG! Of course there are REQUIRED PAYMENTS in Quixtar. IMPLICIT! The products are the shill for that. Your upline gets an over-ride commission only when you and everyone else in his down-line buy products. And recruits are repeatedly told to become 'prosumers' - i.e. buy products for their own use and teach others to do the same, thereby generating commissions for the upline. Recruits are ALMOST NEVER told to retail products - obviously because the thought of retail selling would turn off most potential recruits.