How can such an old scam still be attractive ? The Ponzi scheme is not yet down.

Charles Ponzi

You've probably already seen a childhood friend pop up in your Facebook newsfeed who suddenly claims to have the solution to make money easily. The offer seems attractive, simple and safe. A friend even recommends it , so at first sight there would be no reason to be suspicious. But this "offer" is not insignificant and the way to earn money with this method is far from being quick. 

A well-crafted scam.

This scheme pretends to be a simple buy-sell business model, but is rather a fraudulent form of investment where people are lured in by word of mouth with the promise of a quick and easy return on their investment. Eventually, each 'member' is paid according to the number of people he or she has managed to recruit into the system. Like a pyramid, the higher up in the pyramid you are, the more profitable you are likely to be.... at the cost of those at the very bottom.

Such an organisation was initiated by Charles Ponzi, who was the head of a financial company in 1919 and who managed to attract more than 30,000 investors in a few months by promising them to double their investment in three months by merely buying stamps. 

This scheme is often driven by the lack of information and the relationship of trust between an already existing member, who is often a relative, and the newly recruited member. Obviously Ponzi scheme is illegal in most countries, however many "businesses" still manage to offer similar schemes and which are considered legal.  

Is multi-level selling more ethical, though?

In this case, a sponsorship system allows the recruitment of more and more collaborators in order to make a profit. The products are sold at the seller's home and he becomes a distributor in his own right, with each sponsor receiving a percentage of the sales of his godchildren.

The forerunner of teleworking 

However, a " starter kit ", which is often expensive - usually around 100 USD - is required to start a distributorship. The issue is that brands using multi-level selling often claim that it is their own customers who share an objective opinion of their products and advertising, in the same way that one would recommend a restaurant or a film to a friend. Is it possible to be genuinely objective if the aim is not to sell as much as possible but rather to sponsor as many people as possible? It becomes clear that the main focus is more on recruiting than selling. Facebook, Instagram and even TikTok videos promote the entrepreneurial or " Mom-boss " dimension.  As in the Ponzi scheme, the notion of a referral from a friend or relative appears to be one of the key elements of this economic model.

A legal system...

Back to the legitimate aspect, multi-level selling system is surprisingly considered to be legal. The biggest difference with a Ponzi scheme lies in the presence of real goods that are being sold. This means that the earnings come from both the recruitment of new brand ambassadors and the sale of the products. 

This system clearly benefits those at the top of the pyramid. Aimway, one of the most profitable MLM-based companies in the US, generated nearly $8.4 billion in 2019. In 2020, Herbalife worldwide net sales were around $5.54 billion

... and yet at what cost?

Although this type of scheme is legitimate, the ethics of such a practice inevitably leads to a situation where those at the bottom of the ladder are losing out.  Moreover, compared to working as an ordinary employee, even at the bottom of the ladder and at the lowest wage, there is no requirement to invest any money to earn a minimum wage. Nevertheless, this kind of business practice keeps on attracting young people especially given the success of TikTok in terms of "small business". We can fear a new upsurge of this kind of business model enhanced by the crisis caused by COVID-19.

Pauline M.

References :

Understanding a Ponzi Scheme: Victims’ Perspectives

Le marketing de réseau comment ça marche ?

Investor.gov - Ponzi scheme

The Case (for and) against Multi-level Marketing By Jon M. Taylor, MBA, Ph.D., Consumer Awareness Institute

Leader de la vente directe Amway annonce un chiffre d'affaires de 84 Milliards USD pour 2019

Herbalife net sales worldwide - Statista