Multi Level Marketing: Why is it not sustainable?

by Guruprasad

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Why do the business schemes like Amway/GoldQuest/Herbalife etc always collapse, with the 1% forerunners/organizers absconding and rest 99% of the members crying foul?

“Dude, I am working on a part time business for additional income and would like to invite you also to the same. Are you free this weekend?”

Havent you heard this dialogue from a friend before? It turns out to be a typical “Multi Level Marketing” in which you are supposed to pay a certain amount to become a member (and maybe get a gift which costs much lesser than the membership amount) and later refer it to your friends and convince them also to join it. In the process, when the friends pay the membership amount, you are awarded with some partial amount and when they in turn refer to their friends, they will be awarded some money, and since you are their “parent”, you will also get some money. As the process continues recursively, you “end up having a source of unlimited passive income!!”. Although it sounds very rosy, it is practically not possible to sustain this business model. It is unfortunate that most of the aspirants who get their hands burnt in such schemes are ambitious people from the software industry who actually have very good analytical minds but fail to make use of it to evaluate these models.

Such a model can be represented as a binary tree with each node representing a person and the 2 children nodes under it representing the referred friends. It is also called “Pyramid scheme”. As you would have realized or the organizers might have suggested, in order to just recover the money that you have spent for membership, you need to have atleast 3-4 levels under you and only the levels beyond that will start fetching you some passive income as and when new members join. Just recollect the formula for number of nodes at the “n”th level of a binary tree. It is 2^n (2 power n). We shall use this formula in the following analysis.

Usually in such sophisticated and well orchestrated system, all the investors & family members of the organizers (forerunners) place themselves into the tree such that they form the initial 7 or 8 levels at the top. With just 200 members, their tree is already 8 levels complete. Next, they start referring friends who form the 9th level. The 9th level requires 2^9 = 512 members. Now the exponential function starts showing its real colors. For the 10th level, you need 1024 new members. By the time it reaches your neighborhood, it might be in the 15th level and that level alone has 32,768 members. To add another level into it, it needs 65,536 new people. Just to give you an idea, in order to add the 25th level, you need 33 crore new members into the system and you already have 33 crores inside the system (number of nodes in a tree of height N is 1 less than ‘2 power N+1’). By the 30th level, the entire population of the earth will be in the system and the last 3 billion people who just entered the system into the 30th level have nobody else to refer. Everybody they try to approach is already a member. The forerunners would have made huge amount of money by now and would go absconding, leading into a fraud.

The above narration is an ideal case. Not everybody can afford to become a member and not everyone who can afford would wish to become a member. So, such schemes collapse by the time it reaches 18th or 19th level itself. Dreams are shattered and friendships are broken.

There have been instances in the past where even autodrivers had sold their belongings (including their auto) and paid upto Rs 35,000 to become members of such scheme (GoldQuest). But as with any pyramid scheme, they had to bear the brunt of the binary tree’s exponential function and they became bankrupt. As expected, the organizers went absconding.
Several arrests were made and the scheme was banned:
http://www.hindu.com/2008/05/07/stories/2008050759840600.htm
http://articles.timesofindia.indiatimes.com/2009-01-06/chennai/28014737_1_cb-cid-team-gold-quest-international-agents

Inspite of it, several new schemes have again mushroomed and they try to target freshers from the software industry by tempting them to spend 5-10K, which is a relatively lesser amount compared to GoldQuest (Rs 35K). So, the next time a friend comes to you and says “Dude, I am working on a part time business for additional income” and talks about such Multi Level Marketing schemes, explain these concepts to him on a piece of paper and advise him also to stay away from such schemes. Losing money is bad, losing friendship is worse and being part of a fraudulent system is the worst..

Share it with your friends so that they dont fall for such traps later.

Here is the link to original article in facebook which has an ongoing discussion and debate in which you can participate using your facebook account:
https://www.facebook.com/photo.php?fbid=3477607908170&set=a.3401234758889.276079.1510418566&type=1&theater&notif_t=photo_comment

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