MLM - ' Might Lose your Money' has been around since the 1600's. Here is a very long winded article, full of math, about the subject.
Enjoy
Pyramids
I recently had a conversation with some folks about multi-level marketing. This has gained a recent resurgence. These schemes actually come and go in cycles. I remember they were popular about 20 years ago but then seemed to dissipate. Many economic trends occur in 25 to 30 year cycles. Essentially a new generation repeats the failings of the prior generation. Then the next generation does it again.
If you want to learn more about economic cycles, I would recommend the Great depression of 1990 by Dr. Ravi Barta. If you would like to learn more about the history of speculation, I highly recommend A Short History of Financial Euphoria by John Kenneth Galbraith.
So there are several organizations out there promoting themselves and the advantages of multi-level marketing, pyramid marketing, binary marketing, or what ever buzzword seems nouveau. In fact some reputable companies incorporate elements of multi-level marketing into their operation structure.
The standard company will incorporate this multi level strategy into their marketing efforts. Typically a sales person earns income from product they sell to customers. But they also receive a bonus on any sales generated by any sales people they supervise. Eventually with enough underlings this sales person is removed from the sales process and becomes a full time sales manager. He or she is put on salary commensurate with either their prior sales income or commensurate with the amount of income generated by their staff. Their compensation is enhanced by a bonus structure dependent on their group exceeding sales goals.
You can extend this metaphor to any typical business organization. Perhaps you work for a small firm. There is one owner and ten workers. The total staffing is 11. The number of levels (or depth) is 2. The span of management (or breadth) is 10. If each worker generates $30,000 in gross profit, the firm will earn $300,000. Generally the owner will retain 20% or $60,000, while the workers will earn 80% or $24,000 each. The owner does not contribute any work but contributes his capital. He or she is the one bearing the risk of loss. The workers are contributing their effort and time. Notice also that the owner earns twice what the workers do. It is common in most organizations for each higher level to earn twice what the average person below them earns.
Let’s extend this metaphor to another business. This business consists of a staff of 111. There is one owner. Under her are 10 managers. Each manager has 10 workers reporting to them. Let’s assume each worker generates $30,000 in gross profit as in the last example. In this case the workers will again have a salary of $24,000 each. The managers will earn $48,000 each. So what is left for the owner? From the total gross profit of $3,000,000. From this subtract the manager level salary of $480,000. This leaves $2,520,000. Next subtract the worker level salary of $2,400,000. This leaves the owner with compensation of $120,000.
So this second example has 3 levels or a depth of 3. It retains the breadth or span of management of 10. So by changing the levels from 2 to 3, the owner in the second case earns $120,000 versus the owner in the first case who earns $60,000.
You can see that this is simply a numbers game. It is based on the depth of the organization, the breadth of each node or branch in the tree, and on the retention percentage. The retention percentage or whatever term you like is the amount that is passed up the organization. In our examples the workers contributed 20% of their production to the next level up. The management level then passes 20% of their take up to the next level.
What does this have to do with multi-level marketing? In the scenarios I have presented each level worked for the company. They received a salary and benefits. In the case of the sales organization, the sales people would get benefits and commission and perhaps a base salary. What distinguishes multi level marketing from a basic corporate structure is who is bearing the risk. In some cases the bottom level recruits actually contribute capital, time, and their contacts. The organization only contributes “the great idea” whatever that might be.
Now let’s run through an imaginary multi level or pyramid scheme. I start a company called Journal for Understanding Novel Knowledge. I create a product of nominal value. Perhaps it is simply education material or self help package. Let’s assume the cost of the product itself is minimal. I then sell this product (J.U.N.K.) to ten people, Level 2, for $100 each.
Round One:
Level 2 has spent $1,000 or $100 each
Level 1 has made a gross profit of $1,000
Total $0
I then offer each of these customers the opportunity to distribute this product to their friends and family. They can sell JUNK for $100. Once they make a sale, they will pay me 20% or $20 for each sale. My condition is that they must make 10 sales no matter what.
Each of these customers is now JUNK Consultants II. They go forward and do sell 10 JUNK to their friends and family.
Round Two:
Level 3 spent $10,000 or $100 each
Level 2 generated $10,000 in sales or $1,000 each
Level 2 pays Level 1 $2,000
Cumulative Results:
Level 3 -$10,000, $100 each
Level 2 $7,000, $700 each
Level 1 $3,000
Total $0
Now I call a meeting of Junk Consultants II and tell them to pass along the same opportunity to their new customers. Of the 20% that they receive, I will receive 20% of that.
Round Three:
Level 4 spends $100,000 or $100 each
Level 3 generates $100,000 in sales or $1,000 each
Level 3 pays Level 2 $20,000
Level 2 pays Level 1 $4,000
Cumulative Results:
Level 4 -$100,000 or $100 each
Level 3 $70,000 or $700 each
Level 2 $23,000 or $2,300 each
Level 1 $7,000
Total $0
Then I call another meeting of Junk Consultants II. They call meetings of Junk Level Consultants III. Of course of the 20% that Level 3 receives, they will pass 20% to Level 2, who of course will pay me 20% of that.
Round Four:
Level 5 spends $1,000,000 or $100 each
Level 4 generates $1,000,000 or $1,000 each
Level 4 pays Level 3 $200,000
Level 3 pays Level 2 $40,000
Level 2 pays Level 1 $8,000
Cumulative Results:
Level 5 -$1,000,000 or $100 each
Level 4 $700,000 or $700 each
Level 3 $230,000 or $2,300 each
Level 2 $55,000 or $5,500 each
Level 1 $15,000
Total $0
Now we’ll just continue the math for each successive round.
Round Five
Level 6 spends $10,000,000 or $100 each
Level 5 generates $10,000,000 in sales or $1,000 each
Level 5 pays Level 4 $2,000,000
Level 4 pays Level 3 $400,000
Level 3 pays Level 2 $80,000
Level 2 pays Level 1 $16,000
Cumulative Results
Level 6 -$10,000,000 or $100 each
Level 5 $7,000,000 or $700 each
Level 4 $2,300,000 or $2,300 each
Level 3 $550,000 or $5,500 each
Level 2 $119,000 or $11,900 each
Level 1 $31,000
Total $
Round Six
Level 7 spends $100,000,000 or $100 each
Level 6 generates $100,000,000 in sales or $1,000 each
Level 6 pays Level 5 $20,000,000
Level 5 pays Level 4 $4,000,000
Level 4 pays Level 3 $800,000
Level 3 pays Level 2 $160,000
Level 2 pays Level 1 $32,000
Cumulative Results
Level 7 -$100,000,000 or $100 each
Level 6 $70,000,000 or $700 each
Level 5 $23,000,000 or $2,300 each
Level 4 $5,500,000 or $5,500 each
Level 3 $1,190,000 or $11,900 each
Level 2 $247,000 or $24,700 each
Level 1 $63,000
Total $
Round Seven
Level 8 spends $1,000,000,000 or $100 each
Level 7 generates $1,000,000,000 in sales or $1,000 each
Level 7 pays Level 6 $200,000,000
Level 6 pays Level 5 $40,000,000
Level 5 pays Level 4 $8,000,000
Level 4 pays Level 3 $1,600,000
Level 3 pays Level 2 $320,000
Level 2 pays Level 1 $64,000
Cumulative Results
Level 8 -$1,000,000,000 or $100 each
Level 7 $700,000,000 or $700 each
Level 6 $230,000,000 or $2,300 each
Level 5 $55,000,000 or $5,500 each
Level 4 $11,900,000 or $11,900 each
Level 3 $2,470,000 or $24,700 each
Level 2 $503,000 or $50,300 each
Level 1 $127,000
Total $ 0
So now we have gone through seven rounds and one trillion dollars in sales. Let’s see what has happened. The genius that started this company has reached a profit of $127,000. His costs were minimal. His time commitment was simply to launch the product and get the ball rolling. Notice how his cumulative profit progressed.
Level 1 Owner
Round - Net - Cumulative Profit
One $1,000 $1,000
Two $2,000 $3,000
Three $4,000 $7,000
Four $8,000 $15,000
Five $16,000 $31,000
Six $32,000 $63,000
Seven $64,000 $127,000
How about those that got in early? They also fared pretty well.
Level 2 per individual
Round - Net - Cumulative Profit
One -$100 -$100
Two $800 $700
Three $1,600 $2,300
Four $3,200 $5,500
Five $6,400 $11,900
Six $12,800 $24,700
Seven $25,600 $50,300
Level 3 per individual
Round - Net -Cumulative Profit
One $0 $0
Two -$100 -$100
Three $800 $700
Four $1,600 $2,300
Five $3,200 $5,500
Six $6,400 $11,900
Seven $12,800 $24,700
But the benefits decrease the later you got in.
Level 4 per individual
Round - Net - Cumulative Profit
One $0 $0
Two $0 $0
Three -$100 -$100
Four $800 $700
Five $1,600 $2,300
Six $3,200 $5,500
Seven $6,400 $11,900
Level 5 per individual
Round - Net - Cumulative Profit
One $0 $0
Two $0 $0
Three $0 $0
Four -$100 -$100
Five $800 $700
Six $1,600 $2,300
Seven $3,200 $5,500
Level 6 per individual
Round - Net - Cumulative Profit
One $0 $0
Two $0 $0
Three $0 $0
Four $0 $0
Five -$100 -$100
Six $800 $700
Seven $1,600 $2,300
Level 7 per individual
Round - Net - Cumulative Profit
One $0 $0
Two $0 $0
Three $0 $0
Four $0 $0
Five $0 $0
Six -$100 -$100
Seven $800 $700
Level 8 per individual
Round - Net -Cumulative Profit
One $0 $0
Two $0 $0
Three $0 $0
Four $0 $0
Five $0 $0
Six $0 $0
Seven -$100 -$100
The other item to notice is the depth of the organization. While we have kept the breadth at 10 recruits per JUNK Consultant, the organization has grown as follows:
Number of people at each level at different rounds
| Round | Level1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | Total Number |
| I | 1 | 10 | 11 | ||||||
| II | 1 | 10 | 100 | 111 | |||||
| III | 1 | 10 | 100 | 1,000 | 1,111 | ||||
| IV | 1 | 10 | 100 | 1,000 | 10,000 | 11,111 | |||
| V | 1 | 10 | 100 | 1,000 | 10,000 | 100,000 | 111,111 | ||
| VI | 1 | 10 | 100 | 1,000 | 10,000 | 100,000 | 1,000,000 | 1,111,111 | |
| VII | 1 | 10 | 100 | 1,000 | 10,000 | 100,000 | 1mil | 10mil | 11,111,111 |
So after 7 rounds we have a depth of 8 levels. We have reached an organization size of over 11 million people. If we continued for 10 rounds, our organization would reach a size of 11,111,111,111. This 11 billion member organization would exceed the population of the earth.
Summary
You may have noticed a few things from this analysis. First, that you still do not like math. Second, if you are the one to start one of these schemes, you will do very well. Third, that you can increase your profit by expanding the breadth or number of offshoots per individual branch. Fourth, that you can increase your profit by increasing the depth or number of levels in the organization. Fifth, if you are not the one starting the organization or getting in very early, you will not make much money.
Questions
If you are presented with one of these opportunities, try to ask how steep the organization is already. If there are already three or four levels above you, it is too late. Try to ask what the initial and ongoing investment is. I could have increased my profit in the above example by charging membership or renewal fees to each JUNK consultant. Try to ask what products you have to buy. I could have increased my profit in the above example by selling monthly updates to the Journal and making the purchase of the updates somehow mandatory. Try to ask what percentage of the income you generate goes to your manager or recruiter. Ask how their compensation is determined. If they will not answer it should tell you something.