Why is business like prepaid Legal and YTB considered pyramid scams??

Answer 1

You can't just take the job and make money.
You need to sign people up to sell it also.
And they have to sign people up.
and so on and so on.
You spend all your time trying to recruit people for the company and you never make enough to make it worth your time.

http://www.ftc.gov/speeches/other/dvimf16.shtm
http://en.wikipedia.org/wiki/Pyramid_scheme

Answer 2

I wasn't aware Prepaid legal was considered a PS.

People call things a pyramid scam when the people in the program spend more time trying to hire new salesreps than actually selling product or services.

Let's say that you have a new guy named Joe in Prepaid Legal. He has a good service he can sell to people. However, he spends all his time recruiting salespeople A, B, C, etc. Then A gets active and recruits H, I, and J as salespeople. Pretty soon Joe has this big organization set up to sell the service, but they're all trying to get new reps and no one is actually selling the service. And if rep H actually sells the service, then A gets a commission and Joe gets a commission and everybody up the pyramid above H gets a small commission.

Makes you wonder if the service is really worth it if they have to pay commission to 10 different people when the service is sold.

Answer 3

First, the usual term is "Pyramid Scheme," although many folks consider most pyramid schemes to be "scams."

A Pyramid Scheme is, by definition, one that promises you rewards based on the performance of other people "below" you in the pyramid; illegal pyramid schemes are those that make unreasonable, unrealistic, or mathematically impossible promises.

For example, many "pyramid letters" would promise that if you sent $1 to each of the 7 people whose names and addresses are listed (or perhaps only to the top person), and then created a copy of the letter on which you removed the top name and added yourself at the bottom, and sent your letter to 7 people, then in a few weeks or months, you'd receive millions of dollars from the millions of people (7x7x7x7...) who got letters with your name on them.

These schemes are unrealistic if they expect all recipients to participate; they are mathematically impossible because after only 12 "levels" of the pyramid, there would be 13.8 billion participants (far more than the number of people in the world).

Prepaid Legal and Amway/Quixtar (and thousands of other "home-based businesses" that use a business structure that emphasizes the use of multiple levels of sales agents) is not a "pyramid scheme" because it doesn't make such absurd promises, but it is a "Multi-Level Marketing" (MLM) arrangement, in which participants receive rewards based on the sales activities of people whom they bring in at lower levels below them.

Many people consider MLM to be similar to pyramid schemes because they often project unreasonable earnings based on unrealistic assumptions about the number of people who can be "recruited" and "managed" at each level, and the level of activity by the people who are being recruited and managed.

My wife is a Creative Memories consultant, selling scrapbooking products; CM is a multi-level marketing company. If you actually read ALL their disclosure materials, you will find that despite frequent emphasis on "star performers" who earn lots of money, the average CM consultant actually sells only a modest amount of product each year (I think the average is less than $10,000 in gross sales; net profits are probably nearly zero, on average).

I believe that every MLM company operating in California (at least those requiring an initial payment or purchase in order to participate) is required, to comply with California law, to disclose the actual average sales and earnings for its consultants, as well as identifying the number of consultants who fall in various earnings "tiers."