Direct selling lets entrepreneurs build an organisation that brings customers to a company without any other distribution or marketing methods. The system lets people build a distribution channel using their own contacts. The business model is very effective and, when it's done professionally, the most ethical and moral one there is.
The problem is that far too often concepts pop up where we're offered fantastic opportunities to "invest" in everything from gold and silver to newly launched marketplaces with secret shares or cloud mining of virtual currency. The money here doesn't come from any profit margin, it comes straight from the people who've put capital into the structure after you. Doomsday prophecies explain that the only way to survive financially in the future is to invest in their company now. These are usually plain Ponzi schemes, or what we commonly call a pyramid scheme, and I'll explain why.
The idea behind direct selling is to build a distribution channel to get products out on the market. Many products reach people best through conversational marketing, because they need a walkthrough to explain the product's unique qualities. Other products don't work at all in direct selling, simply because the profit margins aren't there. In those concepts the whole point is to take advantage of the leverage of a sales organisation, no matter how the equation looks.
In serious companies there are always structural limits on how money is paid out, which means it doesn't matter when you start, it's about what you do with it. A consumable product that makes customers run out of a bottle, jar or box usually creates repeat orders. If you sell health products or cosmetics there's normally a buying price and a selling price. The price you pay as a distributor is, for example, 20% below the recommended price to the customer, unless the customer has been given some special offer on a subscription of some kind.
Most companies have a points system that keeps track of the value and margins on the different products. CV, Credits, QV, PV (Personal Volume), which means your own turnover. The reason different products carry different points is that the margins can be bigger on one product than another, so that one gets more points even if the price is the same. The points then measure, every week or month, how much turnover you've created, and that turns into money that's paid out.
Margins
If a can of Coca-Cola costs 10 kronor, my guess is that 2 kronor is production cost, 5 kronor is distribution and marketing costs, and the profit lands on the bottom line after other expenses. If we play with the idea that a serious direct selling company would develop a product like that, to be sold for 10 kronor, then in theory the manufacturing cost is the same 2 kronor. 5 kronor would go out to the organisation as commission, and the profit lands on the bottom line after other expenses here too, exactly as in the example above.
Can gold or silver in itself be a product that feeds an organisation within direct selling? The answer is no. It would be like building an organisation by selling 100 kronor notes. The value of the note is 100 kronor. There's no margin to raise the price. The only way to sell 100 kronor notes in order to feed an organisation would be to sell them for more than 100 kronor. That would clearly be a pyramid scheme, where the product is only there as an incentive to take part in the game. In other words, the price goes up so the compensation plan can be spiced up.
Pyramid schemes or Ponzi frauds
This is financial crime. Plain criminal games with money. Many people know the principle of pyramids, but Tim Sales has written a good article about Ponzi schemes here.
Some of these disguised pyramid schemes, the so called companies, come right out and say that "This product is worth 400 kronor, you pay 800 because we all add an administration fee to cover costs." What costs?!
They claim, of course, that the website, the digital material and the login to their virtual office costs 400 kronor a month, but there isn't a single serious company that charges for that. It's money the company needs to bring in to be able to pay out according to the compensation plan. A disguised pyramid scheme. Whether it's silver for 500 kronor or gold for 5000 kronor, there are no margins. The money comes from the people who made their "investments" after you. You might as well sell 100 kronor notes for 500 kronor each and claim there are expenses for running the pyramid. Something else worth studying is Robert Kiyosaki's colleague Mike Maloney when he talks with David Morgan about "leveraged gold & silver investments".
Imagine, symbolically, starting to sell 100 kronor notes for 500 kronor. Everyone can get really well paid (an administration fee of 400 kronor that goes straight out in commissions). If anyone asks why they're overcharging for their 100 kronor notes, the organisation is trained to answer "Never mind that, can't you see what a fantastic compensation plan we have, you only need to find two who do the same!".
If it's silver coins, there's an administration fee to feed the organisation. If it's gold, they've been clever enough not to send the gold bar home to you unless you pay an administration fee. They "store" it for you, which means they take in a whole lot of money to run the pyramid with.
Where does the money come from?
There needs to be a margin on products sold to external customers who buy because they want the product. 100% of those who buy gold or silver this way are part of the organisation, which goes against everything legitimacy means.
What does Direct Selling Sweden say?
Serious direct selling companies are members of the direct selling associations in the countries where they operate. There are only three reasons why a company isn't a member or doesn't want to be. 1. They're brand new on the market and haven't "got around to" applying for membership yet. 2. They know they don't meet the requirements for membership. 3. Their application has already been rejected. In most cases it's one of the last two. Direct Selling Sweden is relatively kind to companies applying for membership, but do call them and ask if there's a company you're wondering about.
What does Lotteriinspektionen say?
This is our supervisory authority (the Swedish Gambling Authority), which investigates illegal games in Sweden. A simple question will tell you whether they're investigating, or have even reported to the police, the company you're calling about.
Wouldn't it be better to buy gold or silver from a serious player, so they don't have to wait all those years for the investment to go into the black? The problem then is that they can't build an organisation. Then they don't get at the leverage. This is the definition of a pyramid scheme, with administration fees streaming up to the top. You might as well sell air.
In the next post we'll go through why cryptocurrency and cloud mining of virtual coins don't work in a direct selling organisation, and why you burn your credibility if you think they do.
