Friday, June 08, 2007

Are Pyramid Schemes (Questnet, GoldQuest) Easy Way to make Money???

During my engineering days, I immediately rejected the idea when one of my friends tried to make me a member of a pyramid marketing scheme - a new way of making easy money without any sweat or hard labour. But most of my friends who joined it either burnt their fingers or were just able to break even.. that too after efforts and persuasion that could have easily turned around a mountain... :) To hide the fact that they have made a wrong decision(against the advice of a few level headed friends), they usually came out with a reply that they learnt salesmanship – a useful business skill.


This was something that was bygone. But when i recently heard about a similar scheme from my friend in Bangalore, with a initial investment of Rs. 30,000+ [During my engineering days, it was Rs. 5,000/-], i knew a post was long overdue.


"A pyramid scheme (also known as "Pyramid Scam") is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered. " - From Wikipedia


In the scheme for which i was approached in 2003, I was asked to pay an initial payment(Rs. 5000/-) to become a member of this group. Then for every pair of nodes/members joining underneath me, I would receive Rs. 1000/-. It is easy to explain this with a diagram.

For every pair of identical colour nodes joining under Person No - 1, he collects a thousand. You get a thousand rupees even when an identical pair is joined at the thousandth level. So if u were able to join a few members underneath you, then their efforts would ensure that u get a pay check ever week. It looks simple and easy but the trouble starts when u find that others are not as willing as you to join this scheme.

How is it financed?

If you look at the diagram, the business works in a very simple logic. New members always pay for the profits of the old members. So the good part about these schemes is that at least a few members i.e. early joiners in the regions walk out with huge profits.


Why is it a scam?

  1. Great majority of participants lose money. You could have easily understood from the diagram that the schemes replicate a binary tree. One interesting property of binary trees is that the number of nodes with two children is always less than half the total number of nodes. So, no matter how many people join, more than half of them will lose money. In practice, in these organizations it’s not enough to have only two other people beneath you – to make a profit, you need more. So the number of people profiting is actually far fewer than half.

  2. Reports about Goldquest, a company that uses the pyramid marketing technique being shutdown in the countries - Ethiopia, SriLanka, India

But the worst part of this business is that, it makes you look at your friends, colleagues and relatives as potential sales targets rather than as people you love and respect. Another sad thing is that the yearly inflow of new graduates from various parts of India to the software cities - Bangalore, Chennai, etc. provides these companies potential fresh targets year after year.


P.S: If you want more details regarding these Pyramid schemes, Peter Jayaraj has a few posts on his blog - Digital observation - Label(Questnet).

20 comments:

Vimal said...

I didnt understand the logic behind it(despite the diagram)and why u said more than half of them lose money.
And I have one more doubt - do people actually sell anything through this method or is it just one mass enrolling? whats the use then?

asiftherock said...

Well, I was one of the many guyz who burned their fingers getting into it!!! I just enrolled without thinking properly & learned my lesson the hard way....

Coming back to the post, the concept is called Multi-level Marketing (MLM for short). Companies like Amway have had great success with MLM. You join associates under you & they do actual selling. Those who join as associates get a percentage of their total sales as commission & also get some revenue for making ppl join the program. But as long as sales is robust the model sustains

But there are many other schemes where they dont focus on the sales at all. They just keep focussing on adding people 'under you'. Infact they even tell: "Unlike Amway we dont require you to sell products. Thats a pain. All u need to do is make ur friends join under you!!!!!!" I was such a fool back then & the only lesson that i learned was to be careful next time whenever someone tells me that thers an easy way to make money...

Robin said...

@ Asif,
Pyramid marketing these guys follow though is similar to MLM, but both are not the same.. MLM involves selling of goods and most importantly is legal..

@ Vimal
Logic or Reason for more than half of them losing money..

We will take a binary tree..
A
B C
D E F G
for example B & C are children of A, D & E are children of B and F & G are the children of C..
Now we see that the nodes D,E,F,G dont have any children.. i.e out of 7, 4 dont have children.. The property of more nodes without children holds true for any kind of binary tree of any levels.. Joining 2 chldren under you is the first step to receive your first pay check(1/5 or 1/3 of you investment).. that means in any tbinary tree, there will be atleas half of them who would not have received any money from their investment..


Logic of the old scheme that people asked to join during engineering days..

Person A joins the scheme - deposits 5000 rupees.. Then when he joins 2 people - B & C under him(children in binary tree jargon - Only 2 people are allowed to join directly under you), he receives his first thousand rupees.. Then combined with the efforts of people who joined under him, he tries to join people under
them too.. So for example People - D& E and F & G join under Persons B and C respectively.. Now B & C receive a Rs. 1000/- each.. And A receive Rs 2000/- since D & F and E & G form a pair.. [something like If you superimpose tree under B & Tree under C.. D & F are above each other.. similarly E & G are above each other... so they form a pair.. For more people joining under D, E, F & G - A receives more money.... Hope you got the logic..

Sell anything...
There is no cross-selling involved.. That is exactly difference between Multi level marketing that companies like Amway follow & Pyramid schemes - these criminals follow..

Use - If your network is good and you can sell things to people[remember selling ice to eskimos], then you could easily make good money.. As in the earlier example, after some time Person A can stop working but he would still receive money because somebody in the lower levels are making sure they join people underneath them.. But it is disastrous to people's lives and the country's too..

Anonymous said...

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Anonymous said...
This comment has been removed by a blog administrator.
Abhishek said...

Dear Robin,
I read ur comments on Pyramid Kind of marketing and ur wise(??) decision of turn that down when u were offered one during college...Now I am just wondering how come u have got admission in IIM-I??

Without knowing anything about Pyramid marketing, how can u make such comments?

At one place u r telling that it's easy money, the other place u r telling that the amount of hard work which u need will turn the mountain... I expect more generous statement from a mental stable person ( if u r the one).

the problem with people like u is that u think that u know every thing and what ever u think is correct is correct. But my friend I am sorry to say that it's not true...
I am in one of this kinda business for last 2 months and I have earned the triple amount (abt 90K + Gpld Coin). But to earn this I work real hard and there is no free lunch.. How can u say that it's easy money?
Also, in one paragraph u said about making ur friends/relatives as target... My friend, it's not about making them victim but sharing the opertunity with them... Try to see things in proper manner..

Every one has his one limitation and everyone can't do this business...Those who don't access there capability and join this are the one who burnt there finger.... So, instead of being rude to system, u shld work with ur capability..

Like not all the cretor
Just remember one this: It's needs courage to Live...Anyone can die....

Like all the creature which can swim and are in Sea are not Fish…It may be mammal also..On the same line all the pyramid marketing is not bad..So, judge first and then decide…

Regds,
Abhishek

Robin said...

@ Abhishek,
Regarding my admission into IIM-I, I too wonder about it a lot of times.. As of now, settled that it is purely by God's grace..

My friends(so-called) when they introduced about this pyramid scheme told me that it is easy money.. But my later experience on seeing other members taught me it is not so.. [Please forgive me if i wrote in a way that it is misunderstood.. ]


Good to know that you were able to make a quite a lot of money through the scheme.. (You should be a good salesman/marketer)... But the fact remains there is going to be a lot many people (even more than the number of people like you) who are not able to recover even their basic investments... And remember atleast a few of this people would be in your friends circle(and in a few months they are going to think bad about you)...

Is it legal/ethical to run a business (which is based on greed of human kind) in which more than half of people are going to be losers???

Just because a business is able to provide money for a few people does not mean it is good.. We have to think of the common good for the society.. This is a business which given wings can cripple a whole nation's economy... [since we waster our time and efforts on adding members rather than doing any productive work]

Anonymous said...

Hi,
What u said about Goldquest way of marketing is 100% true.It is not just an unfair business illegal too.It has been banned in several countries incoluding Sri Lanka, Indonesia,Iran,Ethiopia,Nepal,bhutan etc...Their basic business concept is is based on fruad.We all know that the 'profit' they distribute is not made out of genuine business transaction.The principle of revenue recognision is completely ignored in this non-sustainable form of fraud business.

abhishek said...

Hey,

Sorry for the late reply as I have shifted to US some couple of months back and was busy in settling down here.

First my apologies abot the comment on ur IIm connection. That was just a kiddish act and I am sorry for that.
It's time to reply your comments:

Robin Said:Good to know that you were able to make a quite a lot of money through the scheme.. (You should be a good salesman/marketer)...
Abhishek: And that's the bottom lines for any business.. Every job/profession has there targer odience. If shahrukh is making money with his acting skills and If I also go there and start acting. But being a bad actor if I am not getting money then It's not the fault of SRK or Bollywood..Everyone has to access his/her quality.

Robin said:Is it legal/ethical to run a business (which is based on greed of human kind) in which more than half of people are going to be losers???
Abhishek Replied: Dost(and it's not so-called), ANy idea how many ppl take up CAT every year and How many actualy get a seat? may be 5% of the total number of applicant ( I am being very generous on numbers). That means CAT is fraud because only 5% people are getting seat and we should not try for CAT. My frnd, every business which are running in thsi world are almost having same story...Very few people make money but rest of them are just watcher..But here atleast half of the people are getting back there money...
So I am finding it ehtical and I am activly doing it though I am thousands of miles away from India..My team is working there...
Cheers,
Abhishek

Robin said...

@ Abhishek,
Nice to see ur comments after a long time.. And my wishes for ur stay in USA..

Yeah.. accept that - certain jobs are cut out for people of certain skills.. At the same time, just because i am good at stealing/murder does not mean i should be doing it.. These activities are not allowed because they are not suitable for the common good.. Similarly, any business which is unproductive to the economy and there is no exchange of goods and services is not suitable for common good.. I think pyramid schemes like Goldquest or questnet fall under this category...

Most of the people writing CAT are well aware of the percentage of people who enter IIMs.. Of the people who joined under you, to how much of them u informed that more than half of the people joining would not get their investment back??? .. [FYI.. CAT is not only for IIMs.. Lot of other colleges also use the CAT score.. ]..

If you are so sure the business is ethical, why don't u place an ad in a well respected daily??.. I m sure the returns from such an ad would outweigh the cost.. [Though i don't think any body is yet ready to face the legal issues arising out of it]

But the key thing in any business or marketing is that there should be an exchange... But what is the exchange taking place in pyramid schemes.. especially for people who cannot make up the necessary money..


My best wishes for your endeavors other than your business in Pyramid Schemes..

Anonymous said...

Hi Robin,
Get in touch with me if you really want to know how things work in what you so Called "Pyramid Schemes", I dont know what are you working as but, isnt everything works on pyramids... every big and small organizations work in this system.

I come from a background of more than 30years of business exp, and i found out this system much more interesting and profitable.
It all depends on "If someone can do it by oneself" as everyone in software can be Narayan Murty, Bill Gates lakhs and lakhs of then are in software but few dedicated and people with vision are successful. Which i feel you will also accept on.

I am not trying to convince you on anything but just sharing my knowledge.

Rds
Aanil
anilpk76@gmail.com

Robin said...

@ Anil,
Pyramid schemes can never be compared to software industry(or any other industry for that matter)... Yeah Only a few innovators/entrepreneurs succeed in the industry... But at the end of the day, those few result in creating wealth and increasing productivity, thereby leading to economic growth of a nation.. That is those few increase the value of money...

But, in pyramid schemes are zero sum.. where work done by people like you does not lead to increase in productivity or wealth of the nation.. What it does is redistribution of money from a majority(who are themself in need of money) to a select few.. Just because you are in that select few does not mean, the business is legal or ethical...

Thanks Anil for your comments look forward to know your thoughts and i m always open for discussion..

- Robin

Rahul said...

@Robin
This forum was a treat... and even more so for me.
I happened to visit a similar sort of "biz presentation".. duh.. through one of my fnds.
Since it was my first encounter with them..I just raised my doubts about how ethical the scheme really is.. and you have to believe it.. the person used similar CAT exam and blah examples up here in the forum.. i guess they are sorta becoming a template for the gold-"marketing experts" ;-).. good work done Robin..unknowingly i think you must be affecting th decisions of atleast a few.. so i just had to congratulate you.. cheers buddy !!

Anonymous said...

Sean-
Hi, I would like to add my comments to this forum. I keep hearing everyone put down network marketing etc. but do you really understand it?

Look at your company (software included) draw your organizational structure and see what the model comes out to be.

You will see that it is worse than a binary tree theory. I am a computer science graduate I have done discrete math and automata theory. If you know how to calculate this please go ahead

You see for whatever you make in your company per month the person at the top makes hundreds of thousands more. While they sit in meetings deciding what they will make you do, and how to reduce 'waste' (IE. your time in between work) you do the hard work.
I am a manager at a very reputable company (Fortune 10 company) and I know that I will always be working for them my whole life watch people fight and backstab to get to that one top spot.

My point is this. The binary model is actually more sound than the model followed by most companies.

All companies sell services or products you in someway inhance thier services and products, and believe me if your in sales you also get commissions quite like network marketing, but with less benifits.

As a note of caution, always look at what network company your joining, just as you analysis what job you get into. Is it worth it for you? Will you have the time to put into it to be sucessful? IT IS a LOT OF HARD WORK. Do you have the ability that is needed to succeed? If not don't join. I haven't heard of anyone being forced to do this.

Robin said...

@ Rahul,
Yeah! I totally agree.. My only hope is that people do a little bit of research(i.e. google) before investing their money.. They should know the positives and negatives of this business before they invest their money...

@Sean,
I am not against binary model as such.. But what i am against is the Goldquest and questnet that uses the pyramid schemes unfairly..

Yeah! In companies also, a select few's salaries outweighs the rest.. But this salaries is not coming from cheating somebody else (which happens in Goldquest & Questnet)...

Why Pyramid Schemes like Goldquest and Questnet are evil?
1. They are not legal
2. They are not ethical
3. If you r not good at sales, you cannot even take out your investment
4. It hampers the growth of a nation. It is like drugs.. If the majority of people start using it, it can single-handedly cripple a country's economy.

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abitu said...

facts are facts
opinions are opinions
well there is no easy money in the world unless one adopts a nonethical illegal way.
Having said that a person who is serious about making it big, cannot have the time to read through any blogs (basically opinions)and base his fate or success on them.
Its very important that he does his due diligence instead of going by opinions.
Last but not the least people who get into network marketing expecting easy money are mind fucks.They lack clarity of thought.
Network Marketing is the surest way to get rich provided One Works the buisness rather than read blogs looking for an answer to whether the biz works or not.

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