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Differences between Direct Selling and Ponzi/Pyramid Schemes

Key Differentiators- Direct Selling and Pyramid/Ponzy Schemes

S. No Parameter Direct Selling Business Pyramid/Ponzy Schemes
Structural differences
1 Basic definition Marketing of product/services to the consumers generally from home or workplaces through explanation and demonstration by Direct Seller i.e. location away from the permanent retail locations. Can last indefinitely- as long as consumers continue to buy products Compensation is based on new participants, not on selling products
2 Driving objective High sale of product Emphasis is on rigorous enrollment of new subscribers/investors with an aim to collect easy money from new subscribers.
3 Nature of business opportunities offered Offers genuine business opportunities as they involve sustainable sales plan of goods Offers no real business opportunities as these schemes generally do not involve products or involve products which are illusionary or have no established market value
4 Cost of entry No or reasonable entry fee usually for valuable support and starter products Comparatively high
5 Plan/Scheme Plans are primarily based on the value of the sale of products and recognition of services for the sales support provided by the distributor Plans are primarily based on money paid new recruits, and not on product sale
Functional differences
6 Mandatory enrollment Enrollment of recruits is not compulsory for doing business as primary objective is sale of products Enrollment of recruits is compulsory for doing business as commission is based on fee from new recruits or solely from the act of recruitment of members
7 Underlying product Involves marketing of products under established brand names Either no products are involved, or else the products are a cover and are not really sold to customers
8 Buy-back/guarantee of product Highly competitive buy back guarantee to help ensure protection of Direct Seller and end consumer Products usually do not have a buy-back policy or it is not followed in practice
9 Inventory Products are supplied to meet demand and Direct Sellers are encouraged to hold minimal inventory and replenish as and when need arises. Further, modern logistics and fulfilment practices often permit ‘just-in-time’ delivery so that distributors do not usually need to keep extensive inventory In case products are involved, “Front Loading” is encouraged. Therefore, products are thrust upon Direct Sellers, irrespective of their ability to sell the product and the actual market demand. Further, such products usually cannot be returned or resold to the seller. This is also known as ‘Inventory loading’
10 Sales training Rigorous product and sales training is required There is no emphasis on product or product sales training
11 Exit option Direct Sellers joining the business can exit the business by returning the unsold inventory to the Direct Selling company Usually, no refund on exit policy exists
Return and potential benefits
12 Returns vis-à-vis associated risk Returns are dependent on the time invested and motivation of the Direct Seller which are generated slowly and tend to go up and down over the time depending on product sales. Thus, returns depend on the value of products sold, not on the number of recruits Returns are primarily consistent and are based on entry fee from new recruits wholly apart from any activity of the participants or products sales. Thus, returns are directly linked to the number of persons recruited to join the scheme. Early entrants make very large returns. Late entrants cannot make any return
13 Sales incentive Sales incentives are primarily delivered from sale of goods and are pain directly by Direct Selling companies through normal banking channels Incentives are based on recruitment of people rather than on sales. Payments are often made through members, and negligible payouts by promoters
Legality of schemes
14 Registration/Licenses These businesses are registered with local regulatory bodies in the countries of existence or obtain licenses under a prevalent law These schemes are unregistered and not affiliated to any government body having power of legal enforcement
15 Adhere to Code of Ethics Every salesperson has to abide by the Industry Model Code of Ethics e.g. Direct Selling associations, etc. Generally, no Code of Ethics at all
16 Secretive and/or complex strategies These business have written rules and regulations and give a clear disclosure of the entire marketing strategy right from enrollment to receipt of remuneration/fees These schemes usually do not have any written document imparting complete information and modalities of the scheme