What’s the difference between a pyramid scam and a multi-level marketing scheme?
I occasionally check out supplements mentioned by clients or readers. It’s become a bit of a hobby because so much of the industry is inundated with overpriced, under-dosed supplements being peddled as part of various pyramid schemes.
Wait, they’re not called pyramid schemes anymore. That term is gauche these days. They’re multi-level marketing schemes. What’s the difference, you ask? Well, MLM schemes have completely different… names.
After examining the protein supplement from the Fairy Dust article and finding it to be a fairly impressive ripoff, I was emailed ingredient lists from a few other MLM schemes. The first one I looked into was a fatty acid supplement.
The supplement contained 2 grams of flax oil, plus 15 mg each of fairy dusted Coenzyme Q10 and Alpha Lipoic Acid.
It worked out to $1.43 per serving. To be fair, the Q10 is dosed at only half of the recommended dosage for healthy individuals looking for minimalistic heart health insurance, so if you were to double the dose on the product you could hit the bare minimum for Q10 intake. For major benefits or populations who actually need it, it’s still dosed at a fraction of what would be required.
Anyway, a 2 gram serving of flax oil can be purchased elsewhere for about 16 cents. (There are a number of good, major websites you can use for this, but my preferred standby is Nutrition Express because they list per dose price breakdowns on just about everything. You can also look into bulk sites like Nutrabio, TrueProtein or Cerebral Health which sell supplement raw ingredients in bulk.)
The lowest dosages I could find available from reputable manufacturers for CoQ10 and ALA were 30mg and 100mg, respectively. These worked out to 9 cents per dose for the ALA and 8 cents per dose for the Q10. That’s at just about 7 times the amount of ALA and twice the amount of Q10 found in the pyramid product.
Broken down to equal the same 15mg doses in the pyramid product, the Q10 would cost about 2 cents and the ALA would be less than a penny per dose. This is at retail prices. The manufacturers are paying much less than that.
So, when it’s all broken down, you’re paying $1.43 per serving for something that could be purchased elsewhere for 19 cents. Since Q10 and ALA aren’t actually sold in such small amounts from quality manufacturers, you would have to buy them in the previously listed higher doses, which would have the benefit of being clinically effective for a change. This would put you at 33 cents per serving, which still leaves the pyramid product at an unjustifiable 430% markup.
If you were actually able to purchase Q10 and ALA separately at such small dosages and create an identical product, it would place the pyramid pills at about a 750% markup.
That’s plenty of profit margin to sustain an entire chain of pyramiders.
How does this happen? How can a company ever survive by ripping people off so badly?
First, these operations proliferate most in small towns, where people are somewhat more insulated and place a greater amount of trust and reliance on personal social networks. The trusting personal relationship behind these one on one sales is the driving force behind them.
The networking concept is fundamental to these operations. If you follow their business policies you’ll constantly hear phrases like “get more people in so you can start making money; recruit, recruit, recruit; join new extracurricular activities to expand your circle, etc.”
Generally the sale of the actual products is a close second to the need to “bring other people into the business” so that they can sell the products down the line.
Think about the economics of this. Nobody in the chain, from manufacturing to marketing to distribution would be involved if they couldn’t profit from it. The more intermediaries there are between manufacture and sale the higher the profit margin must be to make a product worth selling. With these schemes, you’re adding several layers to the sale chain.
There is always a base cost, which is whatever is necessary to manufacture the product. Raw materials, manufacturing, bottling, labeling and transport cost a fixed amount and beyond that is variable. Every time you add a person to the sales chain, the sale price must go up or the manufacturing cost must go down by cheapening the ingredients.
Either way, it decreases the actual value of the product.
If you are being sold a nutritional product, particularly if it’s being pitched by your neighbor, who gets it from his co-worker, who gets it from the girl who works at a the shoe store, take a few minutes to break down the actual ingredients, reassure yourself that the words you can’t find anywhere else are bullshit marketing terms, and objectively evaluate the worth of the product in question.
What you’ll almost always find, in the rather unlikely event that the supplement in question is actually something you need, is that you’re much better off getting the same thing elsewhere for a fraction of the price.