Multi-level Marketing—Clever but Potentially Deceptive
http://www.forbes.com/sites/antoinegara/2015/08/26/federal-trade-commission-calls-vemma-a-pyramid-scheme-that-preys-on-young-adults/
The Federal Trade Commission has recently moved to shut down Vemma, a company selling energy drinks, for using a pyramid scheme to allure distributors, most of whom are college students. The company has generated millions of dollars of profits while often yielding nothing to naive students, who spent hundreds of dollars on starter packs and pay monthly fees.
The story of Vemma illustrates the dilemma of multi-level marketing strategies. On the one hand, these strategies are extremely effective: oftentimes the salespeople use their own social network to sell the product the company offers, which easily forms a huge customer base. However, there is a potential downside because it can be misused as a pyramid scheme. In the latter case, there is no real, marketable product, but each new participant is offered an opportunity to earn a share of the revenue; thus, the participants have the strong incentive to perpetuate the scheme by dragging their friends, family, and acquaintances into this business. To meet the monthly obligation set forth by their superiors, participants have to tap into their own resources and some even go broke.
The reason that the pyramid scheme expands so quickly is that each participant wants to recruit as many new participants as possible. Many people found themselves under the searchlight of their distant acquaintances, who show up suddenly and start courting them on social networking sites. We can relate this to the concept of local bridge we learned in class: because the participants are so enmeshed in the scheme, they probably have exhausted all the resources in their close social circles, so they have to turn to people whose ties to them are very weak and whose close friends are not involved in the scheme. Thus, local bridges are important because they help the scheme to propagate itself and expand to more people.