Question

Topic: E-Marketing

Model For “internet Marketing" Opportunities?

Posted by steven.alker on 8/26/2008 at 1:46 PM ET 500 Points
Dear Experts

I’ve been investigating the new “Internet Marketing” business which appears to be a Get Rich, Recession Proof version of some of the old MLM schemes, but I’m puzzled, so I’ve turned to the forum to get some alternative views and see how you think these schemes actually work. Perhaps we can get some explanations as to how the originators, many of whom are now quite wealthy, are able to make their money.

For those familiar with this, please bear with me whilst I outline some background information and some figures so that those of you not familiar with these selling propositions can bring themselves up to speed before plunging into their answers

Most of us know what make the old scams of unsustainable pyramid selling and MLM tick. It is mathematical illiteracy. There is an interesting definition of unsustainable MLM (The type which requires later participants to recruit more people to the scheme than are particles in the universe for continued success!) it is:

MLM is unsustainable if the financial model for having a profitable business, the proceeds from which you can either completely or partly live off is not viable unless early on, you must recruit further resellers to secure an income acceptable to you. If you need a high ratio of new resellers to satisfied end-users the model is unsustainable.

So, for example if you decide that an income of $40,000 is going to be your goal and the product (Assuming you have a real product) gives you a profit of $100 per sale, you would need to make 400 sales to end-users who are satisfied customers before you need to even consider expanding your “Downline” to generate over-ride income.

Most schemes assume that you will recruit from the word go and often with “Conservative” conversion rates for recruiting re-sellers of “Only 1% of people you contact to sell to”. Few participants do the sums which revel that for the 5th tier of you downline, existing scheme members, starting with you, will have needed to contact approximately 1,000,000,000,000,000 people and fail to convince them to participate further, in order for you to fulfil the financial goals you sought when starting out.

Whilst that’s already greater than the world population by a factor of 200, their tier 5 members would in turn be trying to recruit from a pool of new contacts having tried and failed to sell to 10^30 prospects in total (That’s a 10 followed by 29 zeros and is the kid of figure which cosmologists use to talk about the number of particles in the known universe)

The new “Internet Marketing Opportunities” appear, on the face of it, to avoid this trap and have a model which looks much more linear than an exponential pyramid structure. I don’t think that it actually is and that’s what I’m seeking to clarify.

Firstly, “Internet Marketing” of this type usually involves selling an abstract service. If a product is involved, again it is usually a service by nature and those selling it certainly aren’t looking to make their pile by having thousands of happy customers, providing repeat business. They need further re-sellers who themselves need further resellers in order to prosper.

Having waded through about 10 fairly original schemes, the common factor is that the business model appears to be courses and material, promoted via the web and email, which customers pay for. In return they are taught how to teach further recruits, for a fee. The sole aim appears to be to recruit yet further prospects and teach them how to teach yet more people, er, to teach people to teach yet further people to teach people - - -

So the business of would be internet millionaires appear be to tech people to teach people to teach people ad-infinitum.

The model seems to work by exploiting the huge reach offered by the internet and email at low cost. Recruiting for customers and new re-sellers is by phenomenally long emails, offering “free” products as bonuses which consist of training material to train people to train people to- oh heck, that’s enough.

New recruits are encouraged to set up websites through which they conduct their business. Common themes are very long web pages, usually using black and red text and usually with links in them which are a call to action. The links to the same landing destination are usually repeated up to 5 times on a sales page. The emails sent out to members of the entrepreneurs’ lists also have many repeated links and they extol to wealthy lifestyle of the writer and extol prospective customers to get a slice of it by subscribing to the courses on offer. The courses will reveal the web-marketing “secrets” which will make them rich. Prices are usually relatively low and charges monthly - $27 and £37 a month are common for some reason.

The “product” is also offered to the chosen few (Usually from 20 to 30) by a lump-sum contribution, often for something like $997 for an accelerated programme. The authors always claim to sell out on these limited offers and come back, usually a month later with a new one. Of course the cost of participating is “offset” by the free gifts on offer which usually add up to something like £1997 were the purchaser try to buy them from a Web Guru.

As a consequence, the originators of these schemes score thousands of hits, when you search for them on Google, mostly from almost identical affiliate websites.

Here’s the main question. How do you think that the sales model works – how do the originators earn an income, an over-ride and a residual income from people other than the primary ones they gain from mailing and selling to their list? In fact the building of a suitable list is the main subject which the marketers use to sell their courses.

How is it possible to build a sustainable business which has no product beyond teaching people to build a list of further people who will pay to learn how to teach people the same thing? I’m almost tempted to try it out for myself so that I don’t need to work so hard for relative peanuts.

Over to you!

Steve Alker
Xspirt
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RESPONSES

  • Posted by michael on 8/26/2008 at 10:52 PM Accepted
    Steve,

    Run from anything that requires you to recruit to be successful. Find a company that has a product or service you actuall sell. They're all over the place. (If you e-mail me I'll send you a link to mine...but there is no incentive to recruit as commissions are only paid on products sold)

    Find a product that interests you and sell it. It IS possible...but internet marketing is needed. If you want to play around with what's out there...spend a few minutes on trafficswarm.com or some of the other swap sites.

    Michael
  • Posted by Markitek on 8/27/2008 at 12:09 AM Accepted
    I'm not smart enough to answer that question . . . but I sincerely enjoyed reading it.
  • Posted on 8/27/2008 at 8:03 AM Accepted
    You ask "how".

    The answer is greed. Greed drives and laziness is the fuel. Lazy people want something from little to nothing. That business model eventually fails.
  • Posted by Jay Hamilton-Roth on 8/27/2008 at 8:59 AM Accepted
    If you're interested on seeing what it's like on the "inside", consider the asked for fee your tuition. Ask lots of questions before joining, interview many affiliates, because once you've paid your $, you've lost your leverage.

    The originators might make a cut from any/all of the following: requiring a certain web host, registering a domain through them, selling the website template, providing website copy/videos for membership, etc.
  • Posted by steven.alker on 8/27/2008 at 2:12 PM Author
    Thanks for your early comments. Here are some observations from them and for Michael a bit of reassurance!

    Michael: I was only joking when I said that I was tempted to join in order to find out from the inside and to make $$$ for two and a half hours work a week/month/year.

    I set out to investigate these phenomena because a few of my friends have asked me my opinion of them as businesses to get involved in. One was the manager of a British FTSE 100 company who had recently been made redundant. I detected both desperation and hope in his belief that this might be a way for him to make money until he got a new senior position in industry. Once I ran over the maths and the figures as I saw them, he changed his mind, but he’s still not convinced that this is a con.

    He doesn’t think that it looks like a dodgy MLM scheme from its structure. The sad thing is that 20 years ago, I’d had to tell him that I wouldn’t be jumping to join his new “venture” flogging herbs or tea or wine where I too could earn £47,647 from a few hours a week work and I think that he wasted about £4,000 on stock.

    Don’t worry – I’ll not be joining in one of the new schemes, but I do expect to get some pressure applied because I am investigation the business of some very wealthy people and I’m potentially going to be critical of the probity of their schemes. It is more likely that I’ll get shot than sucked in!

    I’ll look at the site you mentioned, but whilst I’m not looking for one of these opportunities, it would be useful for me to refer people to valid business openings rather than see them work a pseudo entrepreneurial scheme to despair and failure.

    Markitek: Thanks for the compliment – we aim to please! Seriously though, your views would be welcome as it is not only the structure of these schemes that I am attempting to unravel but also to identify their appeal to the uninitiated.

    Sales Training: Sure, greed does come into the equation, but here it is dressed up in odd clothes such as altruism, professional training and there being no easily visible scam in operation. Anyone who lets their naivety and greed relieve them of a few thousand pounds through the Nigerian Email Scam, arguably deserves the cold bath that they get, but these schemes appear to bury the crime rather well and thus hook people who are business minded but don’t know what they are getting into. After all, it’s only $27.95 a month!

    Jay – there’s a lot to look at here – If I come back to you with some sites and some names off line should you care to dig deeper. I am refraining from naming any supposed Internet Millionaire Guru’s or identifying their sites on an open forum because if you Google their names along with Legal Action or Scam, rather than find thousands of blogs shooting these guys down, you find hundreds of blogs outlining the legal action the leaders take against people who “smear” them. After all, if you were receiving 10,000 X $27.90 a month, you too could afford good lawyers!

    It’s worth re-visiting the definition of an illegal pyramid sales operation and the reason why these largely shifted into MLM cams. Maybe you can spot the similarities.

    Pyramid selling did not involve a product. People would be urged to join a network of fellow entrapeneurs by paying a fee to the originator, They would then be expected to recruit further members, from whom the originator would receive a diminishing % of the fee from a growing number of participants. Here’s an example of the schem.

    Recruits are expected to send $100 to the person who introduces them.
    To participate, they must also send $20 to the person above them in the scheme
    They must also send $4 to the person above him
    And $2 to the persone above that one.
    Finally they pay $1 to the person at the head of the list.
    That’s $127 in total paid to 5 different people.

    Only when that is done are they “allowed” to recruit their own 20 new members, who will all mail them $100. They in turn are then expected to recruit a further 20 people
    Every time a new tier is added, the names further up the pyramid receive a diminishing amount of money from an exponentially growing number of people who have joined.

    It all falls apart when the market for suckers is saturated or the scheme requires more participants than there are people on the planet in order to continue.

    Here’s the numbers and the cash that the person in tier 1 will earn as his downline grows.

    He’ll get $100 X 20 from the people who he recruits. – That’s $2,000

    He’ll also get $20 X 400 from the 400 these recruits will in turn recruit. That’s $8000

    Then he’ll get $4 from the 8,000 people these guys recruit. That’s $32,000

    Then he’ll get $2 X 160,000 from the 160,000 that these guys recruit. That’s $320,000

    Finally, he’ll get $1 X 3,200,000 from the 3,200,000 who they recruit. That’s $3.2 Million

    Total earnings are therefore $3,526,000 for an outlay of £127! Most schemes actually cut off at the 4th tier since that’s where there are 5 names including yours on the wider drag, but that’s still $362,000. Maybe the $3.2M figure is too big to be credible!

    Actually, it’s in the originators interest to keep the length of the list manageable, because of the volume of people who need to be prospected to for each new entrant to get 20 idiots. Say you have to canvass 1000 people to get 20 that are no great shakes; they’ve already sent you $2,000 so you are in profit.

    But what about the next tier? – What are the prospects for your recruits? They each have to canvass 1000 people. That implies that in total they’ve talked to 20,000 prospects and been told to push off to get 400 people to send you $20 but you still get your $8,000 – right?

    The next tier will then have talked to 400,000 and been told to take a hike, but hey, so what, it’s not as though the originator has anything more to do once he’s recruited his 20. And the hits amongst that 400,000 will have sent you $32,000.

    The next tier will piss-off a total of 160M people to find their hits and the sweetest one, the last man in your chain who is still expecting to make $3.6M or $320K will have had a cost chat, but a big NO from 3.2 Billion – roughly the population of the world.
    All of these payments must be made before the participant is allowed to start recruiting members for him and earning any money – it’s in the small print and in any case, breaking the chain will bring you 11 years bad luck. I’m not making this up!

    Here are the numbers which the person at the top of the pyramid is expecting.

    Once the 5th member is in place, the network is mature (Start again!) and the originator has received say 20 X $100 from his members, 400X $20 from the next tier, right down to $2 from 160,000 people in tier 4 or $1 from 3.2M in tier 5. That’s why the earnings formula throws up such weird figures.

    The bug question is what is the link between this numerical nonsense and the new type of internet scheme?


    Steve
  • Posted on 8/28/2008 at 10:57 PM Accepted
    Techinically, the program you're talking about is possible. You might be able to make money doing it. However, realize that you are simply selling the same thing you bought. You sell nothing of value, but a pyramid scheme. It is what it is. Here's how, in a pyramid scheme you don't make money until you get people to fall for the same thing as you. You get no value until you do this. Consider instead if you get involved in an affiliate program where you are selling a course that, say, teaches a programming language. You can sell the program to people that want to learn and recruit others to sell it and pay you a cut of their sales. The big difference here is that there are a lot people invovled who are happy with their one transaction, got their value and are happily out of the scheme. They are the people who genuinely wanted to buy something that would teach them this skill.

    You program has no one like that. You are selling nothing but a promise that more people will by the same idea that you just fell for. This does, despite all of your calculations, fall into the same mathmatical problem as any other traditional pyramid scheme. Because it is "Internet Marketing" (which it's not), doesn't fundementally change this.

    Assume for a minute that is was different, it assumes that you can magically recruit people and that it is so simple a chimp can do it. Well, how come chimps aren't doing it? Fact is the vast, vast, vast majority of people who buy into this will never recruit anyone and never get any of their money back.

    You seem like a smart guy, go and sell something real online.
  • Posted by steven.alker on 8/29/2008 at 8:01 AM Author
    Jonathan (Focus Fields)

    Thanks for your contribution. To put your mind at rest, I have no intention of being sucked or suckered into one of these schemes. What I have set out to do is threefold.

    To gain a thorough understanding of the mechanisms and processes they employ

    To find out what the commercial and even the moral hazards are (I’ve had too many friends get bitten and hurt when they should know better)

    To identify any techniques used which are valid in their own right and would be useful for bona-fide sales and marketing activities where there is a product or a service for sale with some intrinsic value

    I have raised the issue here because we have had a lot of questions about MLM over the past 4 years and what becomes apparent is that no matter how well you explain the maths or demonstrate the other silly numbers needed for success, the average MLM junky will not believe it. They get burned time after time, like an alcoholic picking up a drink, hoping that just this time, it will be OK. With most rational things, you get hurt and you don’t repeat whatever hurt you. Serial MLM failures are a bit like someone who sticks their hand into a roaring fire and gets badly burned. A few weeks later, having recovered, they do it again hoping for a different outcome. It’s insane!

    The reason why I wanted some feedback is that these schemes appear to be much more linear in their structure, thus avoiding the silly exponentiation which occurs through geometrically recruiting new re-sellers.

    Maybe they operate without much of an override structure. After all, one leading exponent claims that he has 10,000 clients / customers who are currently signed up to his web-secrets courses. As he charges $37.00 per month for the benefit of being trained, that’s $370,000 a month. That is before you analyse the possible additional income he gets through affiliates referring business to him or charging affiliates for websites and SEO work.

    The affiliates will be building their own list of customers, so the main question outstanding is: “How does the originator of a programme benefit from the activities of his affiliates?”

    Steve


  • Posted by steven.alker on 9/5/2008 at 11:54 AM Author
    Juliet - you are a gem!

    If you send me $29.70 every month, I can make you as clever as I am!!!!!!!!!!!!!!

    Steve
  • Posted by steven.alker on 9/6/2008 at 4:54 PM Author
    Juliet: Thanks for your insights into this, especially sharing the pyramid selling version of the Highland Clearances – If memory serves me well, whole communities of naïve clansmen were burned for a fortune. Sad.

    Actually the difference between illegal pyramid selling and MLM is only the presence of a product. Outlawing pyramid or gifting schemes was incredibly difficult because there is no law against handing over a lot of money to someone you don’t know and there’s no law against being stupid or failing to do the maths. So the authorities over here and in the USA stopped them under legislation governing lotteries – Pyramid selling is deemed to be an illegal lottery because it is a matter of chance whether you get your money back or make a higher return than you have spent.

    Transacting a purchase for a product or a service, such as tea or herbs or psychic water energising disks (I’m not joking) makes it all above board, but unless you can make a living selling whacky water to end users (Which you can’t), the schemes still depend on you recruiting further idiots to recruit further idiots and the numbers exponentiates away to into zillions of participants. (It expands at the square of the target number of recruits / customers. That’s not exponentiation, it is a power curve, but exponentiation sounds better!)

    The difference between these boys is that they are apparently able to sustain a business out of direct sales. The internet allows them to recruit not 10 or 20 people to learn the “secrets”, but to sign up 200 or 2000 or more. At $37 / month, that is a substantial income. Of course the participants will want to do the same and the “secrets” which are disclosed are drip-fed to the participants monthly, in return for their subscriptions. That’s $74,000 a month by the way which is a lot more than, say, my butler earns.

    The recruits are encouraged to use templates and automatic software which is available from the originator. They also use the original web-service and some pay an override to the web entrepreneur for utilising his address, website, server and automated software. If the recruits are only successful in getting 200 of their own recruits, at 10% of the turnover, it is another $40,000 a month plus rental of space, servers and software. If members can grow an email list of, say 20,000 would be entrepreneurs (You won’t believe this – people sign up or opt in to such lists!), then a 1% success rate will give everyone 200 clients)

    Once they start recruiting, again with the aim of a list of 20,000 and success with 200, the square law leads to silly number quite quickly: Vis; 200; 400,000; 80,000,000; 16,000,000,000. I always thought that 16Billion was a wee bit bigger than the population of the planet!

    The people who said “no” or “**** off” is even sillier at (rounded up) 20,000, 4,000,000, 800,000,000 and 160,000,000,000 Also remember, you weren’t the first in the queue, so rather than a clean market, you are probably trying to sell to someone who has already said “No” in fact, it the scheme really worked, there would 800 Million people who have already said get-lost to any one of 80,000,000 of your new colleagues.

    There are also high value courses which are run as supposed one-off limited events. These sell for anything between $397 and $10,000 and they always claim to be over-subscribed. You can’t know this for sure, but the subscription pages on a major Internet Marketing Website are regularly closed to new members. OK some other scheme opens when one closes, but they must get some punters or they wouldn’t continue to do it. One over-subscribed course was for 20 trainee-millionaires at $3,500 each. If true, that is $70,000 for a week-end of intensive training, largely carried out by a robot.

    I don’t think that it is right to lump the business networking sites and enterprises under this heading. OK, they charge anything from £10/month to a lump sum of £7,000 ish for Ecademy Black Star membership, but for this you do get access to a seat with the network dragons. Actually, Ecademy is a fairly good example of setting up a valid tool and structuring it such that everyone else does most of the work.

    Because they want the glory of organising events for Ecademy which are promoted by Ecademy the local organisers work for free. It’s a vanity thing, but it means that Thomas Powers (The first name I’ve used here, but then I’m not kicking them) does the Director bit with out having to organise hundreds of local clubs and events. Power to his elbow (Forgive the pun!)

    As a matter of fact, MLM, web entrepreneurs’ deals and pyramids are banned by Ecademy.

    More later, I need a fag.

    Steve
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