You’ve seen it all before. An ad appears on your Facebook feeds and it goes something like this:
“5 years ago I was slaving away at a crappy job, working 12 hours a day, making 1000$ a month… I was desperate and broke… then I found this method… today I’m travelling the world, earning 30k$ a month working from my laptop… I’m no different from you and I want to show you how you can do this too… blah blah blah…”.
Most people have a very naïve understanding of how internet marketing works and how doing business online is not very different from running your own company ‘offline’, so to speak.
While there is a lot of money on the table and thousands of people are legitimately earning by running successful businesses from their laptop (with a handful of freelancers working remotely), in this article I want to explore the ‘dark side’ of internet marketing and help you avoid a lot of traps.
Let’s start with the bitter pill. Most of the online businesses that pop up on your Facebook feeds that try to sell you on a ‘laptop lifestyle’, on a program to generate income online, to travel the world by sharing your passion and making money, to follow proven steps and strategies to create wealth (even if you don’t have any specific expertise that’s sought after in the market)… are nothing more than pyramid schemes.
Understanding a pyramid scheme in depth
We’ll dive deeper into that by the end of this article, but – first thing first – we need to have a clear understanding of what is a pyramid scheme.
As per Wikipedia’s definition, a pyramid scheme is: a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products or services.
In a pyramid scheme, you’re not selling anything particularly valuable to the next person, except for the rights to sell the such rights to others in turn. Although some goods or services can be transacted in a pyramid scheme, they’re usually ancillary to the rights to be a re-seller. Acquiring those rights – with the promise and expectation of an ROI – is usually the primary driver for people to join the scheme, not the actual product.
To make an example, I can start a pyramid scheme by picking up stones from my backyard and name them ‘magic rocks’, claiming that they attract fortune and fame and price a set at 1,000$.
Once the customer buys the 1,000$ set of stones, he acquires the right to sell them to all his friends and to make 20% of whatever their proceeds from that point onwards. Hence, the true reason my customer buys the rocks is not that he believes in their magical powers: the 1,000$ are de facto the admission fee into a scheme where he expects to be earning higher commissions later from others he’ll recruit into the pyramid.
Therefore the goods or services transacted in the example are only a façade, although I believe that those at the top of the pyramid would indeed claim that the stones have attracted fortune and fame ,citing themselves as evidence later on, if the scheme works out!
This should also tell you that testimonials – a critical component that every pyramid scheme leverages abundantly – constitute very unreliable evidence in this matter, even when they aren’t fabricated.
Pyramid schemes are illegal in most countries, so when a business model is suspected to be a pyramid and gets large enough to draw attention, the authorities might crack down on it. A recent example is what happened to MOBE, one of the largest online training businesses operating on a multi-level marketing scheme, that has been shut down by the FTC.
What happened to MOBE should already be a big red flag on most businesses that operate under similar premises, but most pyramid schemes are small enough or well-disguised enough, that they go unnoticed.
MLM: a bad business deal
Most pyramid schemes effectively protect themselves by selling a service or product that seems valuable, at least on the surface. The most typical is indeed a training course or a mentorship program that teaches you online marketing skills (see how coincidentally they’re selling you exactly what you need to grow the pyramid itself…).
With this type of tweak, it’s also easy to blame you for not having the drive, the grit or whatever it takes to be successful when the shit hits the fan, citing countless examples of other people who’ve made it and disregarding the fact that they may have entered the pyramid much earlier (and higher) than you, or the obvious fact that the business model itself is flawed, for no fault of your own.
When the product transacted is – or appears to be – prevalent, compared to the sale of the rights, then the pyramid scheme simply becomes an MLM: multi-level-marketing. MLM’s are legal, but they present most of the same inherent flaws of pyramid schemes, and they’re often situated in a gray area where it’s really tricky to tell them apart.
Aside from the legal and ethical implications, there is a very practical reason why you want to stay away from anything that looks like a pyramid scheme (or an MLM): it’s simply a very bad business deal.
First off, a pyramid scheme is – by its very own nature – an unsustainable business model. It is predicated on an ever-increasing recruit of new members, until the pyramid collapses. As you can see from this image, if only a group of 6 people starts such a scheme by recruiting 6 people each, by the 13th level you have already exceeded the world population. It’s a business model that’s doomed to fail.
Although most businesses sooner or later fail (given a sufficiently long time horizon), a legitimate business is designed with an infinite outlook. Bill Gates hasn’t built and run Microsoft so that he could cash out and let it go bust in twenty years. The business model is designed and constantly innovated in a such a way to be passed down to the next generation, and the next, while producing profits and dividends. That’s why Microsoft is worth more than 100$ per share.
But as you can see, a company like Microsoft constantly fights over talents, engineers, phd’s, programmers and offers them hefty paychecks to prevent them from going to the competition. They don’t recruit anyone who has a laptop and an internet connection.
Even if you leave aside all ethical considerations, entering a pyramid or MLM is just a bad business decision in terms of expected value.
According to a Government investigation in the UK, just 10% of all agents of Amway, one of the world’s largest legal MLM company make any profit. The income disclosure statement of another large MLM company MonaVie reveals that fewer than 1% qualified for commissions in 2007.
If you do some research, you’ll find how most sources agree that the loss rate for MLMs is at least 99%. This means that less than one in 100 MLM participants make a clear profit, and at least 99 out of 100 participants lose money.
Jon M. Taylor, Ph.D has researched over 400 MLM companies and concluded that in the first year of operation, a minimum of 50% of representatives drop-out. After five years of operation, a minimum of 90% of representatives have left the company. By year 10, only those at or near the top have not dropped out – making it safe to say at least 95% of representatives have dropped out.
He contrasts these statistics with the failure rates for traditional small businesses, using the Small Business Administration’s statistics for 2008 that found that 44% of small businesses survive at least four years, 31% at least seven years, and 39% of businesses are profitable over the life of the small business. Only 64% of small businesses fail in 10 years.
So, if you succeed in a MLM, probably you would have succeeded at starting your own business and much better! Most statistics show it’s just a negative expected value, more so than launching your start-up.
Actually, an MLM is a good move only if you’re the one who builds it from scratch, without particular consideration for anyone other than the small inner circle at the top! And that’s precisely what’s happening with a lot of online businesses, as we’ll see in a moment.
The irony is that those selling you onto the laptop lifestyle, love to bash down on your 9-to-5 job, but the truth is that your 9-to-5 job is a much more transparent transaction. Yes, you’re trading time for money (although not completely true, as more and more companies are introducing flexible hours, remote work, pay-for-performance, at times involving stock options and profit sharing), but at least you know exactly what you’re going to get in return for your time!
In a pyramid scheme, your only hope is that you’re entering early enough so you can get rich at the expenses of those below you, until you realize that in 99% of cases you’ve also ended up trading your time for… nothing.
What makes these schemes so tricky is that your friend who gets suckered into it, will start posting and sharing about all the money he is making and how is life is completely being transformed by this opportunity. But of course, what else could she say? Could she ever hope to make a single sale if she openly disclosed: I’m every bit as broke as before and I’m counting on any of you to sign up so I can start building my income stream?
Hence you shouldn’t be surprised that all these schemes are always full of enthusiastic testimonials! Anyone who enters the scheme, even before making a single sale, is incentivized to lie and sell anybody on his dream ‘laptop lifestyle’. Because there isn’t anything else to sell except for a dream! Not a fridge, an aircon system, a set of bedlinens, a headset, a movie and all the things that sustainable businesses usually sell because people need them to run their lives!
Before you think it’s a legit online business think twice. And then twice more.
Now that we got the most obvious pyramid schemes and MLM’s out of the way, let’s get to the main point of this article.
Why do I say that most online businesses are in fact pyramid schemes?
Here’s the real eye opener. The big MLM and pyramids that make the news are just the tip of the iceberg. A lot of internet entrepreneurs are in fact running what I’d call an implicit pyramid scheme.
For example, have you noticed that most of the ads you see come from people trying to sell you a course that teaches you how to do… exactly the thing they’re selling you? It’s recursive.
Whether it’s a course on how to sell your services online, to build an audience, to create marketing funnels, to sell online courses, to do online marketing, they’re often selling you a how-to that they haven’t applied to anything else, except the sale of their course itself!
Have you noticed this pattern? There are certainly a handful of legitimate internet entrepreneurs, but the skills they possess are no different from those required in ‘traditional’ entrepreneurship. Making your business successful is a mix of product, sales, marketing, R&D, innovation, competitive analysis, creativity, strategy, it’s not just marketing alone.
Most of the so-called laptop entrepreneurs – or online marketers– are selling you just the how-to. Selling training is their favorite because it’s usually at a high-price point, easy to produce, doesn’t require shipment or other major costs and has potential for unlimited up-sells.
So they make you believe there is a recipe that will make you rich, when in fact you don’t even have the ingredients to cook! Most are just packaging up a mix of Clickfunnels basics, Facebook ads and mindset tips that they barely applied to any real business or product, aside from selling their own advice.
They willingly ignore or downplay the fact that everything must start with a great product, which most likely you don’t have, because if you did then you’d take business-specific (or industry-specific) advice. Not generic schemes. If you’re selling gardening equipment you might pay for someone who knows your niche and can save you time in targeting your customers. Or maybe you might hire a marketing expert or a copywriter for your campaigns, but you’d be applying their work to an existing business which does indeed have its own strategy.
Most marketers are targeting your laziness. They know there’s a huge market of lazy people who want to believe in fairy tales and so they’ll sell you onto one. But how many businesses have they built using their own proven 10-step program?
The how-to, the 10-steps in most cases… ARE THEIR ONLY BUSINESS! You’re creating the only case study they’ll ever have, by giving them your money.
Think about this: if the formula for their success lied in their step-by-step guide, if it was enough to know the exact steps to build a successful online business, then why on earth wouldn’t they keep this formula to themselves? Why wouldn’t they use it to build and scale corporation after corporation, instead of selling it for a few hundred bucks to the likes of you and wasting the one source of their competitive advantage? Right, because they’ve told you that they want to help. Sure.
What’s the value of these programs?
This is not to say that all these courses and infoproducts won’t work. Although most won’t. They will probably teach you something (which you could learn in cheaper ways).
They all contain at least a marketing model with steps that sooner or later you’d need to hear about (lead generation, sequencing, split/testing, closing etc.) but none of these courses will ever be the source of your competitive advantage. Otherwise any fool could do it.
Any business needs a real source of competitive advantage, whether it’s hard, like patents, difficult-to-copy product, monopoly, etc, or soft, like high-expertise, asymmetry of information, brand name etc. Otherwise how on earth are you going to make any profit in a competitive market?
It cracks me up when I see a course being marketed as a proven program that doesn’t require any technical skills, nor a product to sell. Or one that teaches you how to monetize your passion, no matter what it is and who you are. Good luck with it!
All these online entrepreneurs are creating an implicit pyramid scheme, because ultimately the only thing you’ll be able to sell after their course is… another course!
You’ll be selling a course on how to make money online to capture other digitally-illiterate people, perhaps even faking successful credentials and luring them in with grandiose promises. That’s how most laptop entrepreneurs are doing business these days. Or at least they’re trying. In fact, they often have inconsistent or minimal evidence to show for their claims.
There are many legitimate teachers out there, and few people who are truly making a killing, but before buying in, I’d want to make sure they pass one test: have they applied their teachings to grow any other business, before getting into the business of selling the ‘how-to’?
And more importantly, was that previous business successful because of their how-to, or because they simply were the first to target a niche (called first mover advantage), or the product was in crazy demand? Because you just don’t happen to have that product, nor that specific set of circumstances, remember.
Don’t forget that a lot of online entrepreneurs are still leveraging leadership positions that they’ve acquired at a time when certain niches were not as competitive as they are today.
They’re still benefiting from the first mover advantage. Also realise that others may have had successes in the past, because they were among the first to jump on an emerging trend. But given that things online move so fast, the opportunity was quickly exhausted and so they’ve moved on to selling courses about how they had success. In both cases, their methods have little application to your current scenario.
How competitive it’s out there
Online business is no different than any other business. If you don’t have an unfair source of competitive advantage, you’ll be grinding out there, rubbing elbows with millions of people. Whether you want to do affiliate, drop shipping, sell your products, or anything else, you’ll need traffic. There are millions of blogs, sites, Youtube channels and videos created everyday. You’ll have to get people to see your page, stop there and click. It doesn’t happen on its own accord.
Actually, the easier the business model, the fewer barriers to entry for your competitors!
When they tell you that you can make money online as an affiliate and this simplifies the process because you don’t need to store inventory, handle returns, shipping, and you don’t even need to have a product to begin with, that’s true. But don’t let it fool you: all those hassles also filter out a lot of people who can’t deal with such complexity. Whereas if you choose the easiest path, it means that literally anybody can jump in and compete with you overnight, thereby reducing your chances of success and earnings! You’ll have to work extra hard and be extra creative to figure out ways to stand out and get eyeballs for your site or ad campaign in that jungle!
In fact, it’s no surprise that just a tiny fraction of all affiliates makes any significant money.
Just like in any business, you must take the long road, build contents, good products, generate value, solve problems and put stuff out there, so that people have a reason for stopping by your shop instead of somebody else’s. If all it took was to run a couple of ads, then everybody would just do that, the cost of ads would be jacked up in no time, and your profits gone (in fact cost of Facebook ads has drastically gone up in the past few years).
There’s no free lunch in the market, why would the most competitive one – the online landscape – with billions of people connected every second be any different? Because you have the step-by-step method?
Now hopefully you can see why for most, the easiest road is just selling others onto the dream. Because the dream is always a product in demand. Because everyone is always looking for a shortcut in life.
But once you’ve taken it, you realize that there’s nothing at the end of it, and all you have to sell is just the same shortcut to the next fool. That’s how most have become laptop entrepreneurs with different degrees of success (as the only metrics we have is their own bragging on social media in most cases) and a big question mark on their sustainability once they run out fools to exploit. That’s why most businesses out there are little more than pyramid schemes, selling you promises coupled with a few tutorials, that you won’t know what to make of, except for repackaging and reselling to the next batch of desperados in search for a silver bullet.
Now, you want to do something real? Forget about the promises. First build something valuable, create something that has beauty, significance, meaning, usefulness, depth. Something that – unlike the short-legged promises you read in the ads– can stand the test of time.
Focus on delivering something of exceptional value. Ask yourself: would I pay my hard-earned money for this thing?
Think in terms of value and forget about the profits. There’s no guarantee you’ll ever make it anyway, so think about what you really want to add to the world out there.
Then you’ll figure out the steps and pay for the right guidance when you’re stuck, from real experts that know how to solve well-defined problems you’ll encounter on your journey. That’s all you need to get started. Not the step-by-step guide to riches, nor the flashy promise of a better life tomorrow. Only something real, today.
Also published on Medium.
