Oblivious to many, there seems to be an emergence of business and marketing frauds that come poised as legit businesses and rob the people of their hard works’ money.
One such scheme, the Enagic machines or Kangen water filter business in the country, has been divulged by the Office of the Consumer Protection (OCP) earlier this week as a pyramid scheme.
The notification was made after the OCP found that both online and offline modes of the business of Enagic Alkaline Ionizer and Water Filtration machines are pyramid schemes.
The business, meanwhile, was promoted as one that can turn normal water into water with many health benefits, and people were enticed to become a member by buying one of these expensive products that cost as high as USD 5,000.
How this business works, especially that of the pyramid schemes, is that they promise consumers or investors large profits based primarily on recruiting others to join their program, and not based on profits from any real investment or real sale of goods to the public.
According to some experts, some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure. The two tell-tale signs that a product is simply being used to disguise a pyramid scheme are inventory loading and a lack of retail sales.
Inventory loading usually happens when a company’s incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. When this occurs throughout the company’s distribution system, it is said that the people at the top of the pyramid reap substantial profits and that the people at the bottom make excessive payments for inventory that simply accumulates in their basements.
Further, experts say a lack of retail sales is also a red flag that a pyramid exists.
While many pyramid schemes claim that their product is selling like hot cakes, studies have mentioned that the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.
Similarly, another closely related scheme to a pyramid is a Ponzi scheme, which revolves around continuous recruiting. However, in a Ponzi scheme the promoter generally has no product to sell and pays no commission to investors who recruit new members.
Instead, the promoter collects payments from a stream of people, promising them all the same high rate of return on a short-term investment, and the promoter just uses the money from new recruits to pay obligations owed to longer-standing members of the program.
While Ponzi schemes and pyramids may be seductive and could even deliver a high rate of return to a few early investors for a short period of time, people need to be wary that both pyramid and Ponzi schemes are illegal and they inevitably must fall apart. Knowing about the schemes is important if we are to protect ourselves rather than waiting for a scheme to collapse.