Statistics

Report reveals dangers of pyramid selling

By Chen Xin (China Daily)
Updated: 2011-03-21 13:54

BEIJING - Online pyramid selling, an illegal and fraudulent method of business, lured more than 40 million people involving some 6 billion yuan ($913 million) in 2010 alone, a recent report reveals.

Pyramid selling, sometimes described as multi-level marketing, usually involves the promise of payment or services to entice other people into the scheme without providing any concrete investment or product. In the online world it is often disguised under the catch-all banner of e-commerce and threatens Internet security, according to the report jointly released by the Zhejiang-based China e-Business Research Center and the Beijing-based China Anti-Pyramid Selling Association.

Selling through a pyramid scheme is a marketing strategy in which the sales force is compensated not only for sales they personally generate, but also for the sales of others they recruit, creating a widening base, like a pyramid, of distributors and a hierarchy of multiple levels of compensation.

Pyramid strategies are applied in businesses such as online shopping, paid advertising clicking and online games, the report said.

The report highlighted an example. A shopping website that provides paid information, such as personal financing or distance education, will ask the user to pay a sum of money for membership. After the user becomes a member, they can recommend others to join, and will be compensated if they succeed in recruiting members.

College students, the unemployed and customer-to-customer online shop owners are often involved in online pyramid selling, as they believed they could earn cash quickly, according to the report.

It is an unsustainable strategy that can result in huge losses for its victims and cause widespread social problems, said Wu Xuefei, an analyst with China e-Business Research Center.

Xiao Feng, a resident in Chuxiong Yi autonomous prefecture in Southwest China's Yunnan province, said he was a victim.

"A friend of mine gave me a card promoting an education website 3xy.com.cn in 2009. Each card was worth of 380 yuan and my friend sold 20 cards to me," Xiao, a 37-year-old decorator, told China Daily on Sunday.

There was a code on the card through which school students could log on to the website and receive online education, he said.

Xiao said he attended a lecture held by the company who ran the website and was told that he would be compensated by 600 yuan if he could sell ten cards to a sub-distributor and he could then get more money after his sub-distributor recruited additional members.

"At the lecture, which was attended by some 300 'members', an experienced 'member' told us that he had made hundreds of thousands of yuan in just two months by promoting the card.

"I thought it's impossible to make such a large sum of money in such a short period of time, and I realized that it was an illegal program and I quit," he said.

Xiao said he still has the cards and suffered losses of 7,600 yuan.

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Wu Xuefei from China e-Business Research Center said multi-level marketing is illegal and she attributed its widespread appeal to the Internet.

In general, online pyramid selling requires membership registration at a website but these sites are often fakes, she said.

The virtual world allows illegal marketing activities to easily spread to other locations, even overseas, making it harder for industrial and commercial watchdogs to track them and stop their operations, she said.

Wu suggested educating the public on the dangers of online business and the differences between legitimate commercial concerns and fraudulent ones.

The public should also be educated in how to resist the lure of illegal online pyramid selling activities and the dangers they pose, she added.