Referral Businesses (1): What is a Ponzi scheme?

 Businesses, in general, require the patronage of people. But there are some businesses that depend on active referrals.

    Active referrals means that referring new people is the lifeline of such businesses, unlike other businesses which can attract or get patronage without people having to invite other people.

    Note that in every businesses referring is involved in one way or the other: anytime a satisfied customer tells his friends and family members about a new restaurant along the street, or a very good barber shop he discovered, or new beautiful shoes he has purchased, if the family and friends patronise those products and services because of him, then he has performed the action called referring in business. This is passive referral.



    In this article, I will be talking about businesses that thrive on active referrals, and not passive referral.

I will be looking at four (4) very common businesses that depend on referrals:

1. Ponzi.

Ponzis can best be described as having same idea as cooperatives that are commonly done amongst workers in establishments, in which certain amount of money is contributed by every one involved and given to a member chosen amongst the contributors.

In a Ponzi scheme, cells are created, involving a definite number of people contributing an agreed amount of money.

If a cell is to contain five (5) members paying $10 for instance, it means that a total of $50 dollars will be generated in the cell. For this to happen, the first member of the cell must refer 4 other people directly or indirectly into the cell. When completed, the proprietor of the platform (the owner of the Ponzi) might take one part ($10) and the first member of the cell gets four parts ($40).

The first member is expected to reinvest into the cell so that the cycle is repeated on the second member of the cell and then the third, fourth and fifth. 

Advantages of Ponzi

A. Ponzi is a relatively cheap and easy business to do because new members know how much they're investing, what they will be paid and when they will be paid.

B. As long as each member of the cell does not fail on their part to reinvest, and more people join the scheme, ponzi will continue to be a very reliable source of income for its members.


Disadvantages of Ponzi

A. Ponzi is highly time risky. The early joiners have higher chance of getting their money because they're the first to join. Late joiners stand a risk of losing their money if no new member joiners the cell or older members refuse to reinvest.

B. Since no real wealth is created in a Ponzi scheme, it's longevity is always not certain because it can easily reach saturation, where the number of people taking from it becomes more than the ones putting money in. And this will result to a crash. People will lost their money and get hurt. 

    Ponzi is an illegal system of business in many countries. So, check to make sure it is legal in your country before partaking in it. 

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