According to statistics, many new projects close within 1-5 years of existence. Knowing this, network marketers are very cautious about new and unknown MLM companies. In the Russian-speaking space, one-day companies are called "scams" or "hypes". In this article, we will tell you more about what it is and how to avoid the failure of your business.

What is a scam

Scam in English means fraud and deception. In network marketing, this term is associated with companies that delay or stop making payments, violate cooperation conditions and obligations to partners, clients, and investors. In fact, a scam indicates the death of a project.

In the Russian-speaking space, such a reputation is firmly attached to investment hype projects and pyramids. These companies most often use a clean matrix type of marketing

More details about the differences between honest MLM projects and pyramid schemes can be found in the article Network Marketing VC Pyramids

Rarely, but there are situations where no one loses money - project founders transparently manage accounting and gradually pay off debts. However, such organizations are exceptions to the rule. Usually, the closure of a company results in significant financial losses for its depositors and partners.

How Scam Projects Work

Scam projects come in various forms, but the main characteristic of financial pyramids is their main source of income. Members of the structure earn only if they attract new people: the team leader receives a percentage of the funds that subsequent participants invest in the company.

Following the principle of earning through recruitment, the classic referral bonus works, but in scam projects, it is the only way to make a profit. While traditional network marketing companies earn from promoting and selling real products, the source of income for scam projects is the investments of newcomers. When the influx of new participants into the system stops, the "shop closes."

How Projects Turn into Scams

Projects start sinking when profitability indicators drop and money outflow increases. The reasons for this economic phenomenon can be various:

- Limited target audience. When the structure of a hype project stops scaling and newcomers do not make investments, the inevitable closure of the project follows

- Panic of partners and depositors. This refers to a situation where, due to the influence of external circumstances (artificially created negative information about the company, the economic situation in the world or the country), depositors collectively and simultaneously rush to withdraw funds from the project. Usually, such situations occur with banks.

- Market seasonality. Before certain events (such as New Year or summer vacation), people also massively withdraw funds.

- Too dynamic start. Marketing of such projects works as long as the growth of participants is stable. If the structure of the project develops very quickly at the start, and then its development suddenly stops - the system's debt becomes huge, and the inflow of money that will go to partner payouts becomes critically small.

- Hacker attack. Understanding the profitability prospects of hype projects, hackers see their websites and bank accounts as a "gold mine." Therefore, when creating any business, it is important to thoroughly ensure the security of user data and transactions.

- Marketing Mistakes. The compensation plan is a critically important factor for the success of a network business. To develop it correctly, entrust its development to contractors who have experience in calculating marketing for other MLM projects.

For more information on what a bonus payment plan in network marketing should be, read the article Your Ideal Marketing Plan

When the "X" hour comes and the founders realize that the company is sinking, one of the following happens:

- The main company website or payment system stops working. For example, the system stops processing withdrawals but continues to accept deposits;

- The company states that there are technical issues and withdrawals will have to be temporarily restricted. Overall, withdrawing funds from the project becomes very problematic;

- A resolution on mandatory user verification is issued. People who have not passed additional verification will not be paid. Such an innovation can be introduced under a plausible pretext - for example, a company launches a new payment system and banking, fights against bots, multi-accounts, etc.;

- Old deposits are frozen or transferred to a “reserve fund”. You can withdraw money from there by meeting certain conditions (for example, “bring a person who invests $1000 and get your frozen $200 back”) or when the system starts growing again and regains its former positions.

When any of the above happens, panic ensues among project partners and problems will arise for the project in any case.

By the way, in some scam projects, money is not initially paid to everyone. There is a certain selection among the structure participants, and payments are made selectively. The list of "VIP users" who are given the opportunity to earn something usually includes people who have some influence on a large audience (bloggers, people with popular social media pages, those with authority and reputation in professional circles).

What will help prevent scam projects

There are basic rules that, by following them, you can significantly reduce the likelihood of your business failing:

Smart marketing. The compensation plan is the "engine" on which the profitability and further promotion of the company depend. Its development requires special attention, an expert approach, and experience in creating marketing strategies for various business directions. It is worth turning to contractors who have been working in the field of multi-level marketing for a long time, know the industry specifics, and have experience in marketing calculations.

Prototyping and testing. If you want to introduce an innovation into your work processes, test it before announcing any changes. The same goes for updating a website, business platform, or even a product: first, design a prototype, conduct testing, and only then launch the novelty into operation.

Flexibility and adaptability of business. In our time, the ability to promptly transform ideas, plans, teams, and work processes is critically important for the viability of a business. As a management approach to work, use Lean and Agile principles.

The main goal of Agile is flexibility and incremental project work. Managers who adhere to this principle gradually create a product, implementing it step by step.

Lean (English Lean) is the principle of thrift. It involves structuring work tasks, minimizing all kinds of risks for the company, and increasing the value of its product. As a management philosophy, it emerged long before Agile and is its foundation.

Building a reliable team of decision-makers (LPRs - decision-makers). Critical decisions for the company's future should not be made unilaterally. Assemble a team of co-founders, investors, project leaders, and allow them to participate in management.

Development of a risk management strategy. Think in advance about the problems the project may face. By listing all the "threats," devise an action plan to eliminate them. Special attention should be paid to the financial side of the project's development -

Develop profit-making opportunities, optimize cost items.

Conduct business audits. Bring in experts to assess the company's current positions: reliability, security, transparency, competitiveness, etc. This way, you can identify your strengths and strengthen them; highlight weaknesses and work on optimizing them. Remember that avoiding project failure is easier when you notice and solve problems at their inception.

Drawing on years of experience working with MLM projects, our team will help minimize potential error risks, optimize the business according to trends and the specifics of the network industry. With us, you will be able to build long-term and honest relationships with clients.

When considering creating or improving your company, ask any questions that arise to the managers at FlawlessMLM.

What to do when things are not going according to plan. How to prevent project failure