Cagey Consumer

Is AdverWorld a pyramid scheme?

As of February 3, 1998, the AdverWorld web site is still operating, even though they were named by the FTC as a pyramid scheme in November 1996's Operation Missed Fortune Read the details yourself: Internet-based marketing group vanishes (Duluth News-Tribune, 2/3/98).

AdverWorld is a web presence provider that claims to focus on "mom and pop" businesses that need a turnkey service. They charge $79 per month for their basic service, which includes one web page with up to 5 links on the page.

You might think that AdverWorld would have a lot of trouble finding customers at that price, because so many other organizations are willing to host a whole web site (typically, this would allow as many web pages as you could fit in 10 megabytes) for under $30 per month. They would be likely to put together a simple web page for free, just to get the business.

But AdverWorld claims to be doing $2 million a month in business from 10,000 customers. How do they do it? Multi-level marketing, of course.

Why are these people paying $79 a month for a classified ad or some other notice that seems unlikely to generate that much income? Take a look at some pages:

There are perhaps a few naive customers of AdverWorld who simply don't realize that they're paying money each month and are most likely not getting any benefit from it. But too many of the advertisers don't even seem to have a situation that would justify spending nearly $1000 a year to promote it on the web. So what's the explanation for customers paying money each month?

Although Independent Representatives are not required to purchase their own web page, they must have at least one active customer to be eligible for commissions from their downline; purchasing their own web page will meet this requirement, however.

It used to be that a standard way to identify a pyramid scheme masquerading as a multi-level marketing plan was that distributors were required to pay a substantial amount of money up-front to participate. Few if any mlm's these days require a large up-front fee, because it makes them an easy target for the regulators. Instead, many mlm's have taken to establishing a monthly purchase requirement which can be met either through purchases made for personal use or through retail sales made by the distributor.

Allowing credit for personal purchases violates the law in some states, but may not be considered illegal in other states. Even in those states that don't explicitly outlaw this practice, a good case could be made that mlm plans with qualifying purchase requirements are illegal under the anti-pyramid laws of most states.

Most regulators, though, have moved away from looking at the formal structure of an mlm's compensation plan, and now tend to look at the percentage of sales that are made to non-participants in the plan. The usual guideline is that at least 70% of sales should be made to people who are non-participants.

The Cagey Consumer's position is that qualifying purchases are an abusive practice, the primary effect of which is to induce the distributor to buy the product or service in order to be eligible to participate in the business opportunity. Such a requirement would be an outright violation of the law in almost all states, but for the fact that it is permissible to meet this requirement through bona fide retail sales.

Related links:

  • AdverWorld a rising Internet Star [Wayback archive] (Fargo Herald, 3/2/97)
  • Internet-based marketing group vanishes [Wayback archive] (Duluth News-Tribune, 2/3/98)
  • plan description [Wayback archive]
  • Operation Missed Fortune defendant list [Wayback archive] alternate link
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    Updated September 14, 1998