Thursday, July 22, 2010

The Chains, The Markets and The Saws

I have a couple of posts that I had started drafting before this but I am pretty sure this one is going to see the light and on to my blog much before it's predecessors. It happened yesterday, when I was shopping in the supermarket and a "Marketing Manager" waylaid me and gave me his intellectual piece of advice about making money. For reasons that are obvious, I do not want to mention the name, origin or the firm he represented as they are of no consequence to what I'm going to relate here. So here he was, explaining to me about a shopping card that I can "buy" and earn points when I recommend somebody for buying the card. The 'Concept' he said, was simple - the more people I get to join, the more money I make. He went on to explain that I get a certain 'percentage' of points for each person who joins the chain with my "Number". And then, we just en-cash the points for free supplies from the "most" supermarkets all around the country!

While I stood dazed at his attempt, he conveniently 'understood' that the person he was talking to wasn't making heads or tails of this brilliant opportunity. And he went on explaining how the growth of the chain under me would generate revenue for me without me having to do anything. He said that computer scientists call this type of chain a 'Tree" or a pyramid and that it is a very powerful mathematical model that has been translated into a marketing model by the most brilliant of market strategists in New York. He even said, in full happiness of having stumped me, that the "growth" I would have in terms of revenue would be exponential. And I continued my state of daze, my mind thrown in its own whirlwind of thoughts, anguish and pity. Realizing that I hardly spoke anything, he gave me his card and left in pursuit of another outbound customer. I'm sure he wouldn't have imagined to meet a person, who has been working on a "Tree Differencing Optimization" problem for a part of his thesis dissertation and has been traveling up and down the 'Tree' data structure like a monkey for the past three months.

What I'm now going to talk about is my very own personal opinion and I hope it remains the same. It is the general lack of awareness about these "Pyramid" or "Chain" business models which made me wonder if people who stepped into this even realize the extent and impact of what they were doing! I have to agree that the "Chain Marketing" was one of the most brilliant marketing model that has been invented to attract low and middle income group, who, otherwise would not have invested in a business venture. That said, I do strongly believe that this is one of the most unethical ways to make money. Trust me, I do!

So what is this "Chain Marketing" ?

A Marketing model based on the exponential growth of a tree. For all my fellow computer science and math enthusiasts, the number of nodes at each level of depth of a tree is n^d, where n is the spread of nodes and d is the depth of the tree.

What does this mean to the chain marketing strategy. For a very simple analysis - let us assume that a person who bought the card, initiates no more than two others into the program. So the tree would now look as shown in the left. Imagine you are at the top (Red) of the chain. Assume you initiate two people (Green) into the program, and the green  initiate two more people (Blue), and the blues initiate two apiece. Now let's do a computation of the income - Assume for simplicity, profit of 10% per person and the card sells for $100. The Blues would get $20, the Greens ($20 + $4), and the Red ($20 + $5).  So what is the big deal here? If you haven't already noticed the second component, viz., the profit percentage keeps increasing the with the number of people in the tree. And even for a small spread tree, like the above, which is called a binary tree - the number of people at each level d grows by 2^d. For a ternary tree, you would imagine this number to grow even faster- and yes, it does as can be seen below. 
This strategy is a version of the well known doubling the chessmen problem. Imagine if you actually took this as an opportunity to make money and initiate probably a hundred to operate for you! Yes, we are talking about minting some serious money in here. Sounds like a fair deal, isn't it? You are just making use of mathematics and smart marketing and hardwork (yes, you are expending huge amounts of effort to initiate people into the chain) to make money. It looks like a very fair opportunity for everyone, after all, you could always initiate more people and retrieve your investment. What is so unethical about it? Think.

Common sense says that there has to be some logical point where the growth has to stop - there are just finite number of people out there in the whole world. Therefore, there are people who end up at the bottom of the chain, but do you want to take a guess how many..? Remember, at each level in the chain, the number of people grow by a factor of n^d which is large, very very large. Believe me, I've been working for the past few months on a tree with the number n hovering about 25~30 and it takes a 4Ghz computer hours to even count the numbers! Come again... the number is large. Agreed. So whats unethical about it? Well, if you have understood this, it is simple - the more the number of people you initiate, the more the spread and growth in the chain resulting in a gargantuan number of people at the very end of the chain. A lot of people who will not be getting their value for the $100 card that they bought. They will end up losing a part of their money which travels to the ones at the top of the chain who make profit out of it.

As you can see, the higher up in the chain you are, the more money you make. Again, what is so unethical about it? I'm not cheating someone!! I'm just providing them with an opportunity to make money by initiating them into this program. With every person whom you initiate into the program, there are potentially thousands at the bottom of the pyramid. Hey! I know the math. So what? You still haven't told me what is so unethical about this?       Nothing.

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