Don't simply equate WeChat trade with pyramid selling

A new business model based on social network WeChat has been emerging since last year. Almost overnight, many people used to seeing friends post selfies on homepages began being introduced to products for sale by the same friends. Data show the number of WeChat "traders", or those trying to sell something via WeChat, has grown from 10 million to 20 million across China this year, and the number is growing.

But it is also true that the WeChat model of business is losing its reputation, as more and more consumers say they have been delivered substandard goods or received poor services. In particular, after a report of China Central Television revealed that some WeChat businesses made money by building a network for more people to buy and sell, instead of selling true products, many people now say WeChat business is nothing but pyramid selling.

The mixed response means we should neither idolize nor demonize WeChat business. In fact, like other forms of e-commerce, WeChat business has two models, namely, B2C (Business to Customer) and C2C (Consumer to Consumer). The former allows shop owners to make profits by selling their products, while the latter focuses mainly on finding lower-level agents and making profits by building networks in which lower-level agents pay membership fees for every business deal. It is the C2C business model that people equate with pyramid selling.

Understanding what pyramid selling actually is will thus help us differentiate it with WeChat business. In pyramid selling, the organizer asks other people to pay a certain amount as fees to become agents, who in turn look for lower-level agents to sell goods at prices much higher than market rates. It is a vicious circle in which fake and substandard goods are sold at high prices, with the bills being paid by the bottom-level agents who cannot find somebody else to pass on the burden.

In this respect, WeChat business is similar to pyramid selling. Data show that 80 percent of WeChat's C2C businesses sell facial masks, with 80 percent of them being women, or, more precisely, housewives. They organize each other into multi-levels of agents to sell the facial masks until they cannot find any more lower-level agents.

Click on the homepage of any WeChat business, and you can see it is full of reposted chicken-soup-for-the-soul stories boasting how much money one can make simply by joining their sales network. It is this brainwashing that is common to WeChat business and pyramid selling.

But equating all WeChat businesses with pyramid selling would be a mistake. The first difference between them lies in the goods they sell. While pyramid-style businesses generally sell goods at prices higher than the market rates - sometimes the goods are totally worthless - WeChat businesses sell usable goods at prices slightly higher than the market rates.

Besides, pyramid selling is a crime, because it violates the victims' personal rights and is sometimes characterized by violence. There are many cases of people involved in pyramid selling "locking up" or physically torturing lower-level agents, forcing them to call their families to pay extra money. WeChat businesses are free of such violent and illegal practices.

Therefore, we cannot equate WeChat business with pyramid selling, although some gangs now use WeChat to do pyramid selling, which is illegal.

We can use certain yardsticks to judge whether somebody is indulging in pyramid selling via WeChat. First, such people often sell almost unusable products at extraordinarily higher prices, and they don't care how many people actually use them - all they want is to find more agents to buy the products and sell them to more agents.

Second, legal businesses generally allow consumers to return goods, but those running pyramid business simply ignore this rule; they have no provision for return of goods.

And three, pyramid selling has a structure in which every member has a fixed level and role. All agents have a line leading to higher-level agents, which can be traced to the top boss. In case you encounter such a business structure on WeChat, be warned that it could be a pyramid selling business and do not hesitate to call the police.

The author is a researcher at China e-commerce research center.