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The Big Picture

'Have you ever heard of Plato, Aristotle, Socrates? Morons.' -- Vizzini from "The Princess Bride"

Thursday, April 13, 2006

The Big Con??

Suppose there is a company, X, who is not a legitimate company, but a scam. What would be the warning signs?

The company, X, is a new company, and much smaller than its competitors. Oh, and factor this in as well: It is a "family values" company from an uber-conservative western state (no, not Texas).

The first clue would be that it sells something that is free, or requires no 'value added'. Further the entire cost of the product, lets call it P, is able to be written off as a business expense of quarterly tax reports. That would mean the entire cost to X for purchasing and reselling P is zero ($0.0). The only other costs for the product is the marketing of it, also a legitimate business expense that can be deducted.

Second, the selling of P is primarily pushed through a retailer, preferable a very large one with both deep pockets and a good reputation. Lets refer to the retailer as Y. The arrangement is that Y sells P in its stores for X, taking a percentage of the sale revenue. However, the percentage Y gets is much less than it receives for similar products sold by companies similar to X.

Third, company X also requires a deposit from customers who have a credit score below a given value. This deposit is payable directly to X and not Y at time of sale. Thus Y has no means of verifying the reason for the deposit, nor what happens to the collected money. (for example Y also sells a different product, Q, but collects the deposit, and has access to the reason for the deposit. This money moves from customer to Y to the company that makes Q.) It is important that the guarantee of the product is through Y, not X, thus Y is carrying financial responsibility for the activities of X.

Fourth, product P requires additional service, the customer cannot use P, without the physical assistance of technicians working for X. Again, Y carries no authority over this, but is the responsible party as they sold P with their good reputation backing it. Furthermore, the techs are not employed by X, they work for another company, call it Z, who is contracted to X. Thus, Z carries no authority for customer service, and in fact only performs actions at the behest of Y.

Fifth, customer service for X, is employed by X, and maintains horrible response to customer complaints, resulting in a large pool of dissatisfied customers, equal to or larger than its pool of satisfied customers. Put into numbers, customer satisfaction rating is at best, 50%, but realistically lower than 50%. Related to this fact is the normal business practice of providing sterling customer service in a new and small company as this is a typical selling point over larger well-established companies. Company X is the opposite of this normal business tactic.

Sixth, the decision to carry P at Y was not made locally, where P is sold, rather it was made at the corporate headquarters of Y, which is not local. But local department managers of Y are beginning to question the legitimacy of X.

Seventh, company X spends large sums advertising and hiring promoters and discounting the service of P, to new customers. While advertising and promoting are common and legitimate there is a creeping dishonesty in that endeavor -- one that is subtle yet real. But the deep discounts are problematic as they eliminate any revenue from the service of P, so the only revenue is from the sale of P, and the deposits needed for the service of P. Note, this loss is also subsidized via the tax code.

Eighth, the revenue from the deposits and the sale of P are under the control of X exclusively, so when a customer returns P, Y refunds the customer, to be later reimbursed by X. The deposit is the responsibility of the customer to contact X for, and X can return the deposit whenever it feels like it.

Ninth, some of the local managers of Y are beginning to suspect something is amiss, but it will take time for these conclusions to work their way up the chain of management back to Y's corporate offices. This gives X a little more time to sell more of P, but time is running out.
Now X has virtually no operating expenses because of quarterly tax subsidies, but is receiving income through the reputable company Y and the deposits. This means the real profitability is near 100%.

So what is your opinion, is company X a scam or legit? To me it seems like a classic cut and run scam. It has all the elements of the scam, a reputable company to provide cover and sales revenue, and one which would be held liable to its customers for not only sales of P, but also the deposit as well. X has virtually no out of pocket expenses, allowing them to promote for free, they skimp on customer service, leaving new customers in the cold.

All it would take is a metal suitcase full of money and a first class ticket to Rio de Janeiro to escape free and clear, leaving Y holding the bag and cleaning up the mess.

If it is a scam, then how much more time before it blows up? I'm guessing that it will be before the end of May. I have a few facts that suggest this to be the case. One fact is that X is planning to cut back on its promoters by the end of April. They are also jacking up the cost of the additional equipment needed for P. These two facts will effectively choke off new customers, maximizing profitability in May by minimizing immediate costs -- new customer service, returns to Y, and paying the promoters. Finally, June 1 is the beginning of the next tax quarter.

If you are an investor in X and not in on the scam, plan on losing money and your credibility on June 1, or soon thereafter. If you own stock in Y, plan on selling it soon, as it will take a hit once the class action lawsuits are filed (Y will undoubtedly settle, so the hit should be short term only).

If you work for X, and are in on the scam, it was nice to know you (not really), hope you send me a postcard from sunny Rio.


At April 14, 2006 4:59 PM, Anonymous Anonymous said...

Jeff, my brother:
I LOVED this post! We definitely think alike since I used the phrase "cut and run scam" with you earlier today! And JUST GUESS which poor employee at Company "Y" is going to be taking the brunt of those numerous upcoming complaints(hint, hint, he he was wearing a green shirt and a red tie today, lol !!)!??
But it's truly a shame that so many innocent people are going to get screwed here in the coming months...and I'm sure SOMEONE at Company Y is benefiting from this scam at SOME level, though.
Good luck with your upcoming endeavors, brother (just in case I don't see you next Friday), and keep in touch! Peace, DC

At April 23, 2006 5:07 PM, Blogger Advertising Center said...

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